19 March 2013

Put away your Petit Robert and your Collins Spanish. The remainder of this post shall be in English.

The world was shocked to learn on March 5th, 2013 that Venezuela’s President, Hugo Chavez, had succumbed to cancer after a protracted two year battle. Election dates have now been set for April 14th, 2013. Henrique Capriles Radonski will face off against President Nicolas Maduro, Chavez’s anointed successor, to determine who will complete the rest of Chavez’s six year term which began in January. While Capriles suffered an 11 point defeat in December, the outcome of the April election is far less certain and likely to be a much closer race.

Venezuelan bonds were among the best performing fixed income investments in 2012, driven largely by the expectation that Capriles would win the election and shift Venezuela’s economy—particularly its behemoth oil company, PDVSA—in a more market-oriented direction.

However, a cursory analysis of the presidential campaign and broader political situation in Venezuela would have shown that Capriles had only the slimmest chances of winning the election. As a result, Venezuela risk tumbled and yields pushed back up, albeit temporarily.

1 year PDVSA 2014 graph

Despite winning the election, Chavez slowly receded from public view as rumours mounted of his deteriorating health. Yields started to come back down and Venezuelan bonds rallied into the end of the year. Chavez’s passing initially put a small dent in the rally, as it was unclear whether there would be another election or not. After the date was set, strong momentum came back due to the perception that Capriles may have a fighting chance in the upcoming election.

With 297 billion (yes, with a b) barrels, Venezuela currently sits on the world’s largest proven oil reserves. Reserves may increase by hundreds of additional billion barrels as more thorough assessments of the Orinoco basin provide a clearer picture of the heavy crude potential in Central Venezuela.

However, given a history of asset seizures and contentious commercial arbitration, many international companies have been reluctant to invest in Venezuela. Additionally, PDVSA lacks the capital to undertake the mining, refining, transportation and waste disposal for the heavier crudes, and would first need to focus on boosting short term conventional oil production, which has declined somewhat in recent years.

Interestingly enough, for all of Chavez’s firebrand rhetoric against Western imperialism, Venezuela has yet to default on any of its debt since the Bolivarian Revolution was launched in 1998. Even during crisis periods, such as the 2004 referendum, the failed coup d’etat in 2002, or the 3 month national strike in 2002-2003, Venezuela has continued to pay its debts. This is largely a function of huge domestic demand for U.S. dollars, as well as an ongoing need for capital expenditure funding at PDVSA as well as funding for the many grassroots-oriented social initiatives (or “Missions”) across Venezuela.


The perception is that the upcoming election will greatly affect how Venezuela spends its money; but a deeper analysis would reveal that Capriles cannot and will not immediately roll back many of the social programs instituted by Chavez. Capriles is far from a gung-ho free market capitalist, but could be best described as a younger, hipper Venezuelan spin on Luiz Ignacio da Silva (better known as Lula), the Brazilian President who successfully balanced growth-oriented and people-oriented policies in Brazil during the 2000s.






A Maduro victory would see continued and perhaps even expanded social spending as he would seek to endear the public and establish a legacy apart from Chavez. Maduro is a soft-spoken former bus driver who has served in many senior level positions, including Minister of Foreign Affairs. He is a stalwart Bolivarian, who was handpicked by Chavez over a number of other ‘obvious’ choices for successor. Before his demise, Chavez began to take a relatively conciliatory tone towards former antagonists, and Maduro is expected to continue in that vein while remaining committed to revolutionary principles.


Nagging and persistent distrust of the traditional elite will continue to be a major headwind for Capriles, while doubts regarding Maduro’s acumen and charisma will plague the Chavista camp. However, in either scenario, Venezuela’s credit picture remains roughly the same, with marginal (and overestimated?) improvements to be expected if the opposition wins.

The market has more confidence in Capriles, but as a young and relatively unproven politician in a politically polarized and economically vulnerable nation, there is much that can go wrong. Nevertheless, given strong oil reserves and pledges from both candidates to increase production, coupled with increasing exports to China, even under Maduro the credit picture has a chance of improving.

Additionally, based on World Bank statistics, Venezuela has fairly strong fundamentals, as of 2011: a US$316 billion dollar local economy, with a debt to GDP ratio of 45%, and foreign reserves of US$ 27 billion dollars, although much of that is in gold. Looking at actual figures, it is clear that most of Venezuela’s risk premium derives from its political risk—yet the Bolivarian regime has yet to renege on its obligations. The sum of these factors make Venezuela a buy, even if the regime doesn’t change.

A Maduro win would prompt a sell-off in the bond markets, which in turn may present a buying opportunity for savvy investors. Outside of country risk, interest rate risk should not be ignored but focusing on the shorter maturities could provide excellent options for yield and price appreciation over the next year—albeit not without volatility.

For more insights and detailed analysis, please contact Firstline Securities at


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