Wednesday, 14 January 2009

Rumours that PDVSA is Selling Dollars in Parallel Dollar Market Abound. Will This Help Chavez Avert a Devaluation of the Bolivar?

I met former PDVSA and Venezuelan oil executives in recent days. Despite the tone of preoccupation that I felt when they referred to the current financial situation of the company, one thing particularly called up my attention: speculation over the growing extent of dollar sales carried out by PDVSA in the parallel exchange market.

For weeks, PDVSA has been selling U.S. dollars into the black market, and this is not new to those who follow Venezuelan affairs. As some of you might know, the spread between the official exchange rate of 2.15 bolivares fuertes per dollar and the black market dollar worth 5.5 bolivares fuertes (as quoted by a few sources in the Caracas currency market circles) is widening -- partly fueled by speculation the government will devalue the currency by mid-year. The government needs urgently the PDVSA dollars to keep the existing currency regime in full operation and scare away expectations of a depreciation of the bolivar fuerte, while PDVSA needs more bolivares to pay for increasing taxes, para-fiscal contributions and royalty payments the Chavez administration has imposed upon the company.

One of the former petro-gurus was emphatic: he doesn't expect the government to devalue or raise domestic fuel prices to ease PDVSA's beleaguered finances. I agree with him to some point. Both would be the last things that President Chavez would like to do in a political moment like this. So, if what the source says proves accurate, PDVSA is bound to enter a flurry of greenbacks in the currency markets in coming days to ease political and economic tension, especially now that President Hugo Chavez is trying to win approval for a referendum before March. PDVSA is still being paid for oil shipments from October and November last year, when prices were spiralling down but still remained quite high. The Venezuelan basket closed last week at $37 dollars, down 63 percent from Sept. 30. There is still money coming in, so, black market operators should expect downward pressures on the dollar spot market until the start of February.

One instrument that the government has resorted to in repeated occasions and that bore some short-term results was the offering of dollar-denominated debt in the local market to investors. The peculiarity of this instrument is that the buyer can pay for those bonds in bolivares fuertes and at the official exchange rate, to then sell them in the parallel market. The government is likely to resume those sales, in coming weeks.

Coca-Cola Femsa to Sell 2 Billion Mexican Pesos of Bonds

Coca-Cola Femsa SAB, the world's second largest bottler of Coca Cola drinks, is preparing to offer up to 2 billion pesos of ten-year notes in Mexico's debt markets. These type of sales usually come in different tranches. The notes could be either bear floating- or fixed-rate interest. The purpose of the sale is to add up pesos to existing cash holdings and repay maturing obligations. There are currently no details upon the timing and structure of a sale.

We will try to write more about the local debt market in Mexico as we develop this blog better. The situation for Mexican issuers became rather difficult a few months ago, after derivatives losses at some large companies such as Vitro shook confidence in the system, and the impact of the U.S. recession translated into tighter financing conditions for Mexican companies. On the other hand, liquidity in the commercial paper and mortgage-backed bond markets dried up in the wake of the crisis that followed the demise of Lehman Brothers Inc.

The Femsa securities are rated mxAAA by Standard and Poor's. The Mexico City-based company has a foreign currency rating of BBB+, (investment grade ranking) under the same agency.

Islamic Bonds Issuance Suffered Drop of 56 Percent in 2008, Following Confusion Over Shariah Laws, Impact of Credit Crunch

The value of Sukuk, or islamic fixed-income securities, issued last year tumbled 56 percent last year to $14.9 billion, according to a report by Standard and Poor's. Sukuk have emerged over the past three decades (especifically since 1975) as a relevant asset class that has enabled islamic companies to raise capital without breaking the basic principles of the Shariah (let's remember that, in the islamic world, Shariah prohibits the payment of fees for the renting of money.) Sukuk are, therefore, a form of commercial paper in which an investor has ownership of an underlying asset.

