Latin America overview: Venezuela a classic debt rescheduling candidate

Latin America overview: Venezuela a classic debt rescheduling candidate
Latin America overview: Venezuela a classic debt rescheduling candidate
Share post:
  • Analyst: Venezuela will not be able to benefit from its oil reserves for a while
  • Chaotic, costly restructuring expected
  • Peru, Columbia, and Chile with solid fundamentals

 Venezuela is in crisis: the economy is collapsing, and the GDP has halved (in USD) over the past five years. The volume of crude oil exports – the only important source of revenue for the country – has fallen drastically. And to make matters worse, said exports have recently been burdened by sanctions from the USA. In the past two years, more than two million people are reported (Source: IOM) to have fled to the neighbouring countries, given that there is no money for vital imports. The stand-off between Nicolás Maduro and his opponent, Juan Guaidó, and their respective supporters continues. A change in government driven by “the man on the street” seems possible.

What does the crisis mean for Venezuelan bonds?

The country has been a classic candidate for debt restructuring for quite some time. A change of regime would only expedite this. “The hope of many market participants for a change in government has driven the secondary market price of Venezuelan bonds up in recent weeks. However, the current development looks a bit like naïve optimism,” says Felix Dornaus, Senior Fund Manager for emerging markets bonds with Erste Asset Management (Erste AM).

The South America expert has good reasons to substantiate this claim: since 1 February 2019, the US Department of Finance has banned United States persons from trading bonds from the governmental oil company PDVSA or from the Republic of Venezuela until further notice. This also comes with repercussions on transactions between non-US (i.e. in tax terms, foreign) persons. Liquidity has been on a massive decline due to the fear of the aforementioned non-US persons to become targets of the USA.

USD 10bn worth of loans secured by oil deliveries

“Although the country holds the world’s biggest crude oil reserves, it will not be able to benefit from its reserves for a while,” says Dornaus. The excessive debt is massive, and loans from China and Russia, estimated to amount to USD 10bn each, are already secured by oil deliveries. Half of the biggest asset abroad, i.e. the CITGO group in the USA, has already been collateralised as well. Meanwhile, significant mining rights within the country have been sold to Russian companies. “Due to the lack of resources, in the event of a restructuring, a massive haircut will likely become necessary, not the least for private creditors,” as Dornaus continues.

Given the status quo, the expert feels that the current asset prices may reflect overly optimistic levels of revaluation. On top of that, it is difficult to ascertain who holds what claims (“reconciliation”). “We are heading for yet another problem of the hold-out variety, much like in the most recent debt restructuring of Argentina. This restructuring will be chaotic, lengthy, and expensive for the bond holders,” concludes Dornaus.

Positive outlook for Peru, Columbia, and Chile

The combination of rising US interest rates, weakening economy, and the trade conflict between the USA and China was burdening the risk sentiment in 2018. This unique cocktail initiated a re-pricing of risk. “In an environment of higher volatility, we have seen widening spreads, weaker currencies, and increasing local yields, at least compared to previous years. But looking further back into history, this is a process of normalisation and looking forward, we expect volatility to remain at these levels,” explains Christian Gaier, Head of Fixed Income Rates, Sovereigns & FX.

If we believe the International Monetary Fund (IMF), which predicts stable commodity prices for 2019, the path seems pretty laid out in front of other Latin American countries. The cyclical recovery in the Andes (Peru, Columbia, and parts of Chile) should continue. “Attractive yield levels in connection with a stable growth outlook, which is underpinned by a healthy combination of private consumption and investment, form the basis for attractive, long-term investment opportunities,” complements Gaier.

As low-beta instruments, the bonds of these countries should also be less affected by fluctuations in global risk sentiment. As far as Argentina, Mexico, and Brazil are concerned though, a healthy dose of caution is advisable. “In addition to domestic politics in the respective countries, a higher beta constitutes a possible risk factor. This means that these countries are more susceptible to global risk fluctuations. Investors will have to focus on the local news flow and the local macroeconomic developments in order to be able to seize short- and medium-term investment opportunities,” concludes Gaier.


For enquiries, please contact:

Erste Asset Management, Communications & PR

Armand Feka
Tel. +43 (0)50 100 12341

Paul Severin
Tel. +43 (0)50 100 19982

Erste Asset Management GmbH
Am Belvedere 1, 1100 Wien
Sitz Wien, FN 102018b,
Handelsgericht Wien, DVR 0468703


Legal note:
Prognoses are no reliable indicator for future performance.


Legal disclaimer

This document is an advertisement. All data is sourced from Erste Asset Management GmbH, unless indicated otherwise. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH, pursuant to the provisions of the AIFMG in connection with the InvFG 2011.

The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the key investor document/KID can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the key investor document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund. Please note that investments in securities entail risks in addition to the opportunities presented here. The value of shares and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your shares. Persons who are interested in purchasing shares in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of fund shares to American citizens. Misprints and errors excepted.