18/11/2014 09:15 am
Venezuela’s Bond Plummet Can’t Sway BofA as Losses Mount..
The question is how good is Venezuela as an investment and how good is it compared to the price the market is looking to pay for it right now, he said in a telephone interview from New York.
Bloomberg - Being bullish on Venezuela’s bonds hasn’t quite panned out for Bank of America Corp. and Barclays Plc. Still, neither are prepared to give up their calls.
Since Bank of America recommended the debt in February, the nation’s securities have plunged 13 percent as speculation deepened that Venezuela is running out of money. While the selloff has been the biggest among emerging markets, Francisco Rodriguez, Bank of America’s senior Andean economist, says investors should buy the bonds because the government still has the wherewithal to avoid a default. Yields surpassing 20 percent suggest investors are overstating that risk, he says.
“The question is how good is Venezuela as an investment and how good is it compared to the price the market is looking to pay for it right now,” he said in a telephone interview from New York. “I have emphasized and continue to believe that the likelihood of these bonds being paid is much higher than implied by market yields.”
The rout in Venezuela’s bonds has pushed yields to the highest since 2008 as the price of oil, which accounts for 95 percent of its exports, sinks and the nation’s foreign reserves dwindle to an 11-year low. The benchmark notes due in 2027 reached a five-year low of 53.375 cents on the dollar yesterday. The chance the country will halt payments over the next five years is 80 percent, the highest in the world, swaps trading shows.
Barclays put a buy recommendation on Venezuelan bonds in October 2013. The securities have fallen 20 percent since then.
“We have maintained our overweight based on valuations,” Alejandro Grisanti, an economist at Barclays, said by telephone from New York. “The bonds give a very attractive yield. Even though the likelihood of a cessation of payments has risen, it’s still far below that priced by the bonds. Unfortunately we’ve had that recommendation all the way down.”
The price that Venezuela gets for its oil has plummeted 30 percent since June to a four-year low of $70.83 a barrel last week, below the level it needs to keep making debt payments, according to Jefferies Group LLC.
The nation’s reserves, including its gold, reached $19.4 billion on Nov. 14, the lowest since 2003.
Bond losses have deepened this month after Finance Minister Rodolfo Marco Torres said on Nov. 9 that Venezuela wasn’t planning to devalue its currency.
Reducing the bolivar’s value would provide the government more local currency for each dollar of export revenue from state oil monopoly Petroleos de Venezuela SA and narrow its price gap in the black market, where the currency is 95 percent cheaper.
“For some time we have had a forecast that Venezuela would devalue the currency aggressively because this is what it made sense for the government to do,” Bank of America’s Rodriguez said. “You can no longer rely on the argument that I did make that it would be irrational not to devalue because they would get a benefit from it. It’s not something that in anyway overturns my basic fundamental view because if it did we would have changed our basic recommendation.”
The press office at Venezuela’s Finance ministry declined to comment on the decline in bond prices and the country’s foreign-exchange policies.
Marco Ruijer, who helps oversee $7.5 billion of emerging-market debt at ING Investment Management in The Hague, said he’s reassessing his holdings of Venezuelan bonds.
“It’s hard to remain optimistic when the oil price has dropped so much and they haven’t made any effort to start making policy changes,” he said by phone. “Every day the oil price falls, the situation gets more dire. They have to do something or it’ll all end in tears.”
The slump in oil prices has prompted Moody’s Investors Service to forecast Venezuela will have a current-account shortfall equal to 2 percent of gross domestic product, or about $10 billion, next year.
The economy will also contract for a second year in a row, shrinking 2 percent in 2015, Moody’s said.
“The production engine of the economy is pretty much shot,” Jaime Reusche, a Moody’s analyst, said from New York. “A lot of Venezuela’s basic necessities need to be imported. Now, with the oil price, you’re also hitting the export side.”
With inflation soaring, Venezuela will have to devalue, according to Barclays’s Grisanti.
At 63 percent, consumer price increases in the South American country are the fastest in the world, according to data compiled by Bloomberg.
“Countries with high inflation are condemned to devalue and adjust prices,” Grisanti said. “The government has the desire to pay and still has space to take actions to avoid default.”