RPT-Venezuela a safer bet for investors if Capriles wins-opposition

Fri Sep 14, 2012 10:59am GMT
 

(Repeats Thursday story with no changes to text)
    * Venezuela bond yields are now among the world's highest
    * Capriles vows to put country on sustainable financial path
    * His economic guru sees spreads tightening up to 300 bps
    * Market pans Chavez policies, but he has never defaulted

    By Hugh Bronstein
    CARACAS, Sept 14 (Reuters) - Venezuela's sky high borrowing
costs would fall by up to 3 percentage points and remove
pressure from overstrained public finances if market-friendly
candidate Henrique Capriles wins next month's presidential
election, a top aide said.
    The country's bond yields are among the world's highest,
reflecting a sharp probability of default despite the advantage
of sitting atop the world's biggest oil reserves at a time of
tight global supplies and $100 per barrel prices.
    Socialist President Hugo Chavez's seizure of private
companies and Byzantine system of price and currency controls
are frowned on by investors. But he has never defaulted during
his 14 years in office, rewarding debt holders with three times
the annual income offered by average emerging market bonds.
    As sweet as this has been for buy-and-hold portfolio
managers who bet correctly that "El Comandante" Chavez would pay
on time despite his anti-capitalist rhetoric, his policies have
put a burden on public finances that Capriles vows to relieve.
    The 40-year-old challenger, who is governor of Venezuela's
second most populous state, a ims to put the economy on a
sustainable course by improving transparency and production at
state oil company PDVSA. A l aw graduate, Capriles vow s to
replace inefficient subsidies with infrastructure projects and
induce private sector investment by carrying out no further 
nationalizations. 
    Chavez, 58, leads most of the best-known polls, but they are
notoriously controversial and divergent in this polarized
country. O n e major polling firm puts Capriles ahead.  
    If Capriles wins the Oct.7 vote, his policies will quickly
translate into higher credit ratings and cheaper financing for
Latin America's top oil exporter, his macro-economic policy
coordinator Miguel Angel Santos said . 
    "Our strategy is based on unleashing Venezuela's productive
potential, both in the oil and non-oil sectors," Santos, an
investment banker and corporate finance expert, told Reuters.
    "We are aiming at a reduction of 200 to 300 basis points on
sovereign risk over the first twelve months of a Capriles
government," he added.
    Nailing that target would lower the cost of long term
borrowing to 8 percent from 11 percent currently. Venezuela's
bond due in 2027 yields 10.9 percent versus 4.7
percent offered by equivalent Colombian paper.
    
    SKY HIGH SPREADS
    Lenders demand high yields to compensate them for risks
associated with falling PDVSA output and, as Fitch Ratings put
it in a recent report, "a weakening policy framework, which has
increased vulnerability to commodity price shocks".
    Venezuela's spread over safe-haven U.S. Treasuries is at
about 938 basis points. The overall JP Morgan Emerging Markets
Bond Index Plus - including countries from Russia to
Turkey to Mexico - is at a much tighter 279 basis points,
reflecting the perception of far lower default risk.
    Ex-paratrooper Chavez, who first won office in late 1998
after a stint in jail for his role in a failed 1992 coup, says
he has beaten the cancer he battled over the last year. He
swears he fit to keep leading his self-styled "revolution" and
has been appearing several times a day at campaign events.
     
    Fitch, S&P and Moody's all have Venezuela graded deep in
speculative, or junk bond, territory, which limits the number of
funds willing to buy its debt. Its neighbor Colombia, by
contrast, has joined other Latin American countries such as
Peru, Chile and Brazil as a high-, or investment-grade, credit.
    Santos said he would expect ratings upgrades to follow fast
after Capriles enacts his program, including cuts in oil
subsidies offered by Chavez to allies such as Cuba and Belarus.
    "We estimate that this alone will generate about $7.0
billion in savings," he told Reuters. "We do not think we will
have an issue placing those barrels elsewhere in the market if
these recipients are not willing to pay market price."
    But those savings would not be enough to cover financial
needs, he added, so a Capriles administration would likely look
to the international capital markets and bilateral lenders.
    "Foreign debt amortization over the next two years is low,
and we may need to issue more than what is forecasted to
mature," Santos said. "So we see our foreign debt levels
increasing in absolute terms, but decreasing as related to gross
domestic product."
    Capriles' team says the efficiency and transparency
improvements he wants to make at PDVSA would generate up to $5.3
billion in additional yearly export revenue. But to avoid a
popular backlash and ensure governability, the pace of reform
may be slower than some investors expect.
    A Capriles government would gradually steer the economy away
from an unsustainable private consumption boom, which is driven
by state spending, towards public and private investment and job
creation, targeted especially at poorer Venezuelans, sai d
opposition policy chief Ricardo Villasmil.
    He bets that by avoiding a "shock therapy" approach Capriles
will win credibility over time both at home and on Wall Street.
    "Investors will see that we are in for the long run , "
Villasmil said. 

 (Reporting By Hugh Bronstein; editing by Andrew Hay)

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