The Daily Update - Venezuela’s calamity

According to the 2017 World Happiness Report released yesterday Norway raced ahead three places to be declared the world’s happiest nation, while the Central African Republic is apparently the most unhappy: in a measure of 155 countries. One country rapidly becoming increasingly unhappy is Venezuela, jumping from 44th to 82nd in one year, despite President Nicolás Maduro’s creation of the ‘Vice Ministry of Supreme Social Happiness’ back in 2013. In fact, Venezuela has held the top spot on Bloomberg’s world misery index for three years running, and the country has also caught up with North Korea on the 2017 Index of Economic Freedom, taking its place just ahead of the Democratic People's Republic at 179th place.

Unfortunately, the slump in oil prices over the last two and a half years has been particularly damaging to the economy, where 95% of exports are oil related. However, the government's socialist policies dating back decades have forced the country into its worst economic crisis. Unemployment sits at ~17% (expected to climb to 30% in the next couple years), inflation is at an unofficial 700% and interest rates are over 20.5%, while recent GDP estimates are at -18.6%. Bear in mind however that the government no longer publishes official figures, so these are based on estimates. One number which we can all rely on is the country’s rapidly diminishing reserves which stand at just USD 10.41bn, roughly 10% of its total outstanding debt! The chance of the country defaulting has therefore skyrocketed; in fact Venezuela’s 5-year CDS stands at a massive 3,295bps, at time of writing. To put this into perspective the chance of default on 5-year debt in Greece, which is also on the brink of an economic crisis, trades over 231% cheaper!

According to IMF data the oil rich country, wherein oil has been cheaper than water, scores well on a Net Foreign Asset (NFA) basis, so according to our most recent calculations Venezuela still rates as a 6 star nation, i.e. has NFA over 50% of GDP, so on par with Belgium, Germany and the Netherlands. But, as  there are no official published figures on the nation’s current account we cannot rely on this measure. Also, Venezuela is rated triple C by all three rating agencies, so apart from the obvious reasons it is not within our strategic mandate; we have therefore never invested in it.

For those of you would do enjoy a chunky yield however, the benchmark 20-year issue, 7% 2038’s is trading over 16.5%, or a price of ~$44. We calculate that if the bond were to trade to what we deem fair value, +628bps over USTs, we would expect a capital gain of 34 points, or ~45%. Having never chased yield in preference of credit quality, we know where we’d be ‘happy’ investing our funds.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.