Archive for October 24th, 2012

Bolivia vs. Venezuela’s Debt: What Are Investors Smoking (or Chewing)?

October 24, 2012

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.