Chavez health scare keeps the bid on Venezuelan bonds

August 4, 2011

Venezuelan President Hugo Chavez last week declared himself reborn, phoenix-like, for his 57th birthday, singing and jigging on the balcony of his palace, belying his cancer diagnosis.  That may have disappointed some investors who hoped  the left-wing leader’s health issues would  prevent him from contesting or winning yet another presidential term. Venezuela’s dollar bonds, considered among the riskiest debt securities in the world, have risen sharply since Chavez announced his illness — the most-traded 2027 bond is quoted around 77 cents on the dollar, more than 10 cents off  troughs hit before his operation in June.

Market players are sensitive enough not to mention Chavez’s health problems.  JP Morgan analysts for instance this week recommended an overweight on Venezuelan bonds, citing  “idiosyncratic domestic political events where positive outcomes could offer important market upside, the odds of which may still be underpriced.”

Stuart Culverhouse, head of research at frontier markets brokerage Exotix, is more succinct.  “I think anything that points towards a possible change in government, that would bring with it a more orthodox policy direction, would be welcomed by the market,” he says.

It is political risk that has kept Venezuelan bond yields in the mid- to high-teens. Fear the mercurial president will suddenly declare a default has so far outweighed the fact that his  country could earn well over $90 billion from oil exports this year.

So how big could the upside be for bond markets?

“I see Venezuelan yields going to 8 percent if we get a smooth transition and a pro-market government. I can see a 500 basis-points rally,” Sam Finkelstein, a fund manager at Goldman Sachs Asset Management, said recently.  He too is overweight Venezuela, though  unlike many, he has held that position since last September when parliamentary elections dented Chavez’s majority and raised hopes of an opposition win in 2012.

It’s possible the market is assuming too much. Chavez himself has made clear he does not intend to withdraw from politics. Culverhouse points to Argentina where a bond rally unfolded following the death of former leader Nestor Kirchner last year.  There,  investors’ hopes that Kirchner’s exit would push the country onto a more sensible policy path were soon dashed — his widow Cristina, Argentina’s current president, has shown no sign of deviating from her husband’s legacy and is likely to win the upcoming election.

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