Sep 10, 2014
Venezuelan bond investors are learning the hard way that Nicolas Maduro is no Hugo Chavez.
Since replacing his late mentor in April 2013, Maduro has overseen the worst bond returns in emerging markets, with the country’s dollar debt posting a loss of 8.7 percent. That’s a complete reversal of the Chavez presidency, when the nation’s debt gained 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.
At first glance, it’s hard to see what exactly changed: Maduro, like Chavez, is a self-proclaimed socialist who has followed his predecessor’s model of spending the nation’s oil wealth on a wide array of social programs and ramping up state intervention in the economy. A closer look, though, reveals a president who lacks the kind of political clout and popular support that his predecessor was able to tap into when he needed to contain social and financial crises.
Chavez “had lots of charisma; he was able to transmit empathy,” Bianca Taylor, a sovereign debt analyst at Loomis Sayles & Co. LP, said by phone from Boston. “Nicolas Maduro doesn’t have the charisma, he doesn’t have the support of government and he doesn’t have the support of Congress. And without that, it’s difficult to take the decisions he needs to take. He has been unable to govern because he lacks the strong leadership.”
Taylor said that Loomis Sayles, which has $221 billion under management, has trimmed its Venezuelan bond holdings since Maduro took office.
The yield investors demand to buy Venezuela’s dollar bonds due in 2022 rose 0.11 percentage point today to a six-month high of 15.87 percent. BNP Paribas said the sell-off was an opportunity for investors to buy Venezuelan debt.
The latest rout in Venezuelan bonds began in late July, when Citgo Petroleum Corp. said its owner, state-owned oil companyPetroleos de Venezuela SA, had put it up for sale. Citgo, which operates three refineries in the U.S. and has about 6,000 gas stations in the country, has historically played a crucial role for international bondholders, giving them the confidence they could seize Venezuelan assets if the government ever defaulted.
While PDVSA said last month it’s looking to sell Citgo for at least $10 billion, even that amount wouldn’t cover the government’s arrears with importers, a figure that Morgan Stanley estimated in June to be as much as $13 billion. That’s equal to more than half the country’s $21.1 billion of foreign reserves.
The bond losses have accelerated this month after Maduro removed the nation’s top economic policy maker and as Harvard University professor Ricardo Hausmann questioned the country’s decision to keep paying bondholders in the face of shortages of everything from basic medicine to toilet paper.
The cost of insuring Venezuelan debt is the highest in the world sinceArgentina missed a payment deadline at the end of July. Venezuelan credit-default swaps rose to a six-month high yesterday, implying a 64 percent probability the country will default in the next five years.
The average yield on Venezuelan bonds rose to 14.42 percent on Sept. 8, the highest in emerging markets, from 9.74 percent when Maduro took office in April 2013.
“I have been negative on Venezuela ever since the passing of the Supreme Comandante,” Ray Zucaro, a fund manager at SW Asset Management LLC in Newport Beach, said by phone. “He may have been crazy, but he wasn’t stupid, and I’m not sure you can say the same about the current leadership. Hugo Chavez wasn’t wonderful at running a country, but these guys are even worse.”
A Finance Ministry spokeswoman declined to comment on Venezuelan bond losses.
The bolivar has lost 74 percent of its value on the black market since Maduro was elected. The increasing difficulty of finding dollars is forcing Venezuelans to the government’s official distribution depots and creating shortages of goods such as soap, deodorant, car parts and engine oil.
Annual inflation accelerated to a record 63.4 percent in August, the fastest among countries tracked by Bloomberg, from 62 percent in July, the central bank reported yesterday. Prices rose 3.9 percent from a month ago. Authorities have delayed publishing statistics such as first-and second-quarter gross domestic product.
Jim Barrineau, New York-based director of Latin America fixed-income at Schroder Investment Management, said Maduro’s struggles stem from the policies initiated by Chavez. He said his fund has reduced holdings of Venezuelan bonds.
“The distorted exchange rates, the lack of dollars, the high inflation, all of that flows naturally from the policies Chavez put in place,” Barrineau said by phone. “When you have those policies put in place for a long enough time, this is what you wind up with: product shortage, rationing, high inflation.”
A tumble in the price of oil, Venezuela’s biggest export, has also deepened the slump in the country’s bonds. Brent crude fell to $99.16 yesterday, the lowest since Maduro took power, and is down 13.6 percent from a nine-month high in June.
Maduro’s inability to reverse the country’s economic slide triggered street protests earlier this year that left 43 people dead.
“If you continue doing the same thing over and over and expecting a different result, that’s a sign of irrational behavior,” Munir Jalil, chief economist for Colombia and Venezuela at Citigroup Inc., said by phone from Bogota. “Unless they take measures to reduce economic instability and control inflation, it will end in some form of social unrest.”