EMTA FORUM: THE ECONOMIC OUTLOOK FOR VENEZUELA
Thursday, November 6, 2014
The Langham Hotel - Chase Room
250 Franklin Street
3:30 p.m. Registration
4:00 p.m. Panel Discussion
The Economic Outlook for Venezuela
Carl Ross (GMO) – Moderator
Cem Karacadag (Babson Capital)
Siobhan Morden (Jefferies)
Ben Ramsey (JPMorgan)
Matt Ryan (MFS Investment Management)
Additional support provided by Jefferies and JPMorgan.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
EMTA Boston Panel Speakers Concerned Over Venezuela’s Economic Future
Speakers at EMTA’s Forum on Venezuela expressed grave concerns on the country’s economic future, and suggested that the possibility that the sovereign could default in 2015 was not trivial. The event was held on Thursday, November 6, 2014 at the Langham Hotel in Boston and drew 75 market participants.
In introductory remarks, panel moderator Carl Ross of GMO lamented Venezuela’s “stunning economic policy mistakes, deep structural weaknesses and a lack of transparency.” Ross compared the status of the Venezuelan economy unfavorably to the progress made in most EM countries over the past two decades. According to Ross, analyzing Venezuela has become an exercise in “counting pennies,” and one of predicting the future actions of a leadership where “preserving the revolution remains paramount.”
Matt Ryan (MFS Investment Management) discussed what fellow investors could expect in the coming year. “I don’t think it’s a stretch to say that Venezuela is probably the worst-managed economy in the world right now,” he stated. Ryan made reference to Venezuela’s “abysmal” social indicators and expressed serious concern at “the low and declining levels of liquid, hard-currency assets; little sign that the government is taking measures to address the reasons that have led to the current situation, and the low price of oil, which exacerbates this situation.”
In order to improve the country’s economy, in Ryan’s assessment, Caracas should move to a unified FX regime, and make changes to monetary and fiscal policies. Despite the political cost, it should also reduce the domestic consumption of subsidized fuel, and instead export more fuel for cash. In addition, PetroCaribe subsidies could be reduced, and structural reforms could be enacted. However, he recognized that such actions were unlikely.
Instead, Ryan concluded that investors were likely to see a piecemeal approach to economic reforms by “a weak government trying to plug holes in a sinking ship.” While he believed that the Maduro administration was well aware of the consequences of a default, “there is a price of oil at which some choices will have to be made.”
JPMorgan’s Ben Ramsey reviewed the country’s political outlook. In Ramsey’s view, the 2012 election-related overstimulation of domestic demand would probably have been addressed had President Chavez not succumbed to cancer in 2013. “However, President Maduro did not have the same political capital, so 2013 was a year of no adjustments,” Ramsey stated. Weakening oil prices do little to help Maduro as Venezuela prepares for National Assembly elections, and Ramsey highlighted low polling numbers for the chavista politicians and even weaker numbers for the President himself. What remains unknown, according to Ramsey, was how far the administration would go to avoid the opposition taking control of the Assembly. “Could they create a crisis and delay the elections? I don’t think it can be ruled out, but it would be hard to do,” he reasoned.
Jefferies’ Siobhan Morden raised louder alarms. “Democracy is at risk…and a constitutional break is possible,” she argued, stressing that “I am convinced the chavistas will not allow the loss of one branch of government.” Moderator Ross’ view was that the government “gets so much legitimacy from elections” that it would be more likely to “cheat on, rather than cancel” the vote.
Babson’s Cem Karacadag outlined two possible default scenarios should Venezuela stop servicing debt. In his estimation, a default under the current regime would be based on short-term thinking and unchanged policies, as opposed to being the context of an overall adjustment in macroeconomic policies with long-term benefits. A default under this scenario would likely be hostile to investors and yield modest short-term benefits: Venezuela would save a net $7 billion in debt service, while investor confidence would erode, more capital would flee the country, debtors would attempt to attach assets such as offshore refineries and oil shipments, and Venezuelan oil would sell at a discount because of delivery risk. “A default under this regime won’t be thought-out or researched,” he emphasized.
A default under a future regime, in Karacadag’s analysis, was more likely to be carried out by a government willing to make structural adjustments, would have a longer-term horizon focus, would be friendlier to private investors, and would more likely include Chinese debt. Such a default would lock in an NPV haircut, and potentially improve investor confidence over time.
Finally, the discussion turned to recovery values if Venezuela were to default. Morden argued that a stop in debt service would not occur by accident, and would be undertaken after a thorough review of legal risks. “They would have to do it without attachment risks, because so much of their international trade could be affected by it,” she stressed. Morden reasoned that a default would also occur after a number of emergency measures were taken, such as putting Citgo back on the block or selling other oil refineries. Thus, based on the assumptions that the government would have studied attachment risk, and already sold off key assets, “the recovery value could be quite low.”
The panel concluded with Ross asking speakers what potential good news could emerge. Speakers listed a turnaround in oil prices, and a change in the FX regime, although most speakers expressed high levels of skepticism of any policy improvements. Speakers also deemed the risk of default ranged from “less than 20%” to “between 25 and 50%” for the coming year, with increased possibility of default on a longer time horizon.