Venezuelan dollar bonds: rally time

For all the moaning in Venezuela about last Friday’s devaluation (which the most cynical critics were saying was absolutely essential, until it happened, and then it became a disaster), there is at least one group of people who are fairly content with the development: investors in Venezuela’s dollar bonds.

Once again, a move by Venezuela’s socialist government was in lockstep with the interests of those arch-capitalists on Wall Street. Look no further than the reaction of Venezuela’s sovereign bonds on Monday, with benchmark yields falling to a five-year low.

Source: Bloomberg

The rally, even though it may not last for long, reflects the fact that a weaker exchange rate has a net positive fiscal impact for the government. Some economists say the greater amount of bolivars the state receives on converting its dollar revenues from oil exports could shave as much as 4 percentage points off Venezuela’s GDP deficit, which is variously estimated at anything between about 7 and 17 per cent. Domestic debt as a percentage of GDP will also fall.

In addition, both the energy minister Rafael Ramirez, who is in charge of state oil company PDVSA, and the finance minister Jorge Giordani have both spoken out against issuing new foreign debt lately, so “supply risk” seems to be diminishing after a massive growth in debt over the last decade.

If you also take into account the current level of oil prices, and Venezuela’s output, as well as the fact that there’s always the chance that Venezuela can get more loans from “friendly” countries like China (even if there are rumours that the Chinese are a bit more circumspect about lending to Venezuela in such an uncertain political environment), then it’s quite possible that there won’t be any new issuance for a while.

So the good mood on Wall Street in the wake of the devaluation makes good sense. But with a government as ham-fisted at economic management as Venezuela’s, there’s every chance it won’t last too long.

Related reading:
Companies to feel hit from Venezuela move, FT
Venezuelan devaluation sparks panic, FT
Venezuela devalues bolívar by 32%, FT
Venezuela devaluation: it finally happened, beyondbrics