Latin Finance - September/October 2011 - 70

Andean venezuela debt

Upside Potential
by Jef Cozza

ews in July that Venezuela’s President Hugo Chávez had developed cancer raised the possibility of regime change and excited the imaginations of investors who see considerable upside for one of Latin America’s few high-beta sovereign credits. Hopes are high that a more market friendly opposition will win power come the 2012 presidential elections. “Venezuela represents the most upside of any emerging market in 2013,” says Boris Segura, a fixedincome strategist at Nomura. RBS was also reporting that the possibility of regime change after next year’s election could represent one of the biggest credit trades of 2012 as CDS spreads promptly fell to 950 basis points from 1,200 basis points in the wake of the news. Yet risks abound for the oil rich country. Not only were oil prices marking considerable declines in August on the back of an expected Will Venezuela’s opposition celebrate an election victory come 2012? slowdown in global growth, but some fear that a weaker Chávez increases Some think the latter scenario unlikely, but in a recent report the probability of political instability. Segura noted that high-ranking officials, including the army’s In mid August, S&P downgraded Venezuela to B+ from BB after revising its methodology to put greater weight on political chief of staff, have threatened to reject election results if the opposition wins. “[The idea is] that if elections are postponed or risks. Another downgrade could be on the way if oil prices canceled, things can get ugly; look at what happed in Libya. This continue to fall or if the political backdrop worsens, the agency has been explicitly raised by the minister of foreign relations,” says. Segura says. The government’s decision to repatriate its increasingly large gold holdings back home and shift reserves away from Bulls Bet on Regime Change Europe and the US into politically friendly BRIC countries Whether such concerns were priced into Venezuelan assets in could be seen as a natural precautionary measure at a time of mid August is hard to tell given the steep selloff in high-beta greater uncertainty about the prospects for developed nations’ credits across the board this summer. But prior to the rout, economies. markets seem to have been betting that under an opposition The move, however, also raises worries about diminishing government, Venezuela would presumably enter into a more transparency and that the government is anticipating the virtuous economic and financial cycle. possible freezing of such assets not only because of the claims “That’s been the bullish argument that’s been put forth pending against Venezuela in the World Bank’s court of by those that have been buying up Venezuela bonds over the arbitration, but also for fear that elections may become violent.

Venezuela’s presidential elections are still more than a year away. But the possibility of regime change is already moving spreads. Are investors blind to the underlying risks?

70 LatinFinance

September/October 2011

Latin Finance - September/October 2011

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