Archive for June 7th, 2011

New Debt in 2011 to be Increased by 112% at President Chavez’ Request

June 7, 2011

(Venezuela’s CDS curve this morning. It costs 12 % (1200 basis points) to insure against default in 5 years)

The big economic news last week in Venezuela was Chavez’ announcement that he needed another Bs. 45 billion (US$ 10.46 billion at the official rate of exchange of Bs. 4.3 per US$) in new debt this year. This amount is on top of the Bs. 40 billion (US$ 9.3 billion) in new debt contemplated originally in the 2011 budget. Thus, Chavez is asking fro an increase of “only” 112% in debt for the year.

Never mind that this is not even legal. Under the Venezuelan Budget Law, debt for the year has to be requested in December of the previous year and only in cases of emergency can it be increased. There is no emergency, other than Hugo wants to be reelected. The money is in fact earmarked for Mision Vivienda, Mision Trabajo and to pay interest in old debt. But Hugo cares little about legality, as he is above the law.

Initially, Government officials said that most of this new debt would be in local currency. However, this was later changed as the Government realized that if it was all issued locally, it would hurt local credit. So, unofficial sources say that it is likely to be half and half, with the Government issuing some US$ 5 billion in new debt abroad (plus whatever PDVSA issues in the rest of the year)

All of this happens as oil prices are still near the US$ 100 per barrel level as measured by Venezuelan oil basket last week. Go figure!

The problem is that Government officials continue to say that Venezuela can issue more debt as its debt to GDP ratio is small. This appears to reflect the assumption that Venezuela is a country with a credit rating of investment grade, which is not the case. In fact, Citibank suggests that the biggest danger now in the face of this news is that rating agencies downgrade Venezuela because of the increased debt.

Any debt issued abroad will be very expensive. In February, PDVSA had to issue bonds paying a coupon of 12.75% and credit conditions are very similar to what they were in February. Even worse, the total debt to be issued this year is close to 25% of the budget, an unheard of number in the country’s history.

The worst part is that some of this issuing will be made in order to maintain an artificially low exchange rate, which implies that it will be more expensive that it needs to be. Even worse, part of the money will be used to pay interest on all debt and most of it in discretionary Misiones, not on investment.

The rate of growth is unsustainable and Chavez is now accelerating it, either oil soars or Chavez stops this if gets reelected. PDVSA has issued US$ 9.1 billion in new debt since last August, while the Republic paid US$ 1.5 billion in the 2011 bond which matured in April. A PDVSA bond matures in July in the amount of US$ 2.4 billion. Analysts were expecting the Republic to issue at most US$ 3 billion in 2011 in foreign currency, it may now be as much as US$ 6.5 billion, but there has been no official announcement of the exact amount.

The problem is that Venezuelan bonds trade in a very specific market, which is quite limited. Since the country is below investment grade, only Emerging Market dedicated funds and hedge funds invest in the country’s and PDVSA’s debt. Since the bonds contained in the EMBI Index are about US$ 400 billion, Venezuela’s outstanding debt is a large fraction of that index, which would require that all funds overweight Venezuela. Thus, Venezuela’s debt yields a lot, not so much because of risk, but because of the excess supply in the markets. Every time a new bond comes to market, the supply increases which affects all bonds. This will only get worse in time as the country continues to issue. Thus, even at a constant rate, this would not be sustainable and certainly too expensive.

Below, Chavez’ request to the Assembly, not even one word about the justification for this new debt. It even says “the excess of oil revenues has to be distributed to the “people”, but this is not the excess, this is “extra”, it is not income, it is debt.  (double click twice to read).