This week, Bolivia sold a ten year bond in the amount of US$500 million to foreign investors.
The yield?
Just under 5%, precisely 4.875%, Venezuela’s 2022 bond yields 11.2% to maturity, more than twice as much*
While Bolivia certainly has certain economic variables than are better than Venezuela’s, such as lower debt to GDP ratio (about 30%) , US$ 10 billion in international reserves which is about 20 months of imports for that country and a lower fiscal deficit, it also has a long history of defaults, a Government with a rich history of expropriations and nationalizations and an unproven track record in terms of willingness to pay.
Thus, while Bolivia enjoys a credit rating of BB-, just one notch above Venezuela’s B+, which should imply a lower yield, given the uncertainties, I would have thought investors would have demanded at least 1% or 2% more yield. Instead, the issue was oversubscribed by a factor of almost ten and the yield is like that of countries that are more respectful of private property rights and the law, like the Dominican Republic.
To me, this suggests that investors are overly punishing Venezuela for the lack of transparency in its numbers, its large fiscal deficit and the lack of growth in its oil production and therefore exports. Because even while Chávez could easily announce tomorrow that he will no longer pay the country’s debt, during the last fourteen years, he has shown that willingness to pay in the bad moments, even if he has also stepped over private property rights as much as Bolivia.
Thus, either these investors were smoking (or chewing?) some coca leaves and the bonds should drop in value (higher yield) once the hangover is over, or Venezuela’s bonds should move up significantly over the next few weeks or months and narrow the gap in yield to maturity, and thus country risk, between the two countries. Simply put, in a world without yield, Venezuela having to pay double what Bolivia does for similar bonds* seems somewhat illogical.
But what do I know?
*The two bonds are not identical, the Venezuela 2022 matures in three equal parts in 2020, 2021 and 2022, but all Venezuelan global bonds maturing around 2022 yield more than twice what Bolivia does.
The Devil's Excrement 
October 31, 2012 at 7:12 pm
[…] Bolivia vs. Venezuela’s Debt: What Are Investors Smoking (or Chewing)? […]
October 29, 2012 at 11:03 am
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October 25, 2012 at 2:26 pm
You buy my debt, I’ll buy yours. Look at how well it worked for the EU.
October 25, 2012 at 2:19 pm
Bolivia, for all its faults, has a much more transparent financial system. In fact, it seems that all of Morales’ bluster is about continuing the country’s access to Venezuela petrodollars and pacify his own people than about effecting a change to socialism or punishing plutocrats. The joke is on the bolivarians.
October 25, 2012 at 2:15 pm
But really, the only security behind those bonds is a government guarantee of payment, whose worth nobody really knows, but would be roughly equal to future inflows of oil cash (diminishing, given low investment and dropping demand) minus government expenditures (which have a floor beneath which the country would become ungovernable; the floor itself being pretty high given the dependency of the population on government handouts), plus foreign reserves (who really know what they are?), plus foreign and convertible state assets, minus claims on those assets (and what will a creditor do when faced in bankruptcy court against a valid claim of security that is not registered anywhere but IS VALID, even if it’s owned by a former government crony or a chinese company?) The unknowns in the equation are too many, and the risks too high….
October 25, 2012 at 2:27 pm
I see you are high on us…. 🙂
October 25, 2012 at 4:39 pm
I agree with you that Morales has adopted a low profile while Chavez has raised the ante about his socialist revolution. Investors feel that, at any point he may decide to stop payment and stiff them the way the Argentines (his soul mates) did a decade ago. So economic fundamentals and cashflows come to play a secondary role in risk assessment.
That said, Morales’ silence is not the same as a change of heart and a vow to play by the international finance rules. Whether Bolivia is transparent, I don’t know but it sounds like a bit of a stretch to me.
Ultimately, as we say in French, in the kingdom of the blind the one-eyed are kings. But I wouldnt think that Bolivia is twice as safe as Venezuela. For that matter, I dont think that emerging markets, by definition, can ever be considered investment grade or be priced as if they were; Brazil 10yr US$ sovereigns at 2.56%, Colombia at 2.91%, Russia at 3%??
October 25, 2012 at 2:03 pm
I am buying , I am buying…and so are they…I have seen lots of appetite, given that oil is down.
