Archive for June 18th, 2013

Venezuela: One Upgrade, One Downgrade And One Improved Outlook

June 18, 2013

While President Maduro has done nothing on the most pressing problems of the economy, in the last two weeks, the country received an upgrade in its status with the US, a downgrade from Standard and Poor’s and the Catholic Church seemed to give its blessing to Maduro and the country when Pope Francis met with the Venezuelan President., essentially seeing an improved outlook in relations with the country.

While Maduro is probably happy about the total, unfortunately for the average Venezuelan the only one of these that will affect his or her pocket is the downgrade from B+ to B by Standard and Poor’s. Yesterday morning, before the downgrade, Venezuela’s bonds were trading about at a 1% lower yield than today, which means that any new debt that is sure to come will cost around US$ 10 million more per year for each billion dollars issued.

In fact, so far Maduro being elected has been quite costly for the country, as shown by the graph below:

cds-1

In the graph I show the value of the 5 year CDS, or the cost to insure against the country’s debt default, which is a measure of the so called “country risk” or “country premium”. As you can see, Maduro has been costly to the country since he came to power. Just by being elected the CDS jumped from about 673 basis points (6.73%) to about 830 bps (8.3%). Then, after the electoral noise went away, it was calm for a while, but then markets got impatient (and so did S&P) and started punishing Venezuelan bonds. A few days ago it got as high as 1065 (10.65%) basis points (which was also influenced by world jitters). Then it seemed to calm down dropping to 960 basis point, only to jump yesterday on the downgrade by S&P.

From the graph, it is hard to precisely separate world jitters from Maduro, but if we say the first jump was all Maduro and the recent downgrade was all Maduro, you have at least 250 basis point or about 2.5%due to him since assuming office, or roughly US$ 25 million more in interest payments per year for each billion dollar of bonds issued. In a US$ 3 billion issue, the likely amount of what this Government want to start its issuing would then cost (us Venezuelans) for ten years US$ 250 million.

But Maduro is probably relishing on the fact that the Pope met him, Kerry met Jaua and the FAO gave him the most stupid award possible given the current shortages and the level of inflation.

And when Maduro is gone, Venezuelans will be paying for his ignorance. Meanwhile Maduro is “celebrating” his tenth week as President without a single important economic measure being announced.

Which is precisely why S&P downgraded the country’s debt. Oh yeah! S&P did say that if economic policy became more “pragmatic” the outlook, which is negative, could improve.

Don’t hold your breath…