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.