As Venezuela experiences its worst economic and political crisis, and state-owned oil giant Petroleos de Venezuela (PDVSA), which is on the brink of collapse is to cover a substantial interest and coupon obligation tomorrow, the pressure on the country is mounting. Having failed to deliver relatively small coupon payments on sovereign paper over the weekend (due to ‘technical difficulties’- there is a 30-day grace period in place), Venezuela appears to be prioritising PDVSA obligations: Ecoanalitica (a consultancy firm based in Caracas) tweeted, ‘The funds regarding the PDVSA 20 (capital + interests) is already approved, so it should become effective by friday’ [sic]. At time of writing, we have yet to see an official statement substantiating this claim from either the government or PDVSA.
In 2009 Malaysian PM Najib Razak established Malaysia’s sovereign wealth fund, 1Malaysia Development Berhad (1MDB), with the intention to fund economic development projects within the country. However all number of corruption probes and fund misappropriation scandals have plagued the state fund with the US Department of Justice (DoJ) claiming that at least USD 3.5bn of raised funds have been ‘stolen’. To add to the troubles, a year ago 1MDB missed a USD 50m coupon payment thus ‘defaulted’ on a USD 1.75bn bond issued on 2012.
Today sees the end of the month and what a month it has been! Amongst the recent doom and gloom our portfolios have benefited from the risk-on bounce, with holdings in emerging market and “frontier” markets such as the Middle East enjoying the rally.
This week, we heard that Abu Dhabi is seeking to merge two of its strategically important sovereign wealth funds, the International Petroleum Investment Company (IPIC) and Mubadala Development Company. This deal swiftly follows last week's announcement of state-run bank tie-up as the emirate looks to streamline operations, cut costs, realise synergies and diversify the economy.
With the Fed having finally started raising rates, one of the major uncertainties is now behind us. The extent of future rate hikes by the Fed will depend on the evolution of economic data throughout 2016 with the median consensus forecast being 1.25%. Our own forecast is for a lower Fed funds rate with 1% being the most likely outcome given the significant downside risks to global growth.