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Venezuela & Argentina


Bloomberg reported that an anonymous government official has said that Venezuela will sell at least $3bn in dollar bonds as soon as next month; this would be in line with our expectations. The government official, who is involved in the transaction according to Bloomberg, said that Venezuela is looking to take advantage of lower borrowing costs, but will offer a bond whose implicit exchange rate is not weaker than the 5.3 bolivares per USD rate used in the central bank’s SITME FX market. The official also told Bloomberg that the fact that the approved terms for an additional $10.5bn of debt issuance published in the government’s official gazette last week was denominated in bolivares does not preclude selling dollar-denominated bonds for bolivares in the domestic market. Last year the government sourced 83% of its funding in bolivares and we expect it to continue to prioritize bolivar-denominated issuance. Nevertheless, in our view, dollar bond issuance by Venezuela and PDVSA is largely driven by the need to supply FX access to the domestic market and support Venezuela’s economic rebound. We have been calling for the government to issue $3bn-$4bn of dollar denominated bonds in August for some time. We also think PDVSA could still reopen its 2022 bond in another direct placement with the central bank before the end of the year to boost supply of dollar bonds that the central bank can sell in SITME.

On a separate note, OPEC increased it official estimate of Venezuela’s crude reserves by more than 40% to surpass Saudi Arabia’s reserves as the largest in the world, in line with claims made by PDVSA since January. Venezuela had 297bn barrels of crude at the end of 2010 while Saudi Arabia has 265bn, according to OPEC’s annual statistical bulletin. This is a positive development, although much of Venezuela’s more recently certified reserves are heavy and extra-heavy crude reserves in the Orinoco belt, which will require sizeable investment from PDVSA and its joint venture partners over the medium term to extract and refine. We also note that OPEC’s higher estimate is not necessarily a validation of the accuracy of Venezuela’s oil-related statistics; OPEC relies on member countries’ estimates to compile the organization’s own statistical data. It does come, however, on the heels of recent methodological revisions by the International Energy Agency that brought the association’ output estimates more in line with levels reported by PDVSA and boosted the credibility of PDVSA’s figures in the process.

Meanwhile, Finance and Planning Minister Jorge Giordani said yesterday that there was “no doubt” that President Chavez would run for re election in 2012. “I think there is no doubt the president will be present at the 2012 elections and then for many more years,” Giordani said in a televised interview. Over the weekend, President Chavez returned to Cuba to receive chemotherapy treatment for an as-yet undisclosed type of cancer, following a unanimous vote by the National Assembly to grant him a 90-day leave from the country (the constitution allows for the assembly to approve up to two consecutive 90-day absences). While President Chavez intends to continue to govern remotely, the president has already delegated some of his official responsibilities to Vice President Elias Jaua and Finance and Planning Minister Jorge Giordani (see our 18 July Emerging Markets Daily for more details). Despite Giordani’s comments, we do not expect to have clarity regarding President Chavez’s condition or the viability of his candidacy in next year’s presidential elections any time soon. We think that President Chavez and his government will likely continue to signal that he is not weakened by his illness and remains firmly in control, while providing few details regarding the true state of his health condition or prognosis.

Finally, speaking on state television yesterday, Vice President Elias Jaua said a new costs, prices and salary protection law decrees by President Chavez last week will be implemented in 90 days. As we understand it, the law will expand the government’s ability to regulate consumer prices beyond the basic goods already subject to state price controls. In the months leading up to the law’ implementation, a new government superintendence charged with enforcement of the law will consult with local industry officials to establish a national registry of the production costs for various products, to be used as a basis in the calculation of “fair” profit margins for manufacturing firms. While all firms that produce or import goods or services will be required to register with the superintendence, only the prices of “essential” goods and services will be subject to state monitoring. Vice President Jaua said that penalties for firms found to be speculating may range from fines to state “intervention”. Even if this new pricing framework is able to help contain inflation in the short run, we think it will likely lead to increased shortages, price spikes and perhaps black market activity over time. In our view, the government will have to increase public sector imports of basic goods if it aims simultaneously to control prices, avoid highly unpopular shortages and stimulate economic activity between now and next year’ elections.


The monthly GDP proxy rose 1.5% mom seasonally adjusted in May; during the January-May period, the monthly proxy was up 8.9% year on year. Although the monthly GDP proxy is a rather volatile series even after adjusting for seasonality, the month-on-month changes suggest that the economy is still growing steadily albeit perhaps at a somewhat slower pace relative to last year. INDEC only publishes a headline figure for the monthly proxy and the demand and supply-side breakdowns are only published when the quarterly GDP data are released. However, based on the other high frequency indicators available, we think that the driver of GDP growth in Q2 was again the expansion of domestic demand, particularly of consumer spending and gross fixed investment (public and private), as it was the case in Q1.

We have revised our real GDP growth projection for the full year 2011 to 8% from 7% previously. The revision to our forecast follows higher-than-expected readings of the monthly GDP proxy during the past two months as well as the strong performance of other leading indicators (such as strong consumer confidence readings, growing imports of capital and intermediate products, etc.). Our projection assumes that after rising nearly 9% year on year in H1, real GDP increases by about 7% in H2. We expect a lower year-on-year reading in H2 because of a higher comparison base as well as a gradual slowdown of activity. We note that our projection refers to our expectation about the data that INDEC will publish, as the actual expansion of the economy may be about one percentage point lower. For 2012, we have revised our GDP growth projection from 4.5% to 5% to take into account a larger statistically carryover.

Source: Credit Suisse