October 25, 2012 at 2:02 pm
The thing is though, Miguel, that investors are out to make money, and if there are investors out there who think that there is a possibility of arbitrage because Venezuela is being “unjustly” punished and that the 11.2% yield is to high for the level of risk, they would buy up the bonds very quickly forcing the yield down. Actually, if you believe that the opportunity for arbitrage is there, you can actually buy those instruments. Adam Smith called this the invisible hand. The sad fact is that there is simply no substantial appetite in the market for Venezuelan risk below 11.2%, ergo, bonds yield that much. Free markets.
October 25, 2012 at 1:52 pm
My feeling is that with Venezuela issuing mostly in the local markets in 2013 and the lack of yield in the world, that Venezuela will surprise in how it moves down in the curve. The difference is simply too large, even with all of those problems.
October 25, 2012 at 1:44 pm
I’m not surprised. The benchmarks for all of this are the publicly-traded CDSs (credit default swaps), which can be easily found on a bloomberg terminal. Venezuela and Argentina are the worst of the bunch in the region. There’s no conspiracy afoot. The market is deep and liquid enough. There are many issues at play. Among them, the Bolivian government has proven to be (so far) pretty transparent about their statistics and the MoF there is seen to have a good grip on public foreign indebtedness. Venezuela suffers not only because its bad macroeconomic numbers, but by the fact that nobody really believes that those numbers are real, that the amount of public debt may actually be much higher than that which is reported and that the amount of reserves may be much lower. Add to that, the large amount of claims from foreign companies against Venezuelan public-sector companies. Credit ratings are one thing, and after the financial crisis we can all see what value they really have. What matters is what investors actually do with their money, which is made evident in the CDS market.
October 25, 2012 at 1:35 pm
I agree, but a factor of two seems excessive to me (even including Giordani in the yield)
October 25, 2012 at 1:33 pm
Actually, the Bolivian government of Morales has shown a pretty steady hand and a lot of responsibility in managing the macroeconomy and a lot of respect to its international creditors, much unlike the Venezeulan government. This is not surprising to anyone working in international finance.
October 25, 2012 at 12:36 pm
Miguel – I am a bond PM based in US …married to a girl from CCS so I read and appreciate your blog. I don’t manage EM but my impression on Bolivia and new issue generally is that EM PMs seeing inflows want to own the shiny new issuer who has not brought debt to market in 100 years regardless of valuation/fundamentals. The new Bol issue goes into EM indices at month-end – so PMs will buy new issues for a flip btw issuance date and month end as any positive price performance is excess return vs. one’s benchmark index during the when issued period. This is a strategy that bond PMs use with new issue in inv grade credit/HY/EM…I agree Bolivia coming 600 bps thru Vene makes no sense based on political fundamentals for Bolivia….we think it a case of too many $ chasing too few bonds…our EM PM passed…bonds are trading at 100.75….would rather own Mex/Braz at the same or higher yield…
October 25, 2012 at 12:53 pm
Dave I would have to agree. There’s a Russian saying: “hunger has no taste”. Short Boliva, long Vene!
October 25, 2012 at 1:30 pm
I agree, I prefer Telecom Colombia at the same ytm
October 25, 2012 at 3:20 pm
ADR on the NYSE?
October 25, 2012 at 9:46 am
Miguel, I don’t know where else to post this -it has to do with the election.
I “wormed” my way through the CNE’s election result pages all the way to the “mesas” level and grabbed them all. (by the way I have the votes by mesa in tab delimited format that can easily be imported into Excel or in my case SQL2012) and I can make that available to anyone who wants it).
I found two things:
1. adding all the mesas didn’t match the grand totals -it was around 70 thousand votes short. It turns out there is no detail at the mesa level for anything below Municipio Miranda (Guarico) (There are totals at the Parroquia, Centro but keep drilling down to the mesas and there is nothing there).
2. This one is a little bit more problematic, I remember seeing pictures in your site on election day of voters lined up in New Orleans in what looked to be the Superdome. As a matter of fact I just found the pictures here: http://devilsexcrement.com/2012/10/07/panorama-view-of-voters-lining-up-in-new-orleans/
Yet i noticed that I was getting 0 votes for New Orleans -aggregating the mesa level numbers- although I am matching exactly the grand totals at the EMBAJADA level. This means that New Orleans numbers are not included at all – and it seemed to have been a lot of people voting in NO that day.
