Latin Bonds Hurt By Policies

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Several Latin American bonds are being hit by concern over policies.

Anti-business policies are driving up yields on bonds from countries like Argentina, Venezuela, Nicaragua and Ecuador at a time when they should be lower, experts say. “They require a risk premium compared to other countries with conventional conditions,” says Alberto Ramos, vice president and senior Latin America economist at Goldman Sachs. “Investors are very well tuned to political developments.”

Argentina's benchmark inflation-linked bonds have tumbled 24 percent this year, making the country's debt market the worst performer in the world, Bloomberg reported Friday. The reason? Doubts about official inflation statistics and whether the incoming government of Cristina Fernandez would fix the problem.

VENEZUELA

Meanwhile, five-year credit-default swaps based on Venezuela’s debt has increased by 6 basis points to 3.76 percentage points, according to data from Lehman Brothers and Bloomberg. With international oil prices at record highs, Venezuela bonds should be doing better, Ramos points out. Venezuela is the world’s sixth-largest oil exporter and state oil giant PDVSA accounts for 80 percent of the country’s export earnings, according to the U.S. Department of Energy.

However, radical economic policies by Venezuelan President Hugo Chavez have offset the gains of the oil cash. Those policies include nationalizations of successful telecom and electricity companies, a wave of expropriations, price controls, undermining of central bank autonomy and threats of further nationalizations.

“There’s absolutely no doubt that it has had a negative effect,” Ramos says of the radical policies. “Venezuela should be an investment grade country if managed well. But that’s not the case.”

Currently only Chile and Mexico have investment grade status in Latin America, thanks to years of pro-business policies that include close commercial relations with the United States.

Ramos is concerned about Venezuela bonds in the future as well. Although the country’s credit will likely continue performing well thanks to high oil prices and timely debt payments, economic policies could impact pricing further, he says. “There’s a risk that prices may not stay stable, that policies might lead to an erosion of fundamentals. That’s a concern.”

Also Ecuador bonds have been hit, thanks to a combination of factors including repeated threats to default, political uncertainty and a recent surprise hike on oil royalties (See Ecuador Oil: More Trouble Ahead)

NICARAGUA

Meanwhile, in Nicaragua the yields of the government's benchmark 4.5 percent dollar-linked bonds due in 2015 jumped on recent negative news, according to industry sources and Bloomberg. That news includes a temporary confiscation of a fuel terminal owned by ExxonMobil, frequent attacks on Union Fenosa (a leading foreign electricity company in Nicaragua), closer ties with Iran and increasing anti-Capitalist and anti-American rhetoric.

“Every other day you read news about [Nicaraguan President Daniel] Ortega and his allies, Chavez and [Iranian President Mahmoud] Ahmadinejad talking about oil companies,” says Amir Zada, a New York-based assistant director at Exotix, a British company that specializes in distressed debt. “Investors are scared [Ortega] could turn out to be a Chavez with local companies. If that happens, it would be very difficult for local institutions.”

Just before and after Ortega was elected president in November 2006, they averaged 17-18 percent, he says. Once the dust settled after the election – and Ortega signaled he would be more market-friendly and pragmatic – they fell to 11-12 percent. “Buying before the election and selling after the election was a great play,” Zada comments.

Now the yield has grown to 13-15 percent on average and expectations are that they will grow to 16 percent level, Zada says. Foreign investor hold about half of the BPI bonds - so called land bonds, which are worth some $1.1 billion, according to Gerardo Arguello, general manager of the Nicaraguan stock exchange. The BPIs were issued to compensate those who lost their property the last time Ortega was president (1979-90). On a monthly basis some $10 million are traded. The BPIs are traded on the Nicaraguan stock exchange, which has seen volume decline lately due to political uncertainty and other factors, Arguello says.