Venezuela: Chávez contemplates bolívar devaluation

Jason Mitchell
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More issuance likely from PDVSA; Currency appreciation might force devaluation

PDVSA, Venezuela’s state-owned oil company, might issue up to $3 billion in bonds before the end of the year and the country is expected to devalue the bolívar next year, according to bankers. This follows the October 7 re-election of Hugo Chávez as president for a third term, obtaining 54.4% of the vote, 9.5% ahead of the opposition nominee, Henrique Capriles Radonski.

PDVSA, which in many ways operates as an arm of the government, has tapped the capital markets to the tune of $3 billion already this year compared with a total of $15 billion last year. This debt was sold directly in the local market or allocated to the central bank to be sold to locals at the official Sitme exchange rate (which applies primarily to financial outflows and a limited category of imports and is currently Bs5.30 to the dollar). However, most of this debt ultimately enters the international market since locals see it as a method to obtain dollars.

Barclays says PDVSA might soon issue additional debt of up to $3 billion. By law, the sovereign is able to tap the markets for a maximum of Bs116.9 billion this year and it is already reaching that ceiling, so PDVSA is more likely to issue paper. All of the debt sold so far this year was denominated in bolívars.

Exchange rates

Currently, there are Bs4.30 to the dollar according to the official Cadivi exchange rate, but on the black market the exchange rate is nearer Bs13. Most analysts expect the government to devalue the currency to around Bs6.50 to the dollar some time next year.

"The sovereign and PDVSA issued a lot of paper last year with a view to spending the money raised during the election year this year," says Alejandro Arreaza, Venezuela analyst at Barclays. "They made the issuances last year, so they did not have to issue so much this year."

He adds that Jorge Giordani, the finance minister, is concerned about issuing more bonds because of the level of foreign-currency debt servicing that this involves; this is the main reason why the sovereign and PDVSA have held back this year. If there were an adverse oil shock, it would make it harder for the state and the supranational to service the debt.

The markets were factoring in a Chávez victory this year, so there has been little market reaction to the electoral outcome. However, Barclays itself was caught out, as it thought it was a relatively tight race and that there was a chance that the opposition could win.

"Venezuela has always been a difficult-to-read country, as it is characterized by radically opposed views that could result in wrong readings of the situation," says Arreaza.

Standard & Poor’s says Chávez’s re-election will not change its key assumptions regarding its rating on the sovereign. "Our rating already incorporates a large degree of political uncertainty that balances an otherwise relatively solid balance sheet for a B+ rated sovereign," says Sebastian Briozzo, a Standard & Poor’s credit analyst. For the end of this year, Venezuela’s expected public sector deficit is at a high 8.6% of GDP, but the general government’s debt remains a moderate 25% of GDP, based on S&P’s estimates.

HSBC Securities believes the government will be forced to devalue next year and rein in its spending. "Real appreciation and an exorbitantly high fiscal deficit are the main rationales for the government to devalue the currency in the near term," says Marjorie Hernandez, senior foreign exchange strategist for Latin America at HSBC Securities. "The government’s limited ability to finance the large fiscal deficit via local or external debt issuance creates the need to boost US dollar export revenues via a weaker FX."

The clearest indication of mounting pressures on the official foreign exchange rate is the steep devaluation of the parallel exchange rate, which jumped to Bs13 to the dollar in mid-October, up 36% from its end-July level. HSBC also expects the government to maintain the segmented foreign exchange regime currently in place.

Different rates

HSBC thinks the government is more likely to devalue the Sitme rate, rather than the Cativi rate, as this would have less impact on inflation. Sitme might be devalued to Bs8 to the dollar.

Hernandez adds: "We also cannot discard the possibility that president Chávez may reintroduce a two-tier FX rate for the Cadivi rate with a lower leg applicable for basic products, such as the one that existed until December 30 2010. This would help to further insulate lower-income segments of the population from the inflationary impact of a devaluation."

Regional elections take place in December this year and mayoral elections in March. Chávez won in 20 of the 24 states (including the capital) at the presidential elections and this has placed him in a strong position to face the forthcoming elections.

"The risk ahead is of a cascade effect over the regional and local governments," says Arreaza. "Potentially this could result in the opposition losing their gains and thereby creating further imbalances in Venezuela’s political institutions and more space for Chávez to accelerate his model."

Barclays forecasts that the Venezuelan economy will expand by 4.9% this year, one of the fastest rates in Latin America, but it says that is largely because of heavy government spending this year. The economy should grow relatively strongly next year as well and the only real risk of a hard landing stems from a steep fall in oil prices, which seems unlikely in the current international environment.