So summarizing, the Municipio Miranda numbers appear to be included in the grand totals but there is no detail at the mesa level in the CNE website. The New Orleans numbers (whatever they may have been) ARE NOT included in the grand totals AND there is no detail at the mesa level either. All the guys that travel to NO: your votes were not counted.
I understand these issues will not change the election results but -to me a technical kind of guy- show a degree of sloppiness that would make me wonder about the confidence of the overall numbers,
October 25, 2012 at 11:36 am
Ernesto, votes of Venezuelans abroad are never counted. It’s been like that since, at least, 2004, if memory serves.
October 25, 2012 at 12:24 pm
Ernesto,
What happens if you count this?
http://www.comandoexteriorvenezuela.com/
(plus Cuba)
October 25, 2012 at 1:02 pm
Kepler, i looked quickly at that website (i will give you an in-depth of the differences later on) but what’s interesting is the comandoexterior has numbers for N.Orleans combined with Miami but – guess what, Miami is not even included in the CNE. No one verified this from comando exterior? Just check it here: http://www.cne.gob.ve/resultado_presidencial_2012/r/1/reg_992700.html
That’s 20 thousand votes that are missing.
Interestingly also, the CNE has 0 votes in Montevideo (I happen to be from uruguay that is why i checked this one) and the comando exterior has 327 votes.
San Pablo has 0 in the CNE comando has 544 and Brasilia has 0 commando has 98.
I will develop a detail comparison shortly of what is in the CNE and the table you so helpfully provided.
Just for your info. here are the totals by foreign city in the CNE:
BERLIN 217
FRANKFURT 504
HAMBURGO 177
ST. JOHN’S 8
RIYADH 173
ARGEL 49
BUENOS AIRES 1159
CABERRA 789
VIENA 169
BRIDGETOWN 65
BRUSELA 237
BELMONPAN 6
MINSK 59
LA PAZ 153
BELEM DO PARA 10
BOAVISTA 23
BRASILIA 0
MANAOS 10
RECIFE – PERNAMBUCO 23
RIO DE JANEIRO 266
SAO PAOLO 0
SOFIA 11
MONTREAL 1644
OTTAWA 303
TORONTO 1895
VANCOUVER 765
CHECA 37
SANTIAGO 1385
BEIJING 83
HONG KONG 34
NICOSIA 18
ARAUCA 0
BARRANQUILLA 162
BOGOTA 2329
BUCARAMANGA 0
CARTAGENA 62
CUCUTA 650
MEDELLIN 335
PUERTO INIRIDA 0
RIOHACHA 180
SEUL 13
SAN JOSE 1107
LA HABANA 0
WILLEMSTAD 386
COPENHAGUE 109
ROSEAU 10
GUAYAQUIL 152
QUITO 377
EL CAIRO 23
SAN SALVADOR 72
ABU DHABI 146
BARCELONA 4600
BILBAO 688
MADRID 0
SANTA CRUZ DE TENERIFE 2423
VIGO 0
ETIOPIA 0
MANILA 14
HELSINKI 52
MARTINICA 49
PARIS 0
LONDRES 1599
ATENAS 88
ST. GEORGES 12
GUATEMALA 0
GEORGETOWN 11
PUERTO PRINCIPE 26
TEGUCIGALPA 17
BUDAPEST 33
NUEVA DELHI 12
JAKARTA 22
TEHERAN 12
TEL AVIV 0
MILAN 0
NAPOLES 104
ROMA 447
KINGSTON 6
TOKIO 61
AMMAN 66
NAIROBI 0
KUWAIT 79
BEIRUT 254
TRIPOLI 0
KUALA LUMPUR 87
RABAT 3
MEXICO 1871
WINDHOEK 0
MANAGUA 0
LAGOS 0
OSLO 209
ARUBA 797
BONAIRE 95
LA HAYA 0
PALESTINA 83
PANAMA 1109
ASUNCION 0
LIMA 0
VARSOVIA 35
FUNCHAL MADEIRA 592
LISBOA 247
DOHA 147
SANTO DOMINGO 482
BUCAREST 8
MOSCU 79
BASSETERRE 0
KINGSTOWN 0
CASTRIES 0
SENEGAL 8
SINGAPUR 53
DAMASCO 0
PETRORIA 55
ESTOCOLMO 219
BERNA 472
PARAMARIBO 14
PUERTO ESPA A 273
ANKARA 9
MONTEVIDEO 0
BOSTON 977
CHICAGO 1181
HOUSTON 5132
NEW ORLEANS 0
NEW YORK 2446
PUERTO RICO 819
SAN FRANCISCO 889
WASHINGTON 1657
VIETNAM 0
Total CNE 47108
October 25, 2012 at 1:12 pm
A little addendum I was reading the command exterior columns incorrectly, Brasilia has 0 participation and Miami has 8000 participation not 20 000. (20K is the number of eligible voters).
