2010 11-18 - barclays ve10 1118


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2010 11-18 - barclays ve10 1118

  1. 1. EMERGING MARKETS RESEARCH 18 November 2010 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 3 VENEZUELA Devaluation could come in the new year We have just returned from Venezuela where we met with the Ministry of Finance, the Venezuelan Central Bank, traders, private oil companies that are part of the Orinoco belt projects, pollsters, local political anaIysts and some economists. We returned from our trip slightly more optimistic than when we left, since we expect a formal devaluation of the currency in Q1 11 (the first weeks of the year), instead of a disguised one. We also forecast a private placement from PDVSA to BCV for USD2.5bn of the new 2017 in mid- December, but given the poor results of the swap, it is not possible to rule out the private placement being done with the 2013. After this placement, we do not expect new issuance until mid 2011. In the meantime, we are of the opinion that the market will start to price in a higher probability of a peaceful and democratic transition in 2012 and that the oil belt projects will start early production of about 400,000 barrels per day in 2013. Alejandro Grisanti +1 212 412 5982 alejandro.grisanti@barcap.com Alejandro Arreaza +1 212 412 3021 Alejandro.Arreaza@barcap.com www.barcap.com We expect an official devaluation of the exchange rates After our meetings with the authorities, we are changing our devaluation position. Authorities have said that they cannot repeat the same mistake of 2005-10, when they anchored the nominal exchange rate with an average inflation of 22.7% per year. In addition, they feel that after devaluing 21% for some sectors and 100% for the others in 2010, inflation will be close to 2009 levels. Furthermore, given that the devaluation has a political cost, it is better to do it nowhere near the presidential election in December 2012, and not during the Christmas season. For these reasons, we now believe that they will move the reference rates at least 15% in Q1 11 (with a higher probability in the first weeks of the year). This means that if the government does a linear devaluation, the new exchange rates will be VEB3.0/USD and VEB5.0/USD for CADIVI and VEB6.5/USD for SITME. Figure 1: Venezuela suffered the higher devaluation of its currency in 2009 2008 2009 2010 F 2011 F Weight VEB/$ Weight VEB/$ Weight VEB/$ Weight VEB/$ CADIVI 1 60% 2.15 39% 2.15 18% 2.60 14% 3.0 CADIVI 2 27% 4.30 31% 5.0 Public Enterprises 19% 2.15 19% 2.15 26% 2.60 23% 3.0 Gov’t. Issuances 3% 2.91 10% 4.95 7% 5.64 7% 6.5 SITME 6% 5.30 12% 6.5 Parallel Market 17% 4.27 32% 6.03 15% 7.61 14% 9.5 Weighted Avg FX 2.54 3.68 4.20 5.15 Source: Barclays Capital
  2. 2. Barclays Capital | Venezuela: Devaluation could come in the new year 18 November 2010 2 As we wrote in Venezuela, Taking a breather, January 26, 2010, we did not expect a significant increase in the inflation rate because most of the devaluation happened in 2009. As we can see in Figure 1, without an official announcement, the government devalued the average exchange rate by 44.5%, from VEB2.58/USD in 2008 to VEB3.68/USD in 2009, just reducing the proportion of dollars that it sold at the stronger exchange rate (at that moment, the official rate was VEB2.15/USD) from 60% to 39% and increasing the proportion of dollars that it sold at the weaker rates through government issuance and the parallel market. The Venezuelan government did a disguised devaluation in 2009 of 44.5% For 2010, the changes the government made to the exchange system in the middle of year seem to have mitigated the effect of the devaluation of the official exchange rate announced in January. The introduction of SITME with a stronger exchange rate (USD/VEF5.3) than the prevailing one in the parallel market before it was closed (USD8.2), coupled with a greater amount of FX sold through CADIVI at the official exchange rates, has partly compensated for the greater restrictions imposed on access to the FX market. FX sales through CADIVI in Q3 10 increased 22.3% and 9.1% from Q2 10 and Q3 09, respectively. Additionally, the other part of the demand for hard currency for imports is controlled by the government, which has been increasing the imports directly made by public enterprises, while most of the remaining FX demand has being satisfied through SITME and the bond issuance made by the government. In this scenario, our calculation indicates that the expected devaluation for 2010 is 14.4%, moving the exchange rate from VEB3.68/USD in 2009 to VEB4.20 in 2010. We should mention that according to Ecoanalítica, the average equilibrium real exchange is VEB 5.83/USD for 2010; thus, the current average exchange rate is overvalued by 28.0%. In 2010, the devaluation was much lower than economic agents believe For 2011, if the government decides to make a linear devaluation of 15% in the reference exchange rates and continues selling hard currency through SITME at a rate of USD45mn per business day, the average exchange rate will be VEB5.15/USD, representing a new devaluation of 24.1%. In this calculation, we expect CADIVI to keep about 45% of the supply of hard currency, but the proportion sold at the stronger rate might be reduced from 18% to 14%. Moreover, we expect the proportion of the demand satisfied through SITME and bond issuances to increase from 13% to 19%, while the participation of the parallel/black market would