Venezuelan Bolivar May Strengthen on $3 Billion Bond Sale Plan

By Daniel Cancel

Sept. 28 (Bloomberg) -- Venezuela’s bolivar will likely strengthen in the unregulated parallel market after the government announced its first dollar-denominated bond sale in 18 months, traders and analysts said.

The government will issue $3 billion of bonds “immediately,” Finance Minister Ali Rodriguez said Sept. 26, two days after the ministry laid out plans to sell 12.15 billion bolivars ($5.7 billion) of securities denominated in the local currency by year-end. The dollar debt offer will help meet pent- up demand for the U.S. currency if the government allows Venezuelans to buy the securities with bolivars, as it did in issues in recent years.

“The immediate reaction will be a strengthening, however we’ll have to wait to see what the conditions” of the bonds will be, said Asdrubal Oliveros, a director at Caracas-based economic consulting firm Econalitica.

Venezuelan President Hugo Chavez is seeking to narrow the 62 percent gap between the parallel market rate and official government-set exchange rate in a bid to stem price increases on imports and curb 29 percent annual inflation, the highest rate among 78 economies tracked by Bloomberg.

The bolivar has rebounded 25 percent to 5.63 per dollar in the parallel market from a near-record low of 7.05 on Aug. 4 as Chavez said the government stepped up sales of the U.S. currency at the official rate. Oliveros said the bolivar may strengthen to 5.1 per dollar.

Reserves Drop

Venezuelan companies and individuals turn to the parallel market when they can’t get government authorization to purchase dollars at the official 2.15-per-dollar rate under currency controls Chavez imposed in 2003. The government scaled back dollar sales at the official rate early this year to preserve foreign reserves after a 55 percent plunge in oil, the source of 93 percent of the country’s exports, from last year’s record high. Venezuela’s foreign reserves declined 23 percent this year to $32.7 billion, the biggest drop in Latin America.

Chavez tripled the government’s borrowing capacity for the year in March to 37 billion bolivars to raise funds to offset the tumble in crude.

Venezuela, the biggest oil producer in South America, last sold dollar-denominated bonds in April 2008, when it issued $4 billion of 15- and 20- year securities in the domestic market.

In that sale and in a $3 billion offering by state oil company Petroleos de Venezuela SA in June, the government allowed local investors to buy the securities with bolivars and re-sell them in international markets for dollars. That mechanism provided dollars to investors unable to obtain U.S. currency at the official rate.

‘All Bets Are Off’

The bolivar will likely extend its rebound in the parallel market in the run-up to the $3 billion offering, said Russell Dallen, head trader at Caracas Capital Markets at BBO Financial Services Inc. The rally may stall after the sale, he said.

“Once the new issue comes to market -- unless the government has some other ongoing plan up their sleeve to shore up the rate -- all bets are off and we would expect to see the bolivar return to its consistent path of devaluation and continued deterioration,” Dallen said.

As Venezuelans sell the bonds in international markets for dollars, the supply of securities will swell, which could damp a rally in the country’s debt, according to RBS Securities Inc. A $3 billion dollar bond sale would total about 10 percent of the government’s outstanding dollar bonds.

Venezuela’s dollar debt has returned 74 percent this year, the most in any year since JPMorgan Chase & Co. began tracking the data in 1994, after a 39 percent tumble in 2008.

The yield premium investors demand to own Venezuelan bonds rather than U.S. Treasuries dropped to a one-year low of 8.6 percentage points last week from 18.48 points in mid-February as the easing of the global credit crisis ended the rout in oil. The yield gap was 8.93 points on Sept. 25.

Rodriguez said the government will sell the bonds in several maturities. The Finance Ministry will release details of the notes on its Web site, he said while attending an Africa- South America summit held on Venezuela’s Margarita Island.

To contact the reporter on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net.