Merrill Lynch cuts Venezuela bonds to underweight

Reuters, 01.06.03, 11:07 AM ET

NEW YORK, Jan 6 (Reuters) - Merrill Lynch cut its allocation of Venezuelan bonds to underweight from market weight in its model portfolio on Monday as a five-week-old strike by foes of President Hugo Chavez strangles the country's oil production, pummeling the economy.

The investment bank said in a research report that the opposition, which is demanding new elections or Chavez's resignation, and the president remain far away from a solution to the conflict, which keeps pressure on the fragile economy as businesses remain shut and the production of its top revenue source -- oil -- stifled.

Merrill said that no change at the presidential level until August appears to be the most likely scenario for now. Chavez says the constitution does not allow a binding referendum on his rule until August, which marks the halfway point of his current term due to last until 2007.

"In this scenario oil production and economic activity take time to recover and the economy suffers significantly," said Merrill Lynch.

"While our base case scenario does not include an external debt payment crisis, we have to acknowledge that risks are higher." Merrill said the strike has already cost Venezuela's fragile economy an estimated $2 billion to $3 billion. The investment bank said it expects Venezuela's gross domestic product to have contracted 9.2 percent in 2002, due partly to the strike.

The investment bank said it shifted the money from the Venezuela reduction to Ecuador, an oil producer that is benefiting from higher world crude prices.

Ecuador bonds got a boost on Friday when the incoming government of Lucio Gutierrez named respected economic consultant Mauricio Pozo as finance minister, an appointment seen by analysts as opening the doors for Ecuador to clinch a much-needed International Monetary Fund deal.

Tensions remain high in Venezuela following street clashes and shootings in the capital in the past few days, confrontations that left two dead and wounded dozens.

On Monday, Venezuela's share of the J.P. Morgan Emerging Market Bond Index Plus slid 0.75 percent on the day in midmorning New York trading, while Ecuador's portion leaped 4.34 percent in terms of daily returns.