• It's Coming...

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Takeaway: Another currency devaluation may be on the horizon in Venezuela, which joins Argentina on our LatAm FX devaluation watch list.

SUMMARY BULLETS:

  • Hugo Chavez may use his renewed mandate and outlook on life to accelerate his socialist agenda in Venezuela.
  • “Doing more” likely implies an acceleration of social spending and a potential FX reserve-financing currency devaluation.
  • If we’ve learned anything from the 1990s-early 2000s, it’s that weird things happen to emerging markets when the USD breaks out sustainably (Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis and Sovereign Defaults by Russia and Argentina). Watch that DXY quote into and through the US general election, the Fiscal Cliff, and the Debt Ceiling negotiations!

Hugo Chavez, fresh off a 10 percentage point victory in recent Venezuela’s presidential election and a potential victorious battle with cancer (three surgeries in the past 15 months), may use his renewed mandate and outlook on life to accelerate his socialist agenda in Venezuela – Latin America’s most oil-rich nation (211.2 billion barrels; 15.3% of world proved reserves). The “slim” victory – Chavez’ narrowest of his four total: 1998 = 16 ppts.; 2000 = 22 ppts.; 2006 = 26 ppts. – may actually put pressure on him to “do more” to maintain what he believes to be social and economic stability in Venezuela.

From a practical standpoint, “doing more” may look like the following:

  • Since taking office in 1999, he’s expropriated  more than 1,000 companies or their assets in the name of his socialist agenda.
  • He’s perpetuated a near -40% decline in the country’s international FX reserves as the central bank has been repeatedly forced to transfer the funds to an off-budget fund known as Fonden that Chavez uses to finance public expenditures on social programs.
  • A -50% currency devaluation back in early 2010 helped briefly stem the decline in FX reserves, but they’ve since resumed their downward trend.

IS CHAVEZ POISED TO “DO MORE” IN VENEZUELA? - 1

 

IS CHAVEZ POISED TO “DO MORE” IN VENEZUELA? - 2

Given his history of unstable monetary policy, it’s no surprise to see Venezuelan inflation flirt with rates north of +35% YoY in recent years; it’s since come down to +18.6% YoY in AUG ’12.

IS CHAVEZ POISED TO “DO MORE” IN VENEZUELA? - 3

If “doing more” does, in fact, imply an acceleration of social spending and a potential FX reserve-financing currency devaluation, we’d be remiss to not signal risk to clients who hold assets denominated in VEB or those that invest in USD debt issued by Venezuelan entities whose revenue streams are denominated in VEB. A declining price of crude oil across international markets over the intermediate term (a view consistent with our 4Q12 Macro Theme titled: Bubble #3) would also perpetuate devaluation fears. It’s worth noting that Venezuelan dollar debt had been Latin America’s best-performing YTD (+32%) largely on hopes of a regime change, though Chavez’ reelection has likely contributed to cracks resurfacing in Venezuelan financial markets:

  • Post the election, the VEB has fallen -2.3% week-to-date to a record 12.58 per USD in the unregulated market, where it is trading down -31% YTD (LeChuga Verde);
  • Yields on state oil company Petroleo de Venezuela SA’s USD bonds due 2017 rose +55bps to 11.73% (Stuttgart Stock Exchange); and
  • The benchmark IBC Stock Index is down -16% week-to-date, after closing up +31% wk/wk last week (now up “only” +189.8% YTD).

If you were fortunate to have been on the near +200% hyperinflationary ride up in Venezuelan stock market YTD, we suggest now might be a good time to book some gains. Most likely, however, you probably weren’t; still, to the extent any of the companies in your portfolio have outsized exposure to Venezuela we think it’s worth paying attention to these key risks and developments.

If we’ve learned anything from the 1990s-early 2000s, it’s that weird things happen to emerging markets when the USD breaks out sustainably (Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis and Sovereign Defaults by Russia and Argentina). Watch that DXY quote into and through the US general election, the Fiscal Cliff, and the Debt Ceiling negotiations!

Darius Dale

Senior Analyst