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.

31 Responses to “Bolivia vs. Venezuela’s Debt: What Are Investors Smoking (or Chewing)?”

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

  2. […] BOLIVIA Bolivia vs. Venezuela’s Debt: What Are Investors Smoking (or Chewing)? […]

  3. geronl Says:

    You buy my debt, I’ll buy yours. Look at how well it worked for the EU.

  4. 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.

  5. 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….

    • moctavio Says:

      I see you are high on us…. 🙂

    • Noel Says:

      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%??

  6. moctavio Says:

    I am buying , I am buying…and so are they…I have seen lots of appetite, given that oil is down.

  7. 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.

  8. moctavio Says:

    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.

  9. 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.

  10. moctavio Says:

    I agree, but a factor of two seems excessive to me (even including Giordani in the yield)

  11. 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.

  12. david Says:

    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…

  13. 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:

    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,

    • Alek Boyd Says:

      Ernesto, votes of Venezuelans abroad are never counted. It’s been like that since, at least, 2004, if memory serves.

    • Kepler Says:

      What happens if you count this?
      (plus Cuba)

      • 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:

        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
        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
        CARTAGENA 62
        CUCUTA 650
        MEDELLIN 335
        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
        VIGO 0
        ETIOPIA 0
        MANILA 14
        HELSINKI 52
        MARTINICA 49
        PARIS 0
        LONDRES 1599
        ATENAS 88
        ST. GEORGES 12
        GUATEMALA 0
        GEORGETOWN 11
        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
        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

        • 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.

        • 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.

  14. 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.

    • TV Says:

      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.

      • TV Says:

        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.

  15. Dr. Faustus Says:

    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.”

    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.

  16. TV Says:

    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?

  17. deananash Says:

    It’s all Greek to me. Pun intended, obviously.

  18. Roger Says:

    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 In short it states that malatins aren’t the only way. Also, this site has a great collection of resource links.

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