During the last few weeks, Venezuela and PDVSA bonds have rallied sharply, as investors see increased probability of not only a possible political change in the country, but more importantly, change in the way Venezuela’s public finances are managed.
The rally has been stupendous as seen in the graph below, which shows the price of PDVSA’s 2022 bond, which carries a 12.75% coupon and which was issued in February of 2011:
The bond above has shown three distinct periods over the last year which I have noted with red boxes. First, there was rally last June, when President Chavez became sick. This rally was stopped (second red box) from August to November as the European crisis unfolded. Then, the last and powerful leg this year is shown in the third box and it began in January, as optimism all around the world first drove markets up, which was followed by a move up upon the successful opposition primaries, which received another powerful push up with the news that Chavez’s cancer had returned and the President had to be operated.
Chavismo has called the rally perverse. But in the end, the rally is a bet not on President Chavez’ demise, but the fact that if Chavez played a smaller role in the future of Venezuelan politics, the role of Minister of Finance and Planning Jorge Giordani would also be diminished. Because Giordani was, after all, ranked as the worst economic Minister of Latin America recently.
And ever since Giordani took charge of of Planning and ltaer Finance, Venezuela’s financing costs had been increasing and refused to drop. This can be seen in the next graph, where I show the Global 2027 bond from the year 2000 to last week. As you can see this bond has been at much higher prices (lower yields) than it is today during Chavez’ tenure, despite the fact that oil prices are near an all time high today.
From 2003 to 2007, this bond rose sharply, as oil prices increased. Venezuela had a relatively small debt and new issues were coming to market slowly and in a manner fairly well understood by the markets. Then came the financial crisis of 2008-2009, oil prices dropped and debt prices went down. During this time, Venezuela and PDVSA began offering ever increasing amounts of debt to sustain the exchange rate at an artificially low level. Even worse, the attitude towards the same investors that buy this debt has been unfriendly, surprising the market and issuing large size bonds that flooded the market with paper.
Thus, after the yield in the Global 2027, shown below, hit near 20% during the financial crisis, it had been unable to drop below the ~13% level until last summer.
The rally has been impressive. The PDVSA 2022, issued in February 2011, which traded at 75% in its first day, closed yesterday at 100%. That is a 33% return on capital to those that bought the first day, to which you have to add 17% return in interest, or 50% in little over twelve months.
The question everyone asks, is whether this can continue.
Well, as long as there is the possibility of change in the way the country is managed, the rally can certainly go on. While yields may not go down to the levels of 2006-2007, because the country’s debt has increased dramatically over these years, oil prices are higher and Venezuela could be in better shape than other countries yielding 2% to 3% below Venezuela’s yield. It is, in the end, all relative.
But the ride is likely to be bumpy, as the sell-off yesterday shows, after the violence on Sunday during Capriles’ rally. Investors can scare easily, even if the potential returns can be very attractive. But investors like the yield and this provides some cushion in this bumpy ride.
As usual with investments, it is when to sell that is the toughest to decide.
The Devil's Excrement 
March 12, 2012 at 9:35 am
I am not confusing the Chinese people with the Chinese goverment. Seems like some here are doing this…
I saw news today-Chinese goverment sponsored hacker group responsible for billions of stolen identities and intellectual properties.
(Also, Iran is known to use hackers to spy on their own people as well as US)
I am sure Chavez and Castro find this stuff fascinating and of course the Russian goverment does as well..
O/T but I remember when Cristina Fernandez was first elected and her one visit to US-she demanded DEMANDED that US give intellectual property to Argentina to help develop ?some kinds of industries.Also, remember the Argentinian scientist caught at Los Alamos..And, several Chinese scientists have been caught..
