Investors are split on whether Venezuela’s latest measures are enough to pull its economy from the brink of defaulting.
Nearly a month after Venezuela’s President Nicolas Maduro declared a state of economic emergency, he raised the price of gasoline for the first time in 20 years and also devalued its currency.
Venezuela is teetering on the brink of default and the country is barely making enough money from oil exports to cover its debt payments. This year Venezuela owes over $10 billion in debt payments, with nearly half of that due in October and November.
On 18 February, Maduro raised the price of gasoline for the first time in 20 years and also devalued the country’s currency from 6.3 bolívares per US dollar to 10.
In January, manager of Eaton Vance’s Emerging Market Local Income Bond fund, Citywire AA-rated John Baur, told Citywire Americas Venezuela would go into default later this year unless it took a number of steps.
These measures would include devaluating its currency, increasing the domestic price of gasoline, encouraging investment and reducing government intervention.
Head of Latin American fixed income at Santander Asset Management, Alfredo Mordezki said: ‘The measure looks to most market commentators as a step in the right direction, but highly insufficient to address the current fiscal situation.’
While gasoline prices have been hiked by thousands of percentage points, it’s from a low base and it remain the cheapest gasoline to consumers in the world, he said. He added that it also doesn’t make enough oil to compensate for the fiscal pressure the country is facing.
‘The measures will not avoid a default, but they can provide some comfort to alternative liquidity providers like China, or buy some time for oil prices to show some recovery,’ Mordezki told Citywire Americas.
‘Still the probability of default continues and PDVSA is unable to come to the market to refinance maturities without a restructuring proposal.’
This isn’t a country in crisis
Vontobel’s head of emerging market is mainitaining his exposure to Venezuela in his fund despite the country's economic woes.
Luc D’Hooge said the government is waking up to the economic challenges it faces and making efforts to work closely with its political rivals.
With that in mind, D’Hooge has retained exposure to the market, having held it steady between November and December 2015 at 4.7%. Despite the turbulence and concerns over future payment, D’Hooge said the sovereign story remains attractive.
‘We have a clear indication that all sides know that a default would be extremely painful as it would hurt the dollar flows coming from the oil industry. In this scenario, with bonds priced where they are, I think they are not that bad and could be quite interesting as the story develops. I do however think they will need bridge loans and bond restructuring.’
‘With the world’s biggest oil reserves we see this as a liquidity problem, not a solvency problem. Therefore, at the moment, recovery rates appear higher than bond prices,’ he added.