EMTA Venezuela Forum Speakers Agree There is Little Risk of a Credit Event Short-Term
Venezuela was expected to continue to service its external bond debt despite any short-term economic or political upheavals, according to speakers at EMTA’s Special Seminar on the Economic and Political Outlook for Venezuela. The event was hosted by Thomson Reuters on Tuesday, February 5, 2013 in New York City and drew 125 attendees. Jefferies and JPMorgan provided additional support for the program.
IFR Thomson Reuters’ Paul Kilby moderated the discussion, leading panelists through topics ranging from the timing of a new Presidential election, a potential VEF devaluation, the likelihood of a credit event, and how investors should handle Venezuelan debt issues.
Ben Ramsey of JPMorgan believed that ailing President Chavez would return to Venezuela, “…but not to govern…to fade into the sunset in the homeland.” On a recent visit to the country, he stated, opposition leaders had acknowledged to him that the “deck is stacked against them” in any new Presidential elections, although Ramsey didn’t rule out a competitive campaign.
Siobhan Morden (Jefferies) largely agreed, while pointing out that the opposition’s performance in both the October presidential election and December gubernatorial polls had disappointed the market. The candidates in a new Presidential race were clear – Vice President Maduro and 2012 opposition candidate Henrique Capriles – as both sides would avoid infighting, she predicted.
Fidelity’s Luis Martins concurred with other speakers that Vice President Maduro “will be the next President of Venezuela.” However, he did not think Maduro would serve a full term and instead stated, “he will get invited to go on vacation to Panama!” Pressed, Martins estimated that Maduro might only serve 3 years of a presidential term.
Alliance Bernstein’s Marco Santamaria stressed that it was in the Chavista party’s interest to have elections sooner rather than later. Thus Maduro would benefit from a sympathy vote, and the Chavistas could subsequently concentrate on economic, rather than political, factors.
Kilby questioned whether a Maduro presidency would prove less radical than the Chavez administration. Ramsey suggested that Maduro likely has a strong realpolitik background, having risen through the ranks by bridging gaps between the various Chavista camps. In contrast, other Chavista candidates (e.g. former Vice President Elias Jaua) could be more ideological. Perhaps, Ramsey pondered, Maduro would emerge as being more pragmatic on the economic front (allowing more private participation in the oil sector), while “proving himself” by being more radical politically.
Morden highlighted that the Maduro administration, lacking the personal appeal of President Chavez, could be a weaker regime. “Does a weaker administration have the ability to introduce austerity measures?” she asked. The transition could prove quite difficult, and Morden expressed doubts that a government lacking in skilled technocrats would be able to address the country’s economic challenges.
Martins and Santamaria concurred that Maduro remained enigmatic and it was unclear how he would lead the nation. “That is why I prefer clipping coupons on the short-end of the curve,” stated Martins.
On a potential VEF devaluation, the conventional wisdom held that it would occur post-election to avoid paying the political price, Ramsey observed. However, he believed that a devaluation could happen “In the coming weeks,” as the Chavistas had recently consolidated power. Morden opined that a devaluation would, in fact, occur only after a new administration took office. She expected a dual FX regime, which would “minimize the political impact, but introduce new inefficiencies.” Santamaria went further, commenting “that our concept of a devaluation has to be stretched because of the possibility of multiple rates being introduced to multiple constituencies.”
Only a global recession, with Brent at $50-$70 for a sustained period, would cause Martins to worry about a credit event in the next couple of years. For Santamaria, Venezuela’s liabilities, compared to its natural resources, hinted that a credit event was not in the cards; while on a flow basis, with FX reserves “dropping like a stone and foreign debt exploding,” one would have greater reasons for caution. Ramsey reasoned that, as long as oil remained at high levels, tactics such as delaying payments to PDVSA suppliers could be employed to give Caracas added flexibility. Morden acknowledged that the enactments of appropriate economic policies by intelligent leaders could help Venezuela navigate any payment issues, “…but this government is grossly incompetent.”
The panel discussion concluded with speaker recommendations on how investors should trade Venezuelan debt. Santamaria observed that portfolio managers were buying short-term bonds to receive interest payments, or lower-priced long-term bonds that would have less downside in the event of a credit event. Morden argued that Venezuela ’22 bonds paid a high coupon while not being the “crowded trades” at either end of the country’s curve. [Editors notes: Caracas announced a devaluation of the VEF three days after the event. President Chavez died on March 5, 2013].