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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: blake_paterson who wrote (26916)	12/5/1998 9:32:00 AM
From: blake_paterson	Read Replies (1) \| Respond to of 70976

OT A more optimistic view of Venezuela: Venezuela: Neither Default, Nor Devaluation Carlos Janada (New York) With the presidential elections due this coming Sunday, there are market concerns that Venezuela will default on its external debt payments and will let the currency drop substantially in the weeks to come. It's our opinion that even under a Chavez administration, the country will not default on its external debt payments; a renegotiation of part of the country's external debt might be feasible though. The bolivar should remain relatively stable at least over the next few months. The risk of a large devaluation, however, should gradually increase next year as the oil price remains at current levels and the government struggles to at least reduce its large fiscal deficit. Regarding the elections, the traditional parties, AD and COPEI, decided almost at the last minute to endorse their support of Henrique Salas Romer (who has been leading second in the polls). At least in theory, with the support of AD and COPEI, Salas Romer could beat Hugo Chavez this Sunday. But the move of the traditional political parties comes a little bit late, in our view. In any event, this is going to be a close run to watch. The relevant question now becomes what we should expect from a Chavez administration. There are market fears that Chavez will default on the country's external obligations. We disagree. It seems obvious that such an action would hurt Venezuela in the international community and work against Chavez himself (recalled what happened to Peru's Alan Garcia in the mid 1980s). In addition, despite the decline of the oil price, Venezuela should receive $12 billion in oil exports in 1999. Besides, Venezuela is the only country in Latin America that has traditionally shown current account surpluses (recognizing that the investment of those resources is an entirely different issue). Thus, the concerns with a potential default are a little bit overblown, in our view. The second investor concern is with the currency. Will there be a big devaluation in the forthcoming weeks? In fairness, we can't rule out a devaluation completely. However, we think that since Hugo Chavez has been leading the polls for awhile already, Venezuelans that wanted to take their capital out of the country, might have already done so, and not waited until the last minute. Thus, the capital that was going to leave, probably already did. Presently, the central bank has nearly $15 billion in international reserves, and it has to make an external debt payment of $1.3 billion before the end of this month. That would leave reserves at around $13 billion by year-end. In addition the currency is trading slightly below the middle point of its band, which would leave the central bank some room to speed up the crawl if necessary. And finally, there's the political will of the Caldera administration to defend the present currency band. Thus, concerns with a big devaluation in the forthcoming weeks are overblown as well, in our view. However, the risk of a devaluation would increase after a new president takes office. But still we sense that whoever wins this Sunday, that person will try, at least initially, to keep the bolivar relatively stable. It wouldn't likely pay in political terms to have a devaluation at the start of a new administration (especially it would seem for Hugo Chavez). Unfortunately for the new administration, there should be a couple of factors playing in favor of a devaluation in 1999: the oil price and the increasing fiscal deficit. The oil price has declined recently to levels not seen in a long time. The Venezuelan basket currently trades at $8/barrel or even less. If the oil price remains this low for long, it'll likely exert pressure for a weaker bolivar. However, we think that if worse comes to worse, the government might opt for currency controls instead of a devaluation. The size of the fiscal deficit is tied to the vagaries of the oil price. If the oil price remains at $8/barrel in 1999, the size of the fiscal deficit could easily reach 8% of GDP, and the government's financing needs (fiscal deficit plus amortization payments) would be in the double-digit range. This would not be a pretty panorama. We see this as the key factor to watch next year.