Venezuela’s Remanded Retail Appeal
Venezuelan bonds extended their last place results on the EMBI index as President Maduro reacted to staple shortages by arresting executives of a leading retail chain and introduced another currency trading channel mainly to benefit state oil company PDVSA, as the sovereign rating was further downgraded to CCC-minus implying a 50 percent default chance this year. Reported reserves are $20 billion, but only $5 billion is liquid and the same amount may be held in off-balance sheet official accounts, but recent transactions indicate a cash scramble. Petrocaribe claims on the Dominican Republic were sold at a discount for $2 billion, and Citgo’s parent company in the US raised that sum from banks using a complicated legal structure to avoid jeopardy. The President returned from a trip to China with $20 billion in stated investments without specific details or timetable, as oil shipment terms under previous borrowing was relaxed in recognition of Caracas’ predicament, with $50/barrel oil creating a $30-40 billion annual balance of payments hole. Recession and hyperinflation linger to aggravate capital flight and budget deficit coverage through domestic debt placement at negative real rates threatens the banking sector. PDVSA’s latest $3 billion bond was issued directly to the central bank in these circumstances as maturities over that level approach in the last quarter. National assembly elections are due by then and the President’s party has spawned infighting with his unpopularity, but opposition leaders in jail or in exile have been unable to unify. Ties with Cuba may be more precarious with the diplomatic opening to the US, but Washington’s imposition of sanctions against Venezuelan government individuals for anti-democratic practice may offer a rallying cry for hard-core supporters. The trade embargo against Havana cannot be lifted without congressional action as the 2016 presidential election cycle begins with the potential to freeze relationships in place.
The Dominican Republic buyback reduced obligations by 3 percent of GDP and generated a NEXGEM rally after growth spurted to 7 percent last year on mining, tourism and remittances. In addition to the 50 percent discount maturities were doubled to 20 years, representing a liability management coup. The Medina administration used proceeds from last year’s global bond issuance for the operation and investors are looking for other candidates to mount similar transactions. Jamaica floated an $800 million external bond six months ago as it has exceeded IMF program targets with a 3.5 percent of GDP primary surplus and rough budget balance. However public debt is still above 125 percent of output and growth is barely positive on the heels of a major drought. Visitor numbers are up and the trade deficit may fall on lower oil imports as Jamaican stocks climbed almost 10 percent in January on the MSCI Frontier index. Fund permission needed for a Petrocaribe deal may not however be forthcoming after two debt re-profilings in 2010 and 2013 have yet to sketch a new picture.
