Venezuelan sovereign debt still looks attractive despite the recent political and social unrest whic...
Venezuelan sovereign debt still looks attractive despite the recent political and social unrest which has wracked the country during the past few weeks.
In the space of less than a week, the country has deposed and reinstated its controversial left-wing president, Hugo Chavez, sending bond prices haywire. After Chavez was deposed, following a coup backed by elements of the military, the Aberdeen Sovereign High Yield fund, managed by Julian Adams, saw its net asset value rise by 2% in one day.
Adams says: 'We had 15% of the fund's assets in Venezuelan sovereign debt, which rose significantly in value after Chavez was forced to resign. His left-wing populist government had managed to alienate just about everybody, except the very poorest in Venezuelan society. Politicians, businessmen, union leaders, both blue and white collar workers were on the streets demonstrating against the regime, thanks to its appalling handling of the economy.'
The current crisis was sparked by Chavez's appointment of a number of political appointees to the board of the state-owned oil company PDVSA, which accounts for 95% of Venezuela's foreign currency income and is a vital part of the economy. Workers at the company promptly called a general strike in protest at the appointments prompting violent clashes with pro-government supporters.
Chavez' subsequent reinstatement a week later saw Adam's fund lose its dramatic gains almost overnight. He says: 'Venezuela is the fourth largest oil exporter in the world, and it needs to have a stable, fiscally competent, government. The unlikely coalition of opposition forces which united to oust him had promised democratic elections later in the year, providing impetus to the bond market. Clearly a government which handles the economy better, has a better chance of paying its credit obligations.'
That said, Adams has not reduced his holdings in Venezuelan sovereign debt, preferring to ride out the current storm before making any major asset allocation decisions.
Threadneedle emerging markets fixed income economist, Henry Stipp, thinks the rapid escalation in bond prices in the immediate aftermath of the coup was fuelled by fund managers attempting to shift underweight holdings to neutral positions, or in some cases overweightings.
'A lot of people were underweight and were attempting to rectify this as they perceived that the market was about to take off. As such there was a big rally caused by buying pressure. As soon as he was reinstated, the gains fell away and the price of the bonds went back to fair value,' comments Stipp.
'We maintained a neutral weighting because we didn't believe what was happening was constitutional. Sure, Chavez and his government were unpopular, but Congress should have ousted him not elements of the military.'
The new president immediately dissolved Congress and imposed a media blackout. What started as a protest against the deaths of anti-government demonstrators at the hands of Chavez supporters, then turned into a coup. The loose band of anti-government forces began to splinter as it appeared democracy was threatened and a suitably chastened Chavez was then reinstated, says Stipp.
Not only has he fired the political appointees at PDVSA, which has got the strikers back to work but he has promised to work more closely with his opponents. However, Stipp thinks Chavez could emerge from this in a stronger position than he was in before the crisis.
He says: 'A lot depends on how he responds to this. The opposition are now divided, but things on the ground are starting to stabilise again. If the economy worsens we may look to lighten our holdings, but with coupons of 13.5%, Venezuelan sovereign debt is still appears a sound investment.'
Venezuelan bond market improving.
Country starting to stabilise again.
General strike is over.
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