I personally called the FBI and reported a Chinese engineer who robbed his company after 20 years working for them of all of their intellectual property and the FBI -of course-was not interested…
As shown by Wikileaks recently in the Maklid case with Colombia- US has very little interest- only wanted to find out about Venezuela’s connection to Iran…
Point is-well here is an article:
http://tech.blorge.com/Structure:%20/2010/11/18/chinese-sponsored-hackers-a-huge-threat/
March 11, 2012 at 10:24 pm
Can it be proven that the contracts doled out by Chavez for Faja del Orinoco are not good for
Venezuela? Can it be proven that things Chavez has done to PDVSA have significantly weakened
the company and thus weakened Venezuela? Can it be proven that Chavez has betrayed the people of Venezuela by giving contracts for oil development to foreign governments who have no intention of developing the field-ie. they are not going to invest any money in the oil production -because they don’t have it and have no idea when they will have it. Therefore, their contracts with Venezuela, PDVSA are worthless and Venezuelans will be waiting decades and decades and not receiving any money from this? Whose bright idea was this-Chavez -that’s who? Sue Chavez in court and take back these oil contracts and sell them to someone who will develop them. And, find out what about all the “kickbacks” received by Chavez. I mean for example- what the hell is Russia doing with several blocks of Faja del Orinoco. Russia has plenty of oil already. What makes anyone think the Russians are going to rush into Venezuela and develop the oil there? Stupid, theyare not going to do it..And, as mentioned before so many others -don’t have the money-example Peru -and there is no possiblility of having the money anytime soon.
What about Malaysia- are they rushing in to develop the oil block in the Orinoco. No way. Another
dumb idea by Chavez. What about the Cubans- yeah theyare coming with all of their equipment
and start pumping out oil in Orinoco- you must be dreaming!!
Chavez must be brought before the Court in Venezuela for betraying the nation and robbing the treasure, misappropriating funds that he had no right to appropriate and in an un fair process.
Hell, I am no lawyer-but, Chavez is guilty.
March 10, 2012 at 10:03 am
A little O/T but an interesting article:
http://www.lapatilla.com/site/2012/03/09/miguel-angel-santos-como-derrochar-us-500-000-millones/
March 8, 2012 at 4:29 pm
[…] rally has been stupendous [see graphs in original post], which shows the price of PDVSA’s 2022 bond, which carries a 12.75 percent coupon and which was […]
March 8, 2012 at 3:03 pm
China stocks are a fraud:
Here are a few samples of comments about fraudulent Chinese stock companies-
“People are stupid how can a nation go from a poor third world country to a world leader in 14 years there whole system is based on fraud and these company’s that invested there will fail because make believe number can only be hidden for so long then the truth comes out. ”
“I Lost money Investing in a Chinese Stock in what looks like a ghost company that probably doesn’t even exist, It isn’t even offered anymore. Also, have gotten counterfeit products from there. I do not understand why we deal and put up with this. There are a lot of crooks getting rich over there… And we really cannot do anything to them”
“The sooner we realize that the Chi-coms are not our friends the better”
March 8, 2012 at 9:02 pm
Oh CharlesC, if you only knew, China has done NOTHING in 14 years. For starters, since 1979, approximately 140 million Chinese students have been studying about 70 hours per week. That’s why they laugh at America’s SAT. JUST MY Chinese students have scored a perfect 800 more than 500 different times. (Contrast that with my own experience, I don’t personally know a single American who scored 800 even once.)
There “overnight” or 14 year success has actually been 30+ years in the making. This correlates nicely with what both Japan and Germany achieved after WWII (1945-75).
When you add to that the fact that the average Chinese has traditionally saved approximately 45% of his or her salary, well, things begin to make a bit more sense.
There’s more, lots more.
And I don’t doubt that you were swindled in their stock market. Rule #1 for investing is: ONLY invest in what you know. You obviously know little about China. It certainly doesn’t have even the minimum oversight that western markets have. Translation: It’s a sucker bet for out-of-the-loop foreigners.
March 11, 2012 at 1:47 pm
Deanna,I would be careful to call it all ‘success’, though one could say success is a very personal state of mind.
Just one example:
My son recently finished judging a National piano competition, where a large percentage of advanced students were the sons and daughters of Chinese parents.These kids are abnormally ambitious, spending most waking hours enslaved to working themselves to a frazzle.
However, though many were technically well advanced, musically they were inferior.They won the majority of prizes, but not even one of them was worth listening to.Music , like many other fields, is not a robotic pseudo- science.
All work and no play makes Jack a very dull boy indeed, and not a very creative one.
But most important: After a certain amount of time passes ,and after we have overworked our bodies and minds, they start to pay us back.I don’t want to be a victim of that.
March 9, 2012 at 5:53 am
Deananash is right. As long as you don’t try to learn what the Chinese are really up to, you will be reacting in not better ways than Chavistas do.
