Venezuelan bonds are posting the biggest rally among major developing nations as investors bet that President Hugo Chavez’s tenure will end soon even if he wins the closest election he’s faced in 14 years.
The country’s dollar bonds returned 30 percent this year as Chavez’s battle with cancer slowed his campaign for another six- year term that would allow him to extend his push for more state control of the economy. Only the Ivory Coast’s debt has gained more, according to JPMorgan Chase & Co.’s EMBI Global Index.
While Chavez is still the likely winner, investors are betting on a change in government in South America’s largest oil exporter after the Oct. 7 vote as his health deteriorates, according to TCW Group Inc. Henrique Capriles Radonski, who leads the president according to one poll, is promising to dismantle Chavez’s economic policies, including currency and price controls that have created food shortages and failed to contain the world’s third-highest inflation rate.
“Even if Chavez wins these elections, people are still focusing on a political transition within two years,” said Marcela Meirelles, a Los Angeles-based strategist at TCW, which oversees $128 billion of assets, including Venezuelan bonds. “Putting politics aside for a moment, Venezuela bonds still offer attractive yields, given risks involved.”
The securities are on pace for their biggest annual advance in three years after Chavez had three operations in the past 15 months to remove tumors from his pelvic area. The 58-year-old Chavez says he is now cancer free.
Yield Spread
“I’m recovered and doing exercise,” Chavez said during a radio interview Sept. 4, according to a statement from the Information Ministry. “I thought at one point that I would have to leave politics, but I’m recovered and now my life is in the hands of God and the people.”
Venezuela’s dollar bonds yield 11.05 percent on average, down 3.06 percentage points this year while still the highest among major emerging-market countries tracked by JPMorgan’s EMBIG index. The extra yield investors demand to hold Venezuelan bonds instead of U.S. Treasuries has narrowed 298 basis points, or 2.98 percentage points, this year to 960. The so-called spread is on par with Pakistan, and 249 basis points above Ukraine, which shares Venezuela’s B+ credit rating at Standard and Poor’s, four levels below investment grade.
Polls are split on who is leading in the race. None show Chavez dominating as he did in 2006, when he won 63 percent of votes. Capriles, 40, was supported by 51.8 percent of those who were sure they would vote among 1,546 people surveyed Sept. 27 – Oct. 2 by Caracas-based Consultores 21, compared with Chavez’s 47.2 percent. Chavez’s lead in Datanalisis polls narrowed to 10.4 percentage points in September from 15.3 points in June among people who said they’re certain to vote.
‘Real Chance’
Capriles, a Caracas-born lawyer, has vowed to attract foreign investment, eradicate corruption, create jobs and phase out currency controls while maintaining some of Chavez’s popular social programs such as subsidized food markets and free health care.
Chavez, a former paratrooper and a self-claimed socialist who led a failed coup in 1992, has nationalized everything from utilities to banks to steel companies, leading to a drop in investment from foreign and local companies.
“This is the first time that there’s a real chance for the opposition to upset Chavez,” said Gorky Urquieta, who helps oversee $15 billion of emerging-market debt, including Venezuelan bonds, at ING Investment Management International in Atlanta. Any bond selloff following a Chavez win will be short- lived because “the business environment is unfriendly already and I don’t see things getting significantly worse,” he said.
Dollar Reserves
In a bid to bolster economic growth ahead of the election, Chavez has overseen a 30 percent jump in government spending this year, with outlays going to low-income housing projects and new social programs to assist the elderly and children. Foreign reserves have declined 12 percent this year to $26.3 billion, and touched $24.8 billion last month, the lowest level since 2007. Oil production has dropped 22 percent since Chavez took office to 2.7 million barrels a day last year, according to British Petroleum Statistical Review. Venezuela relies on oil for 95 percent of its exports and half of public spending.
Consumer prices rose 18.1 percent in August from a year ago, the highest official rate among the 102 countries tracked by Bloomberg after Belarus and Iran. Venezuela will devalue the bolivar 31 percent to 6.2 per dollar in the first quarter of 2013 to keep the economy competitive and close a budget deficit by boosting oil revenue in bolivars, according to the median estimate of 14 analysts surveyed by Bloomberg in July.
Cancer Treatment
Venezuela’s economy may contract next year as the government reigns in spending after the election, according to Bank of America Corp. and Nomura Securities International Inc. Gross domestic product will increase 5 percent this year, according to the median estimate of 12 analysts surveyed by Bloomberg.
“The underlying picture has deteriorated,” said Bob Maes, who holds less Venezuelan debt than benchmark indexes in his emerging-market bond funds at KBC Asset Management SA in Luxembourg. “I won’t join the rally at the moment.”
Bank of America recommended in a note Oct. 2 that its clients sell Venezuelan bonds because Chavez is likely to win the election by as much as 10 percentage points, allowing him to pursue “more radical” policies. JPMorgan cut Venezuelan bonds to the equivalent of hold from buy on Sept. 17, saying that the securities were priced appropriately following gains.
Political Transition
Venezuelan bonds rallied the most in 13 years in February as Chavez’s trips to Cuba for cancer treatment fueled speculation that he wouldn’t be able to stay in power. Questions remain even as the president says he’s healthy. Chavez campaigned on live television for about 20 hours in September, one quarter of the time he spent in the month leading up to the 2006 election, according to a Sept. 26 report by Barclays Plc.
Under Venezuelan law, if Chavez wins and becomes too ill to serve during the first four years of his term, Vice President Elias Jaua would assume the presidency and have to call new elections within 30 days. If he can’t serve the final two years of his mandate, the vice president would finish the term.
Chavez, who sits over the world’s largest oil reserves, has never missed a debt payment since taking office, even as crude prices dropped below $20 a barrel in 2002. Oil has increased 21 percent over the past year to $92 a barrel.
Thomas Cooper, who oversees the $2.1 billion GMO Emerging Country Debt Fund at Grantham, Mayo, Van Otterloo & Co. in Boston, said he’s betting on Venezuelan bonds to outperform regardless of the result of the election as the government has enough oil revenue to pay off debt. His fund returned 19 percent annually over the past three years to beat 97 percent of its competitors, according to data compiled by Bloomberg.
“The likelihood of a political transition within two years is something that will continue to support sponsorship of the credit,” TCW’s Meirelles said. “It’s awkward to say since we’re talking about someone’s health, but it is what it is.”
Bloomberg
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