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Friday, September 14, 2007

Lex Venezuela - The one who may not get it is Lex himself....

The one who may not get it is Lex himself.... Although revenues are high, government spending has been growing at a higher rate- and it's just spending, very little investment relative to the size of PDVSA's revenues these last years.

Lex Venezuela

FT.com Published: September 11 2007 09:27 | Last updated: September 11 2007 20:43

Emerging markets have not escaped unscathed from credit market turmoil. Spreads on emerging market sovereign debt over US Treasuries, measured by JPMorgan, have widened by 84 basis points since July 6 to 246bp. But US corporate high-yield debt has fared worse, with spreads, according to Lehman, widening by 188bp to 484bp.

There are, though, some notable exceptions. Spreads on Venezuela’s sovereign debt have increased 200bp to 497bp. There are good reasons for investors’ concerns. The imbalances in Venezuela’s economy continue to worsen. Oil production is falling due to lack of investment. Negative real interest rates and substantial government spending, much of it off balance sheet, have fuelled consumer spending. This has led to a surge in imports and inflation, while price controls have resulted in shortages of many basic goods.

The situation was exacerbated last week by the central bank’s suspension of some open market operations, which sent overnight rates temporarily as high as 120 per cent. The bank’s move may have been prompted in part by worries over the appreciating exchange rate on the parallel market. But lack of clarity over its motives, at a time when Hugo Chávez, Venezuela’s president, is proposing abolishing its autonomy, hardly bolstered confidence.

Economic and political concerns are valid. But despite Mr Chávez’s unorthodox policies, several years of high oil prices have made Venezuela relatively resilient. Indeed, the central bank has been far more active in mopping up excess cash in the system than injecting it. Public sector debt is about 22 per cent of gross domestic product, a third of Argentina’s or Turkey’s, while international reserves are extremely healthy. A big drop in the oil price seems unlikely and in the event of a financial crisis, Venezuela has the flexibility to divert funds from other programmes.

Many of the government’s policies are misguided. This should not distract investors from correctly pricing Venezuela’s risk.

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