Chavez’s 681% Returns Mean Socialism Buoys Goldman: Andes Credit
By Ye Xie & Nathan Crooks -
Jan 30, 2013
Since taking office in 1999, Hugo Chavez has spread his socialist revolution in Venezuela by
seizing more than 1,000 companies. For bondholders that stuck by
him, he’s also delivered returns that are double the emerging-
market average.
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.
Missed Inauguration
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.
Oil Surge
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.
