3 Venezuela Experts: Debt Risk & Dollar Adoption
By Dimitra DeFotis
The head of Venezuela’s state-controlled oil company, Petróleos de Venezuela or Pdvsa, is reportedly out of a job at the company overseeing the largest proven oil reserves in the world.
For bond investors, the timing of a management changes is bad with oil prices slipping below $50 and Venezuela’s April 12 amortization payment of $2 billion due, writes Nomura Securities‘ Siobhan Morden, head of Latin America fixed-income strategy. She recommends reducing risk, writing:
Eurasia Group Analyst Risa Grais-Targow thinks the reported departure of Pdvsa President Eulogio del Pino’s reported does not signal risk for Venezuela’s April debt payments:
Steve H. Hanke, a currency expert and professor at Johns Hopkins University, just published “On Venezuela’s Tragic Meltdown,” which is his testimony before a U.S. House foreign affairs sub-committee this week. He recommends against direct U.S. meddling in Venezuela’s affairs, but instead says U.S. leaders can help stop Venezuela’s high inflation through two mechanisms: installation of a currency board system in which “its local currency becomes a clone of a reliable anchor currency … or abandon its local currency and adopt a reliable foreign currency (read: it can “dollarize”).” He writes:
He says that Argentina’s convertibility system failed because it allowed for both monetary and exchange rate policies. He says a recent survey in Venezuela showed 59% of respondents supported currency boards and 62% supported dollarization. He says that in Panama, Ecuador, and El Salvador, which are officially “dollarized,” and in Peru which is semi-officially dollarized, “real GDP growth has been more stable and generally superior to growth in the countries that issue their own domestic currencies.”
Hanke recommended two books in his testimony:
- On Venezuela’s economic “dysfunction” leading up to Hugo Chavez’ presidency: “Paper Tigers and Minotaurs: The Politics of Venezuela’s Economic Reforms,” by Moises Naim, 1993.
- On the “bizarre state” of economic affairs in Venezuela, “Crude Nation: How Oil Riches Ruined Venezuela,” by Raul Gallegos, 2016)
Venezuela government bonds were among the holdings in the iShares JPMorgan USD Emerging Markets Bond ETF (EMB) and bonds in Pdvsa were among the holdings in the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) as of late February, according to Morningstar. There are no Venezuelan equities in the iShares Latin America 40 ETF (ILF).