Venezuela bonds soar after currency devaluation

By Reuters Staff
January 11, 2010

By Frank Jack Daniel

CARACAS, Jan 11 (Reuters) – Venezuelan bond prices leapt on Monday after President Hugo Chavez ordered a devaluation of the bolivar currency, a move that strengthens the finances of South America’s top oil exporter but risks alienating the leftist’s supporters.

Venezuela’s benchmark 2027 bond soared nearly 7 percent in price on Monday in trading on the first business day following the devaluation, announced by Chavez on Friday night.

The measure has triggered a frantic shopping spree in the capital Caracas, as people predicted the new dual currency system would lead to higher prices for imported goods.

“This is going to affect everything, and of course, the hardest hit are those of us who have the least,” said Rafael Acosta, 63, an employee of a store selling work clothes.

Under the new system, the bolivar is fixed at 2.60 per dollar for basic items like food and government purchases, with a second rate of 4.3 for goods deemed nonessential and for oil income.

The bolivar had been fixed at 2.15 since 2005.

The socialist Chavez has given the state a hefty role in managing the economy. During his 11 years in office he has nationalized most heavy industries and expropriated large farms. Business and finance are tightly regulated.

He is gambling he can drag the OPEC nation out of recession after a 2.9 percent contraction last year, with higher spending ahead of legislative elections in September.

The devaluation is well received by holders of Venezuela debt because it means the government and state oil company PDVSA will receive 4.3 bolivars for every oil dollar, helping finance the budget of the OPEC member and reducing its borrowing needs for the year.

The move also will drive inflation, already the highest in the Americas at 25 percent last year. Venezuela is largely dependent on imports for its consumer goods.

“We are going to cut imports,” Chavez said on Sunday. “I’m calling on all the real national businessmen to join the people.”

The former paratrooper, who calls Cuba’s Fidel Castro a mentor, also hopes the private sector will be helped by the weaker bolivar.

But if prices surge he risks angering his mostly poor supporters, who are already annoyed at electricity and water rationing and high crime.

Some analysts say the price impact of the devaluation will not be severe, pointing out that much of Venezuela’s imports are already paid for with dollars bought on a semi-legal black market, where the bolivar is worth about a third of its official rate.

The currency closed at 6.15 to the dollar in that market on Friday and was expected to strengthen on Monday.

 

BONDS SURGE

On Monday, the highly traded 2027 global bond rose 4.750 points to bid 84.500 with a yield of 11.290 percent.

Returns for Venezuela’s globally traded bonds soared 5.29 percent, according to the benchmark JP Morgan’s Emerging Markets Bond Index Plus.

The increase in returns was by far the largest posted by the 15 emerging market nations in the EMBI+ index.

Venezuela’s global bonds yield spread over U.S. Treasuries narrowed by 129 basis points to 769 basis points, but was still the widest among EMBI+ countries.

The narrowing of the yield spread is widely perceived to reflect investors’ perception that an investment is less risky. (Reporting by Walker Simon in New York and Patricia Rondon; Editing by Andrea Ricci) ((frank.daniel@thomsonreuters.com; +58 212 277 2656; Reuters Messaging: frank.daniel.reuters.com@reuters.net))

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