CARACAS/NEW YORK: Venezuela's dollar-denominated bonds tumbled on Wednesday after the government announced a new foreign exchange platform that was seen as insufficient to resolve an economic crisis and ease fears of a possible bond default.
The OPEC nation on Tuesday unveiled a new free-floating currency platform called Simadi, the third system in a three-tier exchange control mechanism meant to bolster state coffers.
Venezuela faces a potential gap in funding in 2015 given what it owes to foreigners holding US dollar denominated debt.
Siobhan Morden, a veteran emerging market debt strategist and head of Latin America strategy at Jeffries in New York believes the government needs to fill a $14 billion hole in its balance sheet in order to meet its obligations.
"Maybe they can do something that is extremely creative that enables them to get through this year. But as it stands right now, with all the resources I am looking at, they are underfunded," said Siobhan Morden, head of Latin America strategy at Jefferies in New York. If President Nicolas Maduro can make it through this year, that funding gap increases to roughly $26 billion in 2016, Morden said.
"Then they are absolutely, completely underfunded for 2016. But that is assuming they make it through this year.
I would say there is still a high probability of default this year," she said.
Critics pointed out that the changes to the 12-year-old currency control system did not remove two heavily over valued exchange rates, which will limit the government's ability to save hard currency amid a drastic fall in oil revenues.
"The persistence of large distortions in the FX market will make it more difficult for the government to make necessary savings in the new scenario of lower oil prices," wrote Alejandro Grisanti of Barclays.
"In such conditions, scarcity and inflation problems could continue to deepen."
Benchmark Venezuelan government debt fell sharply because the new plan underwhelmed the the market.
Simadi was seen as marginal tinkering at best, even if it was a step in the right direction toward reform. Venezuela's Global 2027 bond fell 3.49 points in price to bid 40.005, driving the yield up to 25.12 percent.
An investor wanting to insure a $10 million portfolio of Venezuelan sovereign bonds for five years would need to spend $6.52 million upfront versus $6.32 million on Tuesday, according to data provider Markit. State-owned oil company PDVSA's bonds declined as well. It's benchmark 2024 bond dropped 1.36 points in price to bid 32.64, with yield up to nearly 25 percent.
A plunge in oil prices has left Venezuela's state-led model created by late socialist leader Hugo Chavez struggling with shortages, swelling grocery lines and recession.
The country's dollar-denominated bonds are now trading at distressed levels and on average their yields pay 27 percentage points more than similar US Treasury bills due to concerns of a possible default.
Maduro insists the country will meet all foreign debt commitments without cutting social spending plans or scrapping the currency control system.
CORPORATE WRITE-DOWNS
Bonds had jumped on Tuesday in expectation that the new system would imply a large devaluation, which is generally viewed positively by bondholders because it frees up more hard currency for debt service.
Officials did not say what the exchange rate would be on the new system, insisting it would be determined by supply and demand once the market kicks off in the coming days.
Business leaders in Venezuela have given little detailed reaction to the change, though some said the free-floating mechanism was a welcome, albeit limited, move.
"The government is recognizing that supply and demand must set prices," said Jorge Roig, head of the main business group Fedecamaras, in reference to the new system. "A bit of liberalism isn't a bad thing."
The three-tiered system will now comprise the preferential rate of 6.3 bolivars per dollar for food and medicine, a complementary rate of 12 bolivars for other goods through a system called Sicad, and the floating rate via Simadi.
Local consultancy Ecoanalitica estimated the new rate would start between 130 and 140 bolivars. The group added that the weighted average exchange rate for 2015 would be 46.6 bolivars per dollar compared with 20.3 bolivars in 2014, which would imply a devaluation of 56 percent.
That could force another round of hefty write-downs by foreign companies with exposure to Venezuela including General Motors Co, household goods maker Procter & Gamble Co and Spanish telecom giant Telefonica.
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