Monetvideo has 244 participants and 300+ eligible.
But the number are slightly different to what I said earlier but Miami is still missing.
October 25, 2012 at 3:39 pm
OK I performed a more detailed comparison of what’s in the CNE and the comandoexterior. (I am sorry for “hijacking” this thread from Miguel’s blog, really sorry Miguel)
The CNE undercounts the EMBAJADAS by about 20.000 votes or close to 30%. (imagine if they were 30% off in the in-country vote count)
Miami/NO(8518) is missing, The Hague(392) Praga(38) are missing, they are not even in the list of the CNE. They don’t exist.
I still can’t understand how the comandoexterior missed this.
Listed with 0 votes (in parenthesis the count of comandoexterior): Madrid (6000) Paris (1255) Vigo (1128) Milan(586) Montevideo(241), Lima(472) San Paulo)382), Bucaramanga (307) Guatemala(150) Managua(70) are listed with 0 votes in the CNE.
In almost all the others there are differences (I have the detail) in most cases undercounting by the CNE – the biggest being San Francisco with a difference of 286 votes (1175 vs. 889 CNE)
To be perfectly honest the CNE has some that are missing from comando (they dont add to much but just to be fair) they are mostly all in remote or islamic countries: for example Aman, Teheran, Tripoli, Beirut that amount to a few hundred votes. There are a few others.
La Habana shows with 0 at the CNE and it does not show in comando.
October 25, 2012 at 8:29 am
Usually a devaluation is considered a positive for dollar denominated bonds, it reduces the size of local debt and the ability to pay the foreign currency debt.
October 25, 2012 at 9:43 am
Venezuela is due to another election in two years’ time, this time possibly much more difficult than the last. I doubt the devaluation will be sufficient for Bs (a very appropriate currency abbervision btw) to come to market rate, currently north of 13 to a dollar. It will also come amidst new (over)spending, weakening the economy further while damaging the ability to repay debt.
In September FT reported that Venezuela may default as early as next year, should Chavez win.
This is all before we consider that an oil price adjustment to 70$/barrel would require nothing more than, say, Libya (or Iraq, or …) coming to their senses about how high oil price is too high.
It’s no wonder Venezuelan debt is hideously expensive.
October 26, 2012 at 2:09 am
To fortify my position, Paralelo Venezuela has Bs average rate at 14.5, down close to 10% in just two days. FT has reported Venezuelan budget deficit at staggering 15% of GDP in the past year, and Venezuela has sold some 10 tons of gold this year alredy – almost 4 tons in september alone.
11.5% may actually be too cheap, seeing as Venezuela has moved gold into the country explicitly to “protect” it from creditors.
October 25, 2012 at 7:53 am
Many economic forecasters are predicting disaster for 2013. The handwriting is on the wall.
Here is what Fitch says about it:
“We believe that in the absence of policy adjustments, government indebtedness is likely to continue to increase.”
http://www.fitchratings.com/web/en/dynamic/articles/Venezuelan-Policy-Continuity-Likely-After-Chavez-Victory.jsp
Venezuela, according to Fitch, will have a ‘currency adjustment’ in 2013. it will go downhill from there. That’s why the interest rate is so high on Venezuelan government bonds.
October 25, 2012 at 9:19 am
Thx for the link, Faust.
October 25, 2012 at 2:43 am
I think it’s also because Venezuela willingly paid huge yields in the past. Would you accept a 6% yield on your money if you knew you could easily get 11% for it, from the same debtor?
October 24, 2012 at 11:39 pm
It’s all Greek to me. Pun intended, obviously.
October 24, 2012 at 10:49 pm
As I recall most of the Venezuelans bonds were mostly bought with Bs. and valued in dollars with no intention of bringing capital into the country. More like the opposite and with a nice yield to boot. I ran into one interesting explanation today http://watchdog-watcher.com/2012/10/16/how-do-i-bribe-thee-let-me-count-the-ways/ In short it states that malatins aren’t the only way. Also, this site has a great collection of resource links.