Venezuela’s Succession Speculation Splurge
Venezuelan bonds buttressed their EMBI-leading 40 percent run as President Chavez returned indefinitely to Cuba for further major cancer surgery and treatment and named his longstanding ally Maduro as preferred successor, as his party swept state governor races with the notable exception of opposition candidate Capriles’ victory in his jurisdiction. A new term begins in January coinciding with a decade of currency controls, as the informal bolivar rate is quadruple the official 4.3 with supply down sharply through the central channel amid widespread assumption of another post-election devaluation. GDP growth of 5 percent on massive public spending spawned a large budget deficit and double-digit inflation heading into next year when the economy could enter recession, especially if world oil prices continue to drop. Another $25 billion in debt issuance was authorized mainly for the domestic market, and Chinese loan for petroleum facilities have not been clarified as joint venture projects in the Orinoco belt remain on hold pending tax and arbitration disputes. Capital flight at $15 billion though Q3 exceeded the current account surplus and FDI was negative as portfolio inflows were $4 billion. Vice President Jaua signaled a status quo business climate including nationalization would extend into the incoming administration, with the food and construction sectors to be possible repeat targets as basic staple and housing shortages persist.
Positive relations have been restored with top trade partner Colombia, where GDP growth above 4 percent has translated into a 25 percent stock market gain as peace negotiations were launched with the rebel group FARC which had allegedly received cross-border financial and military support. Foreign fixed-income investors await the reduction and simplification of withholding tax there under a multifaceted fiscal reform package that will cut corporate rates. The Andean growth champion however at 6 percent is still Peru on a combination of commodities and domestic demand, with the latter spilling into an overheated property sector in the view of industry analysts. The international share of local benchmark debt is near 60 percent despite regular central bank currency intervention and macro-prudential restrictions to discourage allocation.
In contrast with the sub-region’s upward trend Argentina’s bonds lost ground with US court rulings tilting toward full-payment of “holdout” claims, including potential access to the servicing stream for exchange instruments from the re-opened 2010 deal. An appeals tribunal hearing is set for end-February to decide on an amount and mechanism for honoring principal and interest arrears, and Buenos Aires my consider amendment of the original “lock law” to mount another offer at its initiative. GDP warrants were fully redeemed in mid-December with the postponement of a final decision which can still be sent on to the Supreme Court in Washington. According to the latest EMTA debt trading survey the country stayed absent from volume favorites led by Brazil and Mexico, although activity was off one-quarter on an annual basis as the asset class succeeds to long-term position ranks.
