In the next to last post I showed some graphs from Morgan Stanley that seemed to unnerve some people, both pro and against Chavez. As I have tried to explain the job of these guys is to guide their customers in the minefield of Venezuela’s debt, thus their report is an economic opinion of what they are seeing, with no intrinsic political bias. At the end of the day these guys will do well if their recommendations work out.
It has been the standard view in Wall Street that “Venezuela (and PDVSA) have the ability to pay” its dollar denominated debt. However, it seems to me as if the devaluation in January made people realize that Venezuela’s GDP measured at Bs. 2.15 then, was not quite right, and thus the fact that Venezuela’s debt was “reasonable” compared to the country’s GDP is being brought into question now that the Government has decided there are two exchange rates, Bs. 2.6 for the Government and essentials and Bs. 4.3 for the rest. At Bs. 4.3 the Venezuelan economy is simply half of what people thought it was in December and given that the parallel swap rate is now at Bs. 7, then people worry that in US$, the Venezuelan economy is even smaller than they previously thought.
So, let us ask the question from a different angle. Ok, Wall Street is negative, but what are Venezuela’s and PDVSA’s bond prices telling us? What do investors think? A reader attempted to talk about that using sophisticated language in the comments in the next to last post, but I know that such technical language is above the knowledge of the average reader of this blog, so I will try to address it differently.
First of all, let me tell you that since late last year the world of bonds has changed quite a bit. Investors who could not find yields (returns) in safer investments drove prices up (yields down) of almost all bonds in Emerging Markets…
Yeap, even the Ukraine that was yielding (returning) the same as Venezuela in November, rose so much that Venezuela is the lone high yield in the Emerging Market world.
In fact, lets take Argentina. A populist Government, a country that defaulted in 2000, the same country that for a while had to sell debt directly to Chavez every time it needed money. What is Argentina yielding now?
Well, the floating rate Boden maturing in 2012 yields 7.012% today and the fixed (7%) rate 2015 yielded today 10.8%
Argentina 2012 7.02%
Argentina 2015 10.8%
How does this compare to Venezuela?
It depends. If it is Venezuela issued under international law, it is very similar:
Venezuela 2013 11.19%
Venezuela 2014 11.95%
a bit more really, than Argentina, thus investors perceive higher risk.
But if you look at PDVSA the difference is much larger
PDVSA 2011 (zero coupon) 10.35%
PDVSA 2015 14.65%
Now, there is a huge difference (14.5% versus 10.8%!) suggesting investors are not very comfortable with PDVSA’s ability to pay compared to Argentina. I disagree with that perception, but that is besides the point. My opinion is just one opinion, the people who buy the bonds vote with their pockets.
But Argentina should not be like Venezuela, it has no oil, should be a worse risk. But it isn’t.
What about Colombia?
Well, there is no comparison:
Colombia 2012 1.58%
Colombia 2015 4.28%
This is a HUGE difference!
You get 10% more on PDVSA than on Colombia, a country that a few years ago, people were worried about its dollar commitments. But it’s “oil opening” has generated nice oil revenues (Helped in part but Venezuelan oil ex-pats, fired from PDVSA). And Colombia’s economy is booming, even if Hugo does not want to import anything from there.
But Colombia is the rule not the exception. Look at all these issues:
Ukraine 2012 6.3%
Bulgaria 2015 3.9%
South Africa 2012 2.33%
Panama 2012 2.07%
Peru 2012 1.33%
Brazil 2012 1.2%
Now, let me clarify that this is very sloppy. I should show you the coupons (amount to be paid yearly per face value) to make a proper comparison. But why bother? The differences are so large that it does not matter.
The truth is that PDVSA is yielding roughly ten times more (10x) than Brazil until 2015. Investors are saying they have no fear in buying Brazilian bonds at 1.2% until 2012, but they are worried (really worried!) with PDVSA bonds which yield 10.35% if you keep them for the next 16 months. Whatever their reasons, these investors are agreeing with Morgan Stanley, there may be a cash crunch in foreign currency and Chavez may decide to tell investors to bag it.
Will he do that?
I doubt it. There are too many measures he can take, from increasing the price of gasoline, to another devaluation to shrink demand. The problem is that these measures should be taken today, not next year or in 2012. Except we have elections…
But the point is that international investors are voting with their money against Venezuela. They are asking Venezuela to pay through the nose to have them use their money to buy Venezuela and/or PDVSA bonds.
But it should not be that way. Venezuela’s oil and current world’s oil prices should make Venezuelan debt very attractive to foreign investors. Venezuela has comfortable maturities (US$ 1.5 billion in 2010, US$ 4.5 billion in 2012, US$ 1.5 billion in 2013…), Venezuela has CITGO, the German refineries. But
But it also has Chavez-risk, non-transparent numbers and, much like Morgan Stanley, other people have made their calculations and the probability of a bad ending can not be dismissed. If oil prices stay here or drop, watch out! So, why bother.? I will take Ukraine’s 6.3% until 2012, that country may be a basket case, but at least they are trying to fix things and they are talking to the IMF. Thus the difference.
So, you may not like Morgan Stanley’s conclusions, but if you have some savings then put your money where your emotions or intuition is and buy PDVSA’s 2014′s and get a 15% yield to maturity.
Just pray that Morgan Stanley’s guys are wrong, otherwise you may not get paid for quite a while…
(Note and disclosure: This is what the markets are saying. I don’t fully agree with it and currently hold PDVSA 2014 bonds)