Merrill raises Venezuela bonds to market weight

Reuters, 01.30.03, 10:33 AM ET

NEW YORK, Jan 30 (Reuters) - Merrill Lynch raised Venezuelan sovereign bonds to "market weight" in its model portfolio on Thursday, citing a slow recovery in oil output stifled by a two-month-old general strike and the nation's efforts to preserve cash for debt payments. The investment bank said in a report that Venezuela's bonds have underperformed the market since early December, when foes of President Hugo Chavez began a general strike aimed at forcing the leader to resign or call new elections. The strike has strangled Venezuela's oil production, normally the source of half the government's revenues, and raised concerns about the country's ability to make payments on its debts. The worries have helped sink Venezuela's bonds 3.4 percent so far this year, according to J.P. Morgan's Emerging Market Bond Index Plus. With Chavez using troops and replacement workers in an attempt to break the strike, oil production has crept back up in recent days, bolstering bonds. Merrill also said Venezuela's "consideration" of its external debt payments in its move to capital controls was also a motivation in the rating change to "market weight" from "underweight." Venezuela, grappling with capital flight and a free-falling currency because of the strike uncertainty, shuttered its foreign exchange market last week and is now set to implement a fixed single exchange rate. Finance Minister Tobias Nobrega said the fixed single rate would be adjusted monthly but he has not said the level at which it will be fixed. In spite of the move to market weight, Merrill said it did not expect a sizable rebound in Venezuelan bond prices until oil workers are back at work. "We do not expect, however, a sustainable and significant recovery in Venezuelan debt prices, as the political crisis is to have a damaging effect on the economy, unless (state oil company) PDVSA workers break the strike," the investment bank said.