Venezuela’s more optimistic creditors got it wrong. Before Sunday’s election, they seemed to think Hugo Chavez would lose. Instead, the President’s easy re-election win gives him six more years to take over industries such as mining and food and squeeze the oil sector further. Bondholders can expect the Chavez discount to return.
The value of the South American nation’s bonds maturing in 2022 touched historic highs last week, a bet by some international investors that Chavez’s opponent, Henrique Capriles, would unseat him. That always seemed wishful thinking, despite Mr. Chavez’s illness with cancer, and so it proved – the ailing strongman garnered 54 per cent of the vote.
From an external viewpoint, the continuation of Mr. Chavez’s policies will push Venezuela closer to bankruptcy. Over his nearly 14 years in power, he has tied the country’s fortunes more closely to the energy industry. Oil sales make up nearly 95 per cent of exports, up from 80 per cent in 2000. But his heavy-handed meddling with state-owned Petroleos de Venezuela SA (PDVSA) has led to oil output declining by a fifth.
Venezuela’s inflation, at 28 per cent last year, was the highest in Latin America despite price controls. And the nationalization campaign Mr. Chavez launched in 2007 has saddled the state with scores of loss-making companies. Moody’s Investors Service reckons the fiscal deficit could reach 7.7 per cent of GDP this year, a six-fold increase in four years. Increasing levies on both domestic and foreign oil sector participants could appeal as a way to offset this.
Mr. Chavez, 58, has already seized mining ventures, and his 2013-2019 plan aims for more of the same. The food industry could suffer too. He has threatened to nationalize Polar, a 70-year old producer of beer and food staples. He may feel empowered to do so now.
Charisma and confidence aside, Mr. Chavez owes his re-election to generous social spending. This has helped the poorest Venezuelans, but excessive state largesse isn’t sustainable. Pollster Datanalisis reckons that nearly 2.3 million people have dropped out of the work force since 2003. PDVSA, meanwhile, has seen its payroll more than double with Mr. Chavez in office.
Venezuela can still afford to pay its debts. But the run-up in the price of its 2022 bonds to well above par now looks premature. The average of 90 cents or less over the past two years looks more consistent with Mr. Chavez’s renewed ability to do economic damage.