Economic policy reform in Venezuela unlikely
Venezuelan bond yields rallied after currency devaluation and news that Hugo Chavez’s health has continued to deteriorate. But yields are due to rise again as meaningful regime change is unlikely, say analysts.
Venezuelan bonds were given a boost following the government’s decision to devalue the regulated currency rate by 32% on February 8, taking the currency from 4.3 bolivars to the dollar to 6.3. The devaluation is the fifth time that the government has taken such measures in a decade of socialist economic policy. The new currency rate is hoped to correct some of the economic imbalances in the country, mainly by improving the fiscal deficit.
“Overall the devaluation was credit positive to the extent that local bolivar revenues are now higher,” says Claudia Calich, head of emerging markets, senior portfolio manager at Invesco. “The devaluation was long overdue.”
The devaluation came after tighter bond yields amid speculation that Chavez’s reign could finally come to an end following his ongoing treatment for cancer and weakening health. But hope that the socialist leader’s unorthodox macroeconomic policies will come to an end are unfounded, say analysts.
“The expectation is that no matter what happens to Chavez, the government will prevail with Nicolas Maduro [the vice president of Chavez’s United Socialist Party] at the helm,” says Calich. “But the probability that economic policy will change under Maduro’s leadership is very slim.” David Rees, emerging market economist at Capital Economics, agrees: “Speculation of regime change may continue to support the Venezuelan government’s foreign currency bonds in the near-term. But with little prospect for a marked improvement in policymaking, and oil prices likely to fall, we think that bond yields will return to double-digit rates this year.”
Maduro has been the de facto leader of Venezuela since Chavez was again taken ill and treated for an unknown cancer in Cuba two months ago. Unlike after previous treatment in Cuba, no images of Chavez’s return to Venezuela have been released.
One aspect that could encourage investors, however, is that Chavez has hinted at better economic relations with the US. “There might be slight improvements on the margins, but nothing more,” says Calich.
According to JPMorgan Chase & Co’s EMBIG index, Venezuela’s bonds were the third best performing in emerging markets in the past 12 months, after the Ivory Coast and Belize.
Bond investors hope a tighter fiscal policy and an improved investment climate, in the event of Chavez's demise, will boost the country's creditworthiness, buttressed by the sovereign's respectable debt-to-GDP ratio and strong cash flows.
However, amid strong capital controls, macroeconomic imbalances remain, especially between dollar supply and demand. In the parallel, or black market, the bolivar is trading at a much weaker level to the dollar. But chances are that the government will not take any more measures to devalue the currency, especially not before the next election, says Calich.
“The feeling over here is that Chavez’s condition is critical, and that there will be little point in continuing any treatment. With transition in mind the government is less likely to pursue currency devaluation this year.”