The decline in sukuk issuance last year, as well as that of exotic instruments and asset-backed securities, resulted from the fallout in global credit markets, the increase in borrowing costs and the subsequent decline in liquidity levels, and uncertainty. But one very reason that put sales of sukuk at a grounding halt for a great part of the year was due to confusion about the Shariah compliance of some sukuk by the Accounting and Auditing Organization for Islamic Financial Institutions, says S&P. Ijara, or the sukuk used for project and lease financing, was the favourite type of Sukuk issued last year (it made up for 45 percent of all issuances.)

I read last year in a report by a big international bank that the stock of debt represented by sukuk financing tops $250 billion (or, more than $250 billion of sukuk debt has been sold since 1975.) It's a relevant market -- once I talked to the capital markets head of Arab Banking Co.'s Brazilian unit just when the crisis began (around Feb. 2008) and she told me that demand in Brazil for this type of instruments was growing 15 percent a year.

As most specialised securities markets, sales of this asset class won't gather momentum until after the second half of 2009 or early 2010, according to S&P. The same should happen in Latin America to Brazilian FIDCs, or the Colombian mortgage-backed bonds sold by Titularizadora Colombiana. Investors remain on a ''wait-and-see´´ attitude, and it is still hard to assess the damage inflicted by the crisis to the collateral linked to asset-backed bonds in circulation.

One interesting aspect is that the U.S. dollar lost its place as the currency of choice for sukuk last year, according to S&P. The sukuk market will ''continue being skewed toward issuances in local currencies, at least in the foreseeable future,´´ says the rating company. Unfortunately, in the case of Latin countries, that didn't quite happen -- in Brazil the market for FIDCs is shuttered; Mexican issuers are scaling back plans to sell debt; Colombians are only buying AAA or AA rated paper, with issuances only reserved for the biggest borrowers.

Inca Kola Not Allowed for Monterrico Workers!

Well -- one as a journalist can only say Kudos to those who, in the search of the truth, try their best efforts at covering a story. This is the example of brother blog Inca Kola News (this is my 11th praise so far since we went to air in early December!!!) This guy Otto ROCKS!!!

Check today's postings on the Monterrico torture scandal in Peru by Inca Kola News. It seems that Otto's campaign to tell the world the alleged atrocities committed by this company against indigenous communities in Peru is beginning to bear fruit. Reuters picked up the story and, knowing their persisitence and the work of their Lima-based correspondant Terry Wade, will dig on the mud to try to find the truth there.

Management must be mulling prohibiting their workers drink Inca Kola at breaks. Les deja un sabor amargo en la boca ...

Chiste de Tola y Maruja

Están Tola y Maruja leyendo el períodico:
-- Tola: ''Ay Maruja, leé aquí mija! 'Chavez Condecora a Uribe´.´´
-- Maruja: ''Si viste, pues? Condecorado por Violación a la Constitución.´´

New Book About Chavez: Demagogue or Robin Hood? Or Both?

Maria Anastasia O'Grady of the WSJ writes:

''On Feb. 2, Venezuelan President Hugo Chávez will celebrate a decade in power. But it is unlikely that a majority of his compatriots will toast his long run. In the latest referendum on Mr. Chávez -- Venezuela's gubernatorial elections, on Nov. 24 -- government-anointed candidates won most of the country's 22 states, but the six challengers to chavismo who managed to prevail will now head some of the country's most populous states as well as the capital district of Caracas. A tally of total votes cast that day shows that more Venezuelans opposed the Chávez machine than endorsed it.´´

Click here to read the entire article.

Earlybird, Jan. 14, 2009

Headlines for Wedn. Jan. 14:
BRAZIL -- Photo of the Day: Chief of Staff Dilma Rousseff's new look (Left): No one doubts now that she is on the race for the ruling party's 2010 presidential nomination. In a few months, we will spot changes in the tone of her voice; soon she will begin carrying babies in her arms, all that BS. In the meantime, Congress will remain paralysed, the PAC investment plans will continue facing delays and struggling with red tape and all that, and crime will remain high.

BRAZIL -- Trade Unions, Business Guilds Fail to Agree on Loosened Labour Rules (Estado): Well, the road to a more reasonable labour legislation is tough but the very disappointing jobless numbers of November seems to be scaring unions to death. Cia. Vale do Rio Doce CEