Caracas Chronicles

Last week was one of the wildest in the recent political history of Venezuela. After the opposition’s unexpected landslide victory on 6D, the government’s reaction has been little short of schizophrenic.

Venny investors have been at the head of the rollercoaster. Adrenaline junkies that we are, we’ve loved that good-ol’ volatility that fueld our love-hate relationship with these pieces of paper.

All week, the market got yanked about by two conflicting forces. On the upside, a better than expected electoral result, with a new majority raking up two-thirds of the seats and a surprisingly peaceful aftermath. On a negative note, the Venezuelan crude oil basket is hitting a 12-year low of 31,24 $/bbl.

The market’s reaction has been similarly mixed. The ‘short-end’ bonds are under a buyers’ strike, down almost 14% from recent highs mainly attributed to  renewed default fears. The PDVSA bonds due in 2017, which are seen as potential – yet distressed – candidates for a debt swap by Morgan Stanley (something we, ehm, highlighted a couple weeks ago), are down big time this week and trading below 55 cents on the dollar.

That leaves them yielding a loco 60% rate at current prices.

The rest of the curve weakened over the course of the week: WTI crude oil hit a new cycle low this Monday, and bonds opened at the month’s lowest. Despite crude oil regaining the 37$ level at the time of this writing, movement remains sluggish. Traders are eyeing this breakout from the 200-day Moving Average, a technical analysis tool used to determine the major trend of an asset price, as a signal that the worst has passed on Venny Land. Or is it merely a way to distract themselves from the divergence between bonds and crude Oil?

These market movements have interesting implications on the two dynamics of the country’s balance of power.

The movement in price, that is, a convergence in price among all bonds, incentivizes a re-profiling. This is mainly because the relative cost of kicking the can have lessened. Wall Street seems to be OK with 17-18%, the average interest rate paid by PDVSA debt as of today. However it shies away from a notional yield north of 60% – an unrealistic prospect given that nobody seems to really expect PDVSAs to be paid at full face value at maturity.

Given this, common sense dictates that they would be on board for a re-profiling proposal.

The question is still whether these negotiations will continue under a different AN and Finance Minister, if the process extends beyond January 5th 2016, or whether the hopeless Rodolfo Marco Torres will either jump or be pushed out of Maduro’s cabinet.  

Either way, the politics of external debt management next year are going to be a make-or-break issue for the New Majority. Little involvement and they will leave the spotlight the PSUV’s apparatchiks holding the bag, for better or – much more likely, for worse.

And let’s not forget about fundamentals. Current crude oil prices hardly cover production costs – especially in the Orinoco belt. It is evident from a quick glance at the nation’s external accounts that 30$, 50$ or even 70$ oil for that matter, is not enough to keep the economy’s gears greased. There is no easy fix for a global energy supply glut, no “God will provide” in sight. This is going to make the opposition’s challenges fierce on the economic front. Barring a sudden wonder in the oil market, more foreign bailouts will be needed – whether of the Chinese or the IMF kind.

If bond markets are any indication of the future, 2016 is gonna be a hell of a ride for Venezuela. Buckle up!