Wall St eyes Venezuela risk after political arrest

www.forbes.com Reuters, 02.20.03, 2:25 PM ET By Hugh Bronstein NEW YORK, Feb 20 (Reuters) - International investors fretted about Venezuela on Thursday after an opposition leader was arrested, the latest sign that left-leaning President Hugo Chavez, known for his anti-capitalist rhetoric, remains entrenched in power. But selling of the country's sovereign bonds was muted as Wall Street analyzed the risk presented by Chavez versus the tempting rewards offered by high-yielding Venezuelan bonds. Despite his unimpressive economic record, Chavez has sworn to honor debt contracts. "Chavez has won and it appears that he is consolidating his hold on power," said Mark Dow, a portfolio manager at MFS Investment in Boston, referring to a recent two-month national strike that, like a short-lived coup last April, failed to push the pugnacious former paratrooper from office. The strike briefly crippled the oil industry of the world's No. 5 petroleum exporter. Production is still not back up to full capacity. State security police at about midnight seized Carlos Fernandez, a business chief who helped lead the work stoppage. A judge had ordered him and opposition union boss Carlos Ortega detained on charges of rebellion. HIGHER INFLATION ON THE WAY? Dow said he is concerned that recently-imposed capital controls, in combination with the government's weak fiscal position, are setting the stage for Venezuela to print money to cover its public sector borrowing requirements. Such a move would likely increase inflation significantly. "It is almost impossible that Chavez's economic policies will work, so the non-oil economy will continue to deteriorate," Dow said. While emerging market debt on average yielded 7.15 percentage points more than U.S. Treasuries, Venezuela debt yielded an average 13.81 percentage points more than Treasuries. This means investors are demanding much higher yields in exchange for assuming the risks they see in Venezuela. After the Fernandez arrest, investors were left to wonder how far the economy will deteriorate before Chavez is finally forced out, and whether current yields fairly compensate investors for the risks. The answer to the latter question is 'yes', according to Jose Cerritelli, a Bear Stearns debt strategist. "With oil prices so high and with the government's willingness to pay its bonds not in question, people are being more than adequately compensated for the near-term political risk," Cerritelli said. "My recommendation is buy." Three months of negotiations, involving the Organization of American States and a group of countries known as Friends of Venezuela, have made little progress toward hammering out an agreement on early elections. Chavez's term of office is due to expire in January 2007. Jose Pedreira, managing director, Latin World Asset Management, said news of the arrest is not likely to ruffle investors who have come to see the country as an oil play and nothing more. "Chavez has his own agenda and he is not paying attention to what the Friends of Venezuela are trying to do," Pedreira said. "But as long as oil is at $37 per barrel investors are not paying much attention to this kind of news." Dissident Venezuelan oil workers said on Thursday that output was at 1.4 million barrels per day, compared with 3.1 million barrels before they launched the strike in December. The government said output stands at more than 2 million barrels per day.