The Chinese are not doing everything right. In fact: they are making lots of errors…environmentally, socially and so on. And yet they are working their asses for their wealth. They may cheat as others have done in the past when conditions permit, but they also work hard, they study hard, damn hard.
They are doing what Japan did in the Meiji period, only that the Chinese are 1.3 billion people and they have a wide network of expats spawn around the globe.
March 9, 2012 at 12:14 pm
” As long as you don’t try to learn what the Chinese are really up to, you will be reacting in not better ways than Chavistas do”
Foul! (You should apologize for the last part of your statement..)
What are the Chinese really up to, Mr. Kepler?
Just who in the hell told you I don’t know anythingabout the Chinese?
Did you know farmers used to go into the city and buy human waste and pay for it with gold- to be used as fertilizer?
What do you know about the history of farming in China-probably nothing…
Let’s see- economics- read about a study in the 1930’s of Chinese workers
compared to Mexican workers and to US workers. I think the Mexican workers earned as much in amonth as the Chinese earned (if they were lucky) in 6 months.(If they were unlucky and often they were- they got nothing)-Chinese work hard- damn hard- you know I bet a few other people know that too.. And, of course the US worker earned as much in a day as Mexican workers in a month….Lots of Mexican workers and US workers worked hard -damn hard too…
You, Mr. Kepler opened a can of worms…
March 7, 2012 at 7:14 pm
keep it up Hugo….and see what happens
http://www.usnews.com/news/blogs/dotmil/2012/03/07/southern-exposure-iran-terror-groups-setting-up-shop-in-south-america
March 8, 2012 at 2:35 pm
All the world should rest assured of one thing. The American people wish to be friends with everyone. The fact that we just sold Iran two shiploads of wheat demonstrates this fact. We have given away far more.
However, should another terrorist attack inside the USA ever be linked to ANY foreign country, nearly all 312,000,000 Americans will support a military strike against the country that aided the terrorists, no matter what the cost. We will pay whatever price, both in blood and treasure, that is necessary to maintain our security, for as long as we have the ability to fight. That is as certain as the Sun will rise tomorrow.
March 7, 2012 at 3:50 pm
But Miguel,
the truth is that he frames the discourse in those terms for the captive venezuelian audience and he sleeps well at night!
The onus of challenging this frame lies now with venzuelian media and opposition polititians and you know how well those can talk shop in regards to bonds, privatization, HK stock exchange, etc….
Your work is key in feeding the opposition and media the right talking points for this ! kudos.
March 7, 2012 at 1:50 pm
He, he, he does not know that bonds dont trade in stock markets. Nor do they trade in the HK exchnage, it’s just lies to hide their true goal.
March 7, 2012 at 1:47 pm
Ramirez is saying they will be selling bonds, not PDVSA stock. What gives?
http://www.eluniversal.com/economia/120307/ramirez-informa-que-pdvsa-negociara-bonos-en-la-bolsa-de-hong-kong
March 7, 2012 at 1:37 pm
I dunno. Were we talking about an impending, yet normal, change of government in a country with a democratic heritage, then yes, a bond rally would be quite in order. Bond traders around the world look for these kinds of changes in governmental policies all the time. It’s their job. But, … Venezuela? I dunno. There are so many ugly and unique problems confronting the good people of Venezuela. First, the bureaucracy. All of them could lose their jobs in October, and they know it. Second, the military. All past promotions would be subject to review. Third, the police. Same thing, with corruption charges thrown in as well. Fourth, the PSUV. Are these people really willing to step aside and give-up power to the opposition based on a mere election process? I dunno. It’s simply the political violence that is the intangible here. Bonds can rally,..yes. But this country is now run as a religion, Chavismo, rather than as a democracy with its give and take. Would they be ‘willing’ to give-up power without an incredible amount of violence in the streets? That’s the real question bond traders need to ask themselves. I dunno.
March 8, 2012 at 8:46 pm
Dear Dr., I know. But only because history has already shown me. Chavez and his thug companions will NEVER give up power via the ballot box. He has proclaimed it so himself, numerous times, even before his first (and possibly only) legitimate election way back in ’98.
March 7, 2012 at 7:13 am
There goes my plan to win the Florida Lottery & invest the winnings in Venezuela bonds at 17%. 🙂