continue decreasing to 14%. We note that if President Chavez wants to be sure there will not be devaluation in 2012, the devaluation in 2011 will need to be higher and/or government expenditures will need to be lower. In 2011, considering the devaluation of the reference rate and the reallocation of the supply, we expect a 22.6% devaluation What to expect with new issuances and with the SITME SITME has stabilized its daily sales at about USD43mn (of which about 15% comes from the private sector), after increasing its supply in September, and the central bank seems have enough resources to maintain the system’s operations for the rest of the year without needing new issuance. According to the authorities, the public sector has a portfolio of about USD3.5bn that it expects to use to fund SITME. Additionally, we expect PDVSA to pay USD1.8-2.0bn out of a loan of USD4.8bn it has with the central bank. To make this payment, we expect PDVSA to make a private placement to the BCV of the new PDVSA 17 with a notional value of about USD2.5bn before the end of the year. Overall, this implies that the authorities count approximately USD6.0bn in different assets that can be sold through SITME, which should be enough to guarantee SITME’s currency supply through the first half of 2011. Therefore, we do not expect any issuance or private placement in Q1 11. For the rest of the year, we expect new issuances of about USD10bn dollars from PDVSA and the central government. In addition, for the next two years, we expect PDVSA to pay to central bank USD2.8-3.0bn for the remainder of the loan through new private placement – the notional could vary, depending on the characteristics of the bond used. Moreover, if Jorge Giordani remains the minister of finance, we would expect lower issuance from the Republic In 2011, we expect USD10bn in new issuance, mostly from PDVSA
  3. 3. Barclays Capital | Venezuela: Devaluation could come in the new year Figure 2: Average SITME’s daily sales per week (USD mn) Figure 3: Recovery-adjusted spread of Venz versus PDVSA 10 15 20 25 30 35 11-Jun 18-Jun 25-Jul 2-Jul 9-Jul 16-Jul 23-Jul 6-Jul 6-Aug 13-Aug 20-Aug 27-Aug 3-Sep 10-Sep 17-Sep 24-Sep 2-Oct 8Oct 15-Oct 22-Oct 29-Oct 5-Nov 40 45 50 0 200 400 600 800 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 1000 1200 Source: BCV, Barclays Capital Source: Bloomberg, Barclays Capital and more from PDVSA. In this scenario, most of the new supply would come from PDVSA and we would expect the difference in yields among the sovereigns and PDVSA to remain close to the level they are now; if any change happened, it should benefit the sovereigns, in our view. Orinoco oil belt projects A positive source of support for the Venezuelan assets, in our opinion, is the development of the Orinoco oil belt projects, which is not priced in to the market. In meetings, some private oil companies have said that since 2009, with the contraction of oil prices, the government has changed its approach because it is now aware that it needs partners to develop the Orinoco belt. Clearly, the government realizes that Venezuela does not have the capacity to extract and refine all of the heavy oil it has and that it is very important to ensure the inflow of foreign currency. Moreover, given infrastructure restrictions, it is not possible to start seven projects at the same time; therefore, companies are starting production as soon as possible to gain an advantage over their competitors. Based on this, we see more FDI in the oil sector (USD40bn in the next five years) and a real possibility of increasing oil production by 400,000 bpd by 2013 in what has been called early production and 1.0mn bpd by 2016 (authorities are expecting 2.0mn bpd, but we are not that optimistic). For 2013, we expect an increase of oil production of 400,000 bpd What are locals thinking? On this trip, we attended the Metroeconómica/Ecoanalítica conference and were impressed with the slightly optimistic tone regarding business sentiment in Venezuela. Among 700 participants at the event, 77% expect more radicalization, and 59% believe that investing in Venezuela is not favorable. But when the consulting firms asked participants about their own business, 66% expect to make a moderate increase or remain constant in their investments in 2011, despite the fact that most (84%) expect no or negative growth and inflation to remain around 30%. We note that the participants answered very differently when asked about investment in general terms or their own companies. This suggests that they believe there are still some lucrative sectors in which they can invest for the next two years. In addition, 80% expect a formal devaluation of the official and SITME exchange rates and, despite the restrictions, just 7% are not willing to participate in the non-official exchange rate, which most of them expect to be USD/VEB9.5-10.0 by the end of 2011. Last but never least, on the political front, 56% believe it is possible to have a democratic transition in 2012, and 67% think it is possible to visualize a Venezuela after Chavez in 2013. Despite threats to private property rights, 66% of participants plan to make a moderate increase or remain constant in their investment in 2011 18 November 2010 3
  4. 4. Analyst Certification(s) We, Alejandro Grisanti and Alejandro Arreaza, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi- bin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.
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