Comments on: Venezuela — high risk, higher yield http://blogs.reuters.com/globalinvesting/2011/06/10/venezuela-high-risk-higher-yield/ Insights behind the investment headlines Wed, 16 Nov 2016 21:43:49 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: jacintorosas http://blogs.reuters.com/globalinvesting/2011/06/10/venezuela-high-risk-higher-yield/comment-page-1/#comment-95780 Wed, 01 May 2013 04:21:48 +0000 http://blogs.reuters.com/globalinvesting/?p=4334#comment-95780 Venezuelan have attractive advantages for investment. It have a good lot of natural resources, the best infrastructure in Latin America, skilled labor and a privileged geographical location.

Moreover, nowadays the Venezuelan economy it is very dynamic because extraordinary income by petroleum exportation.

Tourism, recreation services, chemical and petrochemical industry, Information and Communication Technologies, agriculture, and foods these are among the best business areas.

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By: economistjoe http://blogs.reuters.com/globalinvesting/2011/06/10/venezuela-high-risk-higher-yield/comment-page-1/#comment-4365 Fri, 10 Jun 2011 23:20:00 +0000 http://blogs.reuters.com/globalinvesting/?p=4334#comment-4365 The long term problems with Venezuelan debt are aren’t insignificant. The country has used massive amounts of future oil supplies as collateral for loans from China, so long term ability to pay is diminished. Additionally, the underinvestment in the country’s oil infrastructure is starting to reduce output. Granted, proven reserves are immense but twelve years of Chavez rule have turned the country into a basket case. The country imports everything at this point and the government has turned to complete control over the currency market to cover up what I believe is a coming crisis in forex reserves.

Yes, Chavez will play the safe game with the debt until his reelection next year (an almost certitude). After the election, he’ll have much less incentive to pay on good terms. Given the decision to pay debt payments or pay for absolutely necessary improvements in infrastructure I wouldn’t bet on payments. He may not immediately default the bonds, but a threat of nonpayment is not so unimaginable. Here is the real danger in Venezuelan debt, with hightened levels of risk must come higher yields. As yields increase, prices must decrease. Unless you are planning on holding the debt to maturity you will not realize your expected yield if you have to sell the bonds for a discounted price.

I would not invest in Venezuelan debt but I probably would not invest in Belorussian debt either. At minimum, the investment should be hedged with some kind of default swap or option relevant to your holding period.

Joseph Hogue is a Research Economist for the State of Iowa. He is a candidate for the level III CFA exam and sits on the board of the CFA Society of Iowa.

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