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Value in Venezuela, say analysts

Oct 8, 2013

A sell-off in Venezuelan sovereign bonds offers a buying opportunity, analysts say


Venezuelan sovereign bonds still present upside, analysts have said after investors dropped the bonds in large numbers last week.

The country has the ability and willingness to continue servicing is international obligations, analysts said, despite a growing lack of faith in the government’s macroeconomic policies.

Worries about Venezuela’s liquidity were "misplaced", said Bank of America Merrill Lynch analysts. "There is remarkably little in the data to suggest that Venezuela’s liquidity position is any different than what it has been during most of the past four years. We thus expect the sell-off to revert as Venezuela’s capacity to service its debt obligations becomes clear."

Venezuela’s 2027 bond slipped around 10 points, to just under 80 cents, at the end of September, according to data from the bank. The bond had been trading around par earlier in the year.

A default is unlikely in the short run, said analysts at Jefferies.

"The policy paralysis does not suggest a near-term credit event unless authorities draw down their stock of external liquidity (which would take around three years of import growth similar to 2012 to reach three months of import coverage)," the analysts said Monday.

"Venezuela still benefits from 10 months of import coverage (including non-reserve assets) and only slow decline in FX reserves."

The fall in Venezuelan bond prices last week was a result of policymakers’ inaction on introducing a new exchange rate regime, as well as more general investor unease over macroeconomic policies, Jefferies analysts said.

Nelson Merentes was replaced as economy vice-president this week, according to media reports Tuesday, replaced by Rafael Ramírez, the minister of petroleum and mining. Merentes had been central bank governor until April, when he was moved to the finance ministry.

The short stint in the position raises uncertainty over economic policymaking, Barclays said. Edmée Betancourt, who replaced Merentes in the central bank in April, was herself replaced in August.

"Given the very short tenure of the persons designated to those positions, it is very hard to understand how the decision-making process inside the government is taking place," Barclays said.

Still, Ramírez’s expanded role is positive as it will allow him to increase private investment in oil, Barclays said. The bank also expects that Venezuela can continue to pay.

"Despite the negative trend in Venezuela’s fundamentals, we still think the country has the capacity to service its debt," the bank said. "Even if it is increasingly sensitive to a decline in oil prices, the oil market outlook remains supportive." LF



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