Venezuela will pay all its foreign debts
Venezuela will pay all its foreign debts
Venezuelan bonds led gains in emerging markets after President Nicolas Maduro assured investors the government will pay its foreign debts.
“What Venezuela has demonstrated in the last 15 years of revolution is that it meets its obligations, and this year won’t be an exception,” Maduro said yesterday in a speech on state television. “We’re ready to keep meeting our international obligations completely, down to the last dollar.”
The country’s $4 billion of notes due 2027 climbed 1.49 cent to 74.03 cents on the dollar as of 1:57 p.m. in New York, the biggest gain since July 8. The extra yield that investors demand to own Venezuelan dollar debt instead of Treasuries sank 0.41 percentage point to 12.55 percentage points, the biggest drop in emerging markets, according to data compiled by JPMorgan Chase & Co.
Venezuelan bonds are the worst performing emerging-market debt in the past month, sinking 11 percent as Harvard University economist Ricardo Hausmann suggested the country might be better off defaulting on bond payments due in October. Swaps traders rank Venezuela, which has the world’s largest known oil reserves, as the least creditworthy sovereign borrower. Concern mounted on the country’s outlook after Maduro sidelined his economic chief this month and Argentina defaulted in July.
“People exaggerated the risks of a near-term default, and now we’re retracing,” Siobhan Morden, the head of Latin American fixed income at Jefferies Group LLC, said by phone from New York. “There was an initial panic sparked by Hausmann and Argentina. Maduro doesn’t make any kind of economic decision. Why would people think he will wake up one morning and declare a debt moratorium?”
Credit-default swaps linked to Venezuela’s debt declined 36 basis points to 14.52 percentage point.
Venezuela will keep paying as long as it can, which means at least for the remaining four months of this year, Morden said. The government and its state-owned oil company had $5.3 billion of bond payments to make in October.
“Inability to pay is a question for next year,” Morden said. She recommends avoiding bonds due between 2015 and 2017. BNP Paribas SA yesterday recommended buying Venezuelan bonds as a default in the short term is unlikely. The bonds had been pricing in an almost 100 percent probability of default, said David Spegel, the global head of sovereign and credit strategy at BNP Paribas in London.
“The country has substantial foreign assets, the highest proven oil reserves in the world, and its ability to fund itself locally has improved,” he said by phone. “The assets were cheap relative to their potential recovery value.”
Hausmann said Maduro’s government had already defaulted on the country’s importers and there were “no moral grounds” for a decision to keep making payments on bonds. The former Venezuelan planning minister, who is now director of the Center for International Development at Harvard in Cambridge, Massachusetts, made the comments in a Project Syndicate article and a phone interview with Bloomberg News from Boston.
Less than $3 billion of Venezuela’s foreign reserves is liquid, Risa Grais-Targow, an analyst at Eurasia Group, wrote in a note to clients. The nation’s bonds slumped last week after Maduro removed Rafael Ramirez, the country’s main economic policy maker, fueling concern the government may delay or scrap measures to reduce the budget deficit, including a currency devaluation and an increase in gasoline prices.
Barclays Plc analysts Alejandro Arreaza and Alejandro Grisanti recommended this week that investors take advantage of the bond selloff to buy, saying the country has enough money to keep making debt payments and the cost of a default “could be very high.”
One of the obstacles the government could face in defaulting is that bondholders may seek to seize the assets of Citgo Petroleum Corp., the U.S. refining and distribution arm of state oil company Petroleos de Venezuela SA, to recoup their money. PDVSA said last month it is seeking buyers for Citgo.
Since replacing his late mentor Hugo Chavez in April 2013, Maduro has overseen the worst bond returns in emerging markets, with the country’s dollar debt losing 8.5 percent. During Chavez’s presidency, the nation’s debt returned an average 16 percent annually over 14 years, generating a total return of 692 percent that dwarfed the 387 percent earned on developing-nation debt, data compiled by JPMorgan Chase & Co. show.
“The selloff was a bit overdone,” Marco Ruijer, who helps oversee $7.5 billion in emerging-market bonds at ING Investment Management in The Hague, said by e-mail today. “We bought bonds maturing in 2014 and bonds with a low cash price this week. I have little doubt that they will pay the bonds maturing in 2014 and keep on paying as long as the capacity to pay is there, only this capacity is diminishing. Maduro does not want to jeopardize the Chavez legacy.”