Merrill cuts Venezuela bond recommendation

www.forbes.com Reuters, 02.26.03, 11:28 AM ET

NEW YORK, Feb 26 (Reuters) - Merrill Lynch on Wednesday cut its recommendation on Venezuelan sovereign bonds to underweight from neutral, predicting more political and financial trouble to come as the country's economy contracts. Opponents of left-leaning President Hugo Chavez recently staged a two-month national strike aimed at forcing him from office. While Chavez has survived the work stoppage, just as he did a short-lived coup in April, Merrill expects the economy of the oil-producing nation to contract by about 12 percent this year, following a 9 percent slump in 2002, . "While the government has managed to reign over PDVSA (Petroleos de Venezuela, the state oil company) and crude production will likely exceed 2 million barrels per day on average for the year, the severity of the political crisis suggests bonds should be re-priced lower as the non-oil economy succumbs to the effect of capital controls, price caps, lack of financing and deteriorated domestic demand," Merrill said in a research note. Prior to the strike, which started in December, PDVSA, the world's fifth-largest oil exporter, had produced about 3.1 million barrels per day of crude oil. Chavez was elected in 1998 after vowing to wrest control from the country's corrupt elite and enact reforms to help the poor. But opposition has grown amid charges the president wants to establish a Cuban-style authoritarian state. As the opposition to Chavez has mounted, Venezuelan bonds have been punished with losses of 6.4 percent so far this year while the market as a whole has risen 4.568 percent in total returns measured by JP Morgan's Emerging Markets Bond Index Plus. "While our base-case scenario does not yet include an external debt default, we believe risks are increasing rapidly as the non-oil economy collapses," Merrill said. The confrontation between the government and the opposition could lead to further violence, state takeover of companies and a state of emergency under which some constitutional rights could be curtailed, Merrill noted. "We do not expect however that Venezuelan bonds would enter into a downward spiral unless the government is unable to maintain oil production above 2 million barrels per day on average for 2003," Merrill said. On Tuesday, two bombs tore into the Spanish and Colombian diplomatic missions in Caracas, wounding five people less than 48 hours after the president accused the two nations of meddling in Venezuela's political crisis.