Venezuela — high risk, higher yield
Which bond would you rather buy — one issued by a country with an unpredictable leader but huge oil reserves, or one with a dictatorial president as well as empty coffers? The answer should be a no brainer. Not so. The countries are Venezuela and Belarus, and a basic comparison of their debt profiles shows how strangely risk can be priced in emerging markets.
Venezuela’s 2022 dollar bond yields 15.5 percent while the 2022 issue from state oil firm PDVSA trades at 17 percent yield. Venezuelan debt pays a 1200 basis point premium to U.S. Treasuries, according to the EMBI Global bond index.
Now check out Belarus. Dire public finances, a huge recent currency devaluation, and seeking an $8 billion bailout from the IMF, yet able to pay 11 percent on its 2018 issue. Its yield premium to Treasuries is 900 bps or three percentage points less than Venezuela.
Is such a huge risk premium on Venezuela justified? RBC analyst Paul Biszko says Venezuelan yields should logically be 300-400 bps lower than current levels, given the strong recent track record in servicing debt — it did not miss a payment even when oil prices fell to $10 a barrel a decade back. Oil is well over $100 a barrel now, yet investors seem unwilling to trust in President Hugo Chavez’ willingness to keep up payments.
“People see him as one day saying he won’t pay so there is limited sponsorship externally for the bonds,” Biszko says. “Meanwhile those who do hold it get rewarded with high premiums…it doesn’t make sense that the premium is double that of Argentina.”
Sure, Venezuela’s economy isn’t in great shape. Inflation is running at 30 percent a year. There is an election coming up. Also, PDVSA has a $2.5 billion bond maturing mid-July. But Chavez is a shoo-in for the election while PDVSA has enough money to pay the bond. And no one can doubt Venezuela’s ability to pay — Barclays estimates its trade surplus this year may hit $90 billion.
Exotix economist Stuart Culverhouse suggests buying the 2019 and 2022 Venezuelan bonds, citing the high yield. “Concerns over willingness to pay…to some extent overstate Venezuela’s default risk,” he says.
As I wrote here two months ago, Venezuelan bonds enjoyed a mini-rally in the first four months of the year, but prices have corrected down with the easing oil price. That’s taken the 2022 yield up by 0.7 percentage points — among the highest in the world. The question is how many will step up to buy?