Venezuela’s Controlled Auction Anger

Venezuela’s decline continued to match the EMBI loss to date as the new dollar auction system repeated its lackluster test without indications that sovereign or oil company PDVSA bonds would be offered again through the mechanism. Both companies and individuals have participated and although the results are not publically reported the clearing level was said to be double the official 6.3 rate versus the 30/dollar informal exchange. Former presidential contender Capriles who was defeated by a scant margin called the outcome a “new devaluation” as another formal re-pegging may come after December local elections. Capital outflows persist with international reserves largely in illiquid gold at just $25 billion with a 15 percent petroleum export drop in the latest quarter. Chinese and Russian state lenders have signed agreements for hydrocarbon access shunned by traditional multinationals that have joined in voluntary or forced direct investment divestiture. GDP growth is barely positive and hyperinflation may loom on chronic staple goods shortages now tracked by the central bank’s “scarcity index.”  President Maduro has retained Chavez loyalists in key economic and security posts and maintained spending for popular support even with the fiscal deficit at an estimated 15 percent of GDP. S&P has a negative outlook on the “B” credit rating with “political uncertainty weakening policy implementation.” CDS spreads have reverted to 1000 basis points with the lack of domestic and foreign issue direction other than upholding his mentor’s legacy and “socialist principles.” A high-level meeting with US representatives aimed at restoring dialogue was shelved at the last minute and Caribbean and Central American neighbors are anxious to learn the fate of the concessional oil sale program promoted by his predecessor.

Initial outreach was cordial with main Andean trade partner Colombia, as President Santos conducts peace negotiations with guerilla rebels and launches a $20 billion public-private rural infrastructure plan as he contemplates a re-election run. Road-building has fallen behind schedule on licensing and environmental bottlenecks and the current account deficit may approach 4 percent of GDP this year on falling oil and mining revenue. Portfolio inflows are softer with the MSCI index off 15 percent through July, as the central bank continues to intervene using a formula for gentle peso depreciation. FDI should cover the balance of payments gap but dividend remittances may further embed it as in Brazil as foreign headquarters demand profit streams. Ecopetrol and Petrobras are now vying for regional petroleum supremacy, as Argentina too has recently attempted a more investor-friendly stance in the energy field after YPF’s nationalization a year ago. Erstwhile owner Respol excoriated a deal with Chevron with its assets offering currency and tax privileges unavailable in other sectors as the President seeks to bolster fuel supplies ahead of October provincial polls. Her opinion approval increased with the move although she has refused to relax commercial and financial controls elsewhere or her fury toward “holdout” creditors awaiting a New York appeals court judgment likely to solidify mutual hatred.