The outlook for Venezuela’s debt is not so gloomy, as oil prices are still high and the prospect of a strategic devaluation early next year would reduce the need to issue bonds to fund capital flight, Gordian Kemen, Latin America’s fixed income chief strategist at HSBC, said.
“The Chávez administration could devalue its currency after the December regional elections due to the lack of financing alternatives,” Kemen said. “We expect any [bond] sell-off to be relatively short and limited, as it would basically be ‘business as usual’ for Venezuelan bond holders.”
Venezuela’s president Hugo Chavez is to deepen his self-styled 21st century socialism following his victory over the opposition candidate Henrique Capriles at last Sunday’s election in the South American country.
Chavez’ initial victory triggered a massive bond sell-off, as some investors who were expecting a victory of the more market-friendly Capriles had invested in Venezuelan bonds, but the market later calmed down.
“The fall in the equity market was quite sharp, but the bond market gives a better flavour of foreign investor sentiment,” said David Rees, emerging market economist at Capital Economics.
Chavez’ deputy Elias Jaua has vowed to strengthen the state’s grip on strategic sectors of the economy, such as energy, food and construction equipment – and therefore deepen the revolution launched after Chavez came to power in the oil rich country in 1999.
In spite of the revolutionary rhetoric of Chavez and his entourage, the outlook for the Venezuelan economy remains cloudy. “Policy making is to become more radical,” said Rees, even though Chavez himself recently pledged to be a “better president” and strike some dialogue with the opposition, which was defeated by an almost 10-point margin at the latest presidential election.
Further nationalizations are expected, and the public sector will play an ever bigger role in the economy, to the dismay of those investors who had expected a possible opening to private sector cooperation in the oil industry in the case of the victory of the opposition candidate Henrique Capriles Radonski.
“There is a real possibility that a sharp drop in oil prices triggers a balance of payments crisis during the next presidential term,” said Capital Economics. The fiscal deficit is believed to have reached 16% of GDP this year.
“A recession next year would be almost inevitable, as a pre-election fiscal giveaway is reversed. Meanwhile, the bolivar would probably be devalued by around 40% to maintain competitiveness in the face of rising inflation,” said Rees.