31 August 2012
Venezuela Weekly Report N° 12 - 31 August 2012
Hernán Yellati* Head of Research & Strategy hyellati@banctrust.com +58 212 9038313 Andrés Trujillo* Senior Analyst atrujillo@banctrust.com +58 212 9038417
The perfect storm A rain of domestic problems arise
Coincidence or not, the official party is forced to face several negative events on the verge of 7O
This could mount to the already poll dynamic favoring the opposition, in our view
Bond prices, far from feeling the impact, seem to have decoupled from both adverse domestic events and the global sentiment
De-decoupling? Three events, concentrated in the past two weeks, all appear as a challenge to the government only five weeks away from the presidential election on 7O (7 October). A fallen bridge, a jail riot and a refinery explosion, exposed the official party in an unprecedented way. The timing is key, as the opposition is gaining terrain in recent polls and the government seems to be lacking a secret weapon to revert it. Meanwhile, both sovereign and PDVSA bond prices kept on heading north even with headwinds from the global sentiment (see chart 1). We argue that, should this trend continue in the coming weeks, asset prices would continue to rise as Venezuela would be poised to a very close election.
Chart 1. Against all odds VIX
VENZ USD TOT RET INDEX Amuay explosion
1050
30
Cupira bridge collapse
1000 Issuer of Venezuela Weekly Report: BancTrust Servicios Financieros Sucursal Venezuela, C.A. (Venezuela)
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*Employed by a non-US regulated entity, and is not registered/ qualified pursuant to NYSE, FINRA, SEC and/or NASD regulations.
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This report must be read with its respective disclaimer on page 3
25 Jail riot
20 900
800 01-Jun-12
15
10 16-Jun-12
01-Jul-12
16-Jul-12
Venz USD tot ret index Source: Various pollsters
31-Jul-12
15-Aug-12
VIX (RHS) 1
31 August 2012
The show must go on
Flatter belly—new diet tip
The coincidence of the three events in such a sensitive
dence of expert warnings on all three matters.
A long debated question among analysts has been whether the global environment (risk-on—risk-off, commodity prices, equities, etc.) or domestic political events are the main driver of the sovereign and PDVSA bond curves. While econometric tools show a clear relationship with global variables (mainly oil prices), it is clear that political events, especially now, are playing an important role for the investor risk appetite. It is in this sense that we remark the positive price dynamic since June in general and over the past two weeks in particular. True, oil prices and recent polls supported the rally. Yet, we would have guessed that domestic negative local events, especially the refinery accident, should, at least, have generated some noise in the upward price trend. We understand that the rally is mainly motivated by a market re-pricing of the probabilities assigned to a regime change. Hence, recent events could have accelerated the price adjustment process, especially since most of the compression happened in the belly and long-end of both curves.
More PDVSA debt supply?
Chart 2. Sovereign bond curve vs. a month ago
electoral moment may be perceived as bad luck in the eyes of the government. In our view, however, they were just accidents waiting to happen. The jail riots, which left 25 people dead and dozens injured in Yare I penitentiary facility, add to a total of more than 300 deaths in Venezuelan jails in 1H12, which represents a 15% increase with respect to the same period last year. The Cupira bridge collapse, which connects Miranda state with the east of the country, and the Amuay refinery explosion and fire, share a common possible cause: lack of proper maintenance. So far, the government has tried to disguise voters’ opinion by waving the responsibility of all three events, with presumably improvised statements. However, this may prove to be a bad strategy that could backlash due to abundant evi-
Putting aside all urgent and most important aspects concerning the Amuay refinery accident, primarily the loss of lives and moral damage; it is important to highlight the impact this could have in terms of the PDVSA finances.
% Yield 13 12
Oil storage repairs, housing rebuilding and compensation to
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families, are just the most immediate costs that will fall into
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PDVSA’s shoulders, once more. Not to mention the past due
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workers’ labor contracts in which the government also put
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PDVSA in charge of their compensation (see Venezuela
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Weekly Report—7O and beyond, 24 August 2012).
30/08/2012 30/07/2012
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Total costs, plus all the above liabilities are still unknown. But,
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USD3.0bn of PDVSA 2035 already issued). New debt should come only after the elections, as the government continues to favor VEF financing tapping local excess liquidity.
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10
Chart 3. PDVSA bond curve vs. a month ago
round of debt issuance sooner rather than later. We estimate cUSD10bn issuance from PDVSA in 2012 (including the
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Duration
taking into account the poor situation of PDVSA’s cash flow, it is fair to assume that these events may trigger another
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% Yield
14 13 12 11
VEF financing and USD shortage
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A by-product of the current government financing strategy
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is the lack of greenbacks in the local market. The parallel
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exchange rate has recently increase above USD/VEF10
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from 9 in previous months. This puts more pressure on a de-
30/08/2012 30/07/2012
0
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valuation, which we believe it will only arrive on 1Q13.
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Duration Source: Bloomberg
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31 August 2012
Disclaimer Mr. Hernan Yellati and Mr. Andres Trujillo, who are part of our Research and Strategy Team and therefore primarily responsible for this report, hereby certify that the opinions on the subject securities or issuers and any other views expressed herein truthfully reveal their personal views and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. This publication has been prepared by the Research and Strategy Division of BancTrust Servicios Financieros Sucursal Venezuela, C.A. which is a Member firm of BancTrust & Co. Holdings, C.V., financial services firm which operates in several jurisdictions worldwide “BancTrust & Co.” is the marketing name and the Trademark duly registered in the European Union, Latin America and other regions in which BancTrust & Co. operates. This report is informative only. Published rates are only for reference. BancTrust & Co. does not recommend or request to buy or sell any Financial Instrument. The words "Banc" and "Trust" do not imply or indicate that BancTrust & Co. is either a Bank or a Trust company, BancTrust & Co. does not perform these kinds of activities in any jurisdiction. Moreover, neither BancTrust & Co. nor any of its affiliates is (i) chartered or licensed as a bank under any U.S. federal or state laws or (ii) subject to supervision or regulation in the United States by any federal or state bank regulatory authorities. The information contained in this report has been obtained from sources that BancTrust & Co. considers reliable but does not guarantee its veracity. The views are of BancTrust & Co. and are subject to change without notice. BancTrust & Co. is not required to update their opinions or information contained in the report. Neither BancTrust & Co. or its affiliates, nor any of their respective officers, directors, partners and/or employees accept responsibility for any direct or consequential loss resulting from any use of this publication or its content. The information published in this report may not be suitable for all investors. Please check for any applicable restrictions in your particular jurisdiction. BancTrust & Co. recommends and advices that investors independently evaluate and apply their own judgment to each issuer, security or instrument discussed in this publication. ©Copyright BancTrust & Co. All rights reserved. No part of this report can be published or reproduced in any manner without the prior written permission of BancTrust & Co. or any of its affiliates.
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