LONDON: Venezuelan dollar bonds rose strongly on Monday after the opposition beat the ruling socialists in a parliamentary election at the weekend, raising hope of at least some economic reform in the crisis-ridden country.
Bonds from the sovereign as well as state oil firm Petroleos de Venezuela (PDVSA) rose as much as 4.2 cents in the dollar, moves that will likely extend further if the opposition fulfils its expectations of a two-thirds majority.
The Democratic Union coalition has so far won 99 seats, against the Socialists' tally of 46 seats, with some districts still to be counted. President Nicolas Maduro has called on his supporters to accept defeat.
Sovereign bonds maturing in 2022 rose 4.2 cents to a 10-day high while the 2028 and 2038 issues firmed 1.3 cents to 3.3 cents. The 2027 issue, considered the benchmark for Venezuela, jumped 3.4 cents , according to Thomson Reuters data. PDVSA's 2024 issue rose as much as 3.9 cents
, while the 2027 bond rose 1.5 cents. Jan Dehn, head of research at emerging markets asset manager Ashmore, said: "It's positive news ... this is a government that is pursuing policies that are deliberately eroding the economic health of the country," referring to the squeeze on the private sector, inefficiencies at PDVSA and controls on the currency and goods' prices.
"If the (opposition) get a two-thirds majority or more we could start seeing changes to Venezuela's institutions, and that could make some of the opposition politicians more ambitious."
The outcome makes Venezuela the latest Latin American country to swing away from the left, after the opposition's election win in Argentina, the diminishing popularity of Brazil's President Dilma Rousseff and a change of government in Mexico three years ago. Venezuelan bonds have outperformed in recent months on hopes the opposition would trounce Maduro's increasingly unpopular government.
But they trade around 35 to 43 cents in the dollar, levels that price in a strong probability of default as the OPEC state's economy has bucked under the oil price collapse.
Socialists have lost support after presiding over a declining economy, the highest inflation in the Americas, chronic shortages of basic goods and sky-high crime rates.
The economy is expected to contract more than 5 percent this year while inflation is over 80 percent.
The average premium of Venezuelan bonds over US Treasuries contracted 18 basis points to 2,680 bps on the EMBI Global index on Monday.
While still the highest yielding emerging market credit with more than double the premium paid by Mozambique or Iraq, spreads have contracted more than 600 basis points since August.
Stuart Culverhouse, head of research at brokerage Exotix predicts more price gains if the opposition scores a two-third majority.
"(A two-third majority) would potentially be a game changer in terms of what they can do (in the legislature)." But many remain pessimistic given the scale of the challenge, with Dehn saying Venezuela would not be "a sudden turnaround story".
Crude prices around $42 per barrel are a serious problem, given oil makes up 95 percent of exports.
"There are some important unknowns. One is what will the final tally be for the opposition, and will the Maduro administration and the opposition find a way to compromise on a set of sensible economic policies?" Dehn said.
"Can they move forward in a constructive way and take Venezuela away from the brink?"
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