“The sanctions seem to be a case of much ado about nothing,” said a US based fund manager. “Russian development bank VEB sold off eight points before the sanctions announcement on Tuesday but rallied pretty quickly when it became clear that the sanctions were non-biting. So far only a few individuals and shipping companies have been hit. Of course the worry is always that there’s worse to come and that concern gets bigger as we run up to US elections. But [US President Donald] Trump also saying this week that sanctions could be removed if exchanged for some concession on Ukraine or Syria was also important.”
There was also a big movement in Angola bonds this week as its ministry of finance said that it was in discussions with the International Monetary Fund around fresh financing. The country’s 2028s rallied 40bp to a Z spread of around 525bp, but both a syndicate official and an investor in London said that the move may have been exaggerated because of the low volumes trading.
But Turkey levels at least seem to stable, after weeks of big swings.
“Trading desks are around 70%-80% staffed at the moment,” said one US-based fund manager. “Not only are people on their summer holidays but Eid al-Adha is also in play as week. The noise around Turkey seems to have died down a little, but they don’t seem to have solved much. My sense is that the volatility is just taking a bit of a break.”
Venezuela flails in attempt to rein in currency
Venezuela’s default entered a new phase last week, when it missed a maturity payment on a sovereign bond, adding $1.1bn to its mounting stack of missed payments.
Only one of Venezuela’s public sector bonds is not in default. The state oil company, PDVSA, is still servicing a 2020 bond. The bond is collateralised by 50.1% of the shares in Citgo, the company’s US refinery.
PDVSA will have to make a $900m amortisation and coupon payment in October. “Citgo is worth a lot more than that, so Venezuela will do everything it can to make that payment and retain control of Citgo,” said a Latin American investor.
The PDVSA 2020 bond is trading at 86 cents on the dollar — considerably more expensive than the borrower’s other paper, which is trading around 22 cents. The sovereign paper is trading around 25 to 26 cents on the dollar, according to the investor.
In a bid to rein in its burgeoning hyperinflation, Venezuela launched a new currency on Monday, the sovereign bolivar which, as of Wednesday morning, was trading at 55.9 to the dollar. “Cosmetically, it’s chopped off five zeroes, but no one is fooled,” said the investor. “It’s a huge devaluation but brings the foreign exchange into line with the black market rate.”
However, while the new currency appears to reflect true market valuations (the old currency was held at an artificial level), the sovereign will only be able to defend it as long as its reserves last.
Coupled with that, the nation has pegged the value of the new currency to the petro, the pseudo-cryptocurrency it launched earlier this year. Petro’s value is backed by Venezuelan oil, meaning its price fluctuates with the price of the Venezuelan oil basket.
Should the oil price increase, Venezuela would find itself forced to defend an unsustainably strong bolivar.
This won’t matter, according to the investor, because Venezuela’s situation is already completely untenable.
In addition to the new currency, Venezuela has raised its minimum wage to half a petro, or 1,800 sovereign bolivar, 30 times its present level. It has also promised to fund the increased wage bill for small and medium corporates for three months.
“There’s simply no way it can pay its public wage bill, nor meet the private sector wage bill it’s promising, so it will have to go on printing money, and inflation will continue,” said the investor.
Elsewhere, Latin America is “as quiet as it gets”, the investor added, with no bond deals expected until September.
Loans dead in the water
An air of resignation is hanging around the emerging market loan market, with more lenders accepting that their chances of hitting budget this year are all but gone.
“There just hasn’t been the activity anywhere other than the Middle East and the usual refinancings that come year in year out,” said one head of loans.
Some heads of loans have seen activity fall by as much as 30% year-on-year across their entire loan book, which includes investment grade EMEA transactions, GlobalCapital reported last week.
“I’m going to have to think how I can make the numbers look better for the bosses,” said another loans banker. “But if they give a budget based on some excellent [previous] years, we can’t always be expected to do that.”
There is some light — Saudi Arabia’s sovereign wealth fund has the potential to tip the scales with an up to $8bn loan that is out with requests for proposals among global lenders.
Francesca Young, emerging markets editor +44 (0)20 7779 7313 fyoung@globalcapital.com
Lewis McLellan, emerging markets reporter +44 (0)20 7779 7350 lewis.mclellan@globalcapital.com
Michael Turner, EM loans reporter mike.turner@globalcapital.com
Olly West, Latin America reporter oliver.west@globalcapital.com
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