Chavez’s 681% Returns Mean Socialism Buoys Goldman: Andes Credit
By Ye Xie & Nathan Crooks - Jan 30, 2013
The 681 percent advance, equal to 14.7 percent annually, has enriched investors from OppenheimerFunds Inc. to Goldman Sachs Asset Management LP that counted on Chavez’s willingness to siphon the country’s oil wealth to pay its creditors in the face of start-stop growth and falling reserves. While his policies drove away enough investors to keep Venezuela’s borrowing costs over 12 percent on average during his tenure, or 4 percentage points higher than those of developing nations, he’s never missed a bond payment.
“This is a really great high-income and high-total-return investment for your portfolio,” said Sara Zervos, an emerging- market debt manager at New York-based OppenheimerFunds, which oversees $176 billion in assets and has invested in Venezuelan notes for more than a decade. “Chavez hasn’t done a lot of good for his country, but he has the objective to service the bonds. Our interests are aligned.”
Now, as the 58-year-old leader battles cancer, the nation’s outsized returns may be nearing an end. While Venezuela’s benchmark bonds have climbed to a five-year high since Chavez said on Dec. 8 that he needed more surgery, they’re unlikely to replicate the gains they’ve posted in the past decade once the rally drives yields down closer in line with regional peers, according to Russell Dallen, the head trader at Caracas Capital Markets.
Chavez’s deteriorating health has triggered a 41 percent bond gain in the past year on speculation that a new regime will retreat from policies that curtailed oil production in the country that holds the world’s largest reserves.
Chavez missed the inauguration for his third six-year term on Jan. 10 as he recovered from surgery to treat an undisclosed type of cancer. Information Minister Ernesto Villegas told reporters on Jan. 27 that the president is healthy enough to make economic policy decisions.
A former paratrooper and an ally of former Cuban President Fidel Castro, Chavez has nationalized farms and energy companies, imposed price caps on products such as toothpaste and toilet paper and championed companies where workers participate in decision-making. He has devalued the bolivar four times since imposing currency controls in 2003, shut down more than 50 foreign-exchange brokerages in 2010 and threatened to jail people who trade in the black market.
The policies have led to shortages of everything from electricity to sugar and beef, fueled the world’s third-highest inflation rate and inflated Venezuelan bond yields. That’s rewarded investors willing to buy the debt at discounted prices.
Interest-rate payments on Venezuelan bonds exceeded price gains by 1.4 times since 1999, versus 0.3 for Brazilian bonds and 1.09 for Mexican securities, according to data compiled by Bank of America Corp.
Chavez has made good on debt payments as crude oil prices surged to $97 a barrel from $12 in 1998. The government will earn about $81 billion from oil exports this year, almost 10 times the amount of interest-rate payments and debt redemptions from the government and state-owned oil company Petroleos de Venezuela SA, known as PDVSA, according to Citigroup Inc.
At 22 percent of gross domestic product, Venezuela’s net government debt is lower than the median level of 36 percent among similar-rated countries, according to Standard & Poor’s.