Yes , We See Dead People - Many See Chevez Dead

Investors Are Snapping Up Venezuelan Bonds, Hoping Hugo Chavez's Health Situation Gets Worse

Hugo Chávez suffered some complications from his emergency cancer surgery in Cuba on Monday, causing bleeding that required corrective measures, reports AP. The source of the news, Venezuelan Information Minister Ernesto Villegas, also says that Chavez is now recovering favorably.

The news comes on the heels of a hot run upward in Venezuelan government debt recently, as investors have snapped up bonds in anticipation that Chavez may not be able to finish out his third term as president of Venezuela.

On Saturday, when Chavez made public that he would be traveling to Cuba for the surgery, he also did something he's never done before: in effect, he named his successor, the vice president, Nicolas Maduro.

This leads BofA Merrill Lynch analyst Francisco Rodriguez to conclude that regime change may be right around the corner:

We believe these developments make it highly likely Venezuela will have presidential elections early in 2013. Key economic policy decisions such as FX devaluation will likely be delayed until after those elections. The magnitude and length of the delay will depend crucially on the government’s perception of its electoral prospects. If government forces perceive the likelihood of a Maduro victory as high, elections are likely to be scheduled early in the year, resulting in only a minor delay in the adjustment.

Remember, Chávez was just re-elected at the beginning of October, and he hasn't even been sworn in for his third term yet.

The bonds have had a pretty good year in 2012, but a significant portion of the gains have occurred in just the last few weeks:


Torino Capital CEO Jorge Piedrahita told Bloomberg News, "There is a clear correlation between the price of Venezuela’s debt and Chavez’s health."

Investors think the end of Chavez as president also means the end of socialism in Venezuela, so they are plowing into sovereign debt – which is currently rated at B+ by S&P and Fitch, while Moody's has it rated one notch lower.

The health concerns add to another factor that may be driving Venezuelan bonds higher – the fiscal consolidation course the Venezuelan government has taken since the elections.

According to BofA's Rodriguez, the government is expected to reduce its budget deficit from 8.8 percent in 2012 to 2.2 percent in 2013.

That will mean a lot less issuance of government bonds:

Although the FX adjustment and revenue-raising measures, such as a gas price hike, appear to have been delayed, the spending adjustment has continued, with spending declining 16.0% in real terms in the nine post-presidential election weeks. The delay in devaluation has been accompanied by a slight increase in SITME flows, which rose to an average of $23.5bn over the past three days, higher than the $17.8bn seen between 15 November and 7 December, but much lower than the $42.9mn average for the first nine months of the year.

Unless government forces believe they face a particularly difficult presidential election, we expect spending and SITME supply to remain relatively restrained. Even if these expand temporarily in January and February, the adjustment is likely to resume after the elections, regardless of who wins. So, we continue to expect a strong improvement in fiscal accounts in 2013, product of the devaluation and post-election fiscal contraction, with the central government budget deficit falling to 2.2% of GDP from an estimated 8.8% in 2012.

This is all feeding into a bullish theme in the market for Venezuelan debt, and as the chart above shows, investors have started taking profits after some nice price appreciation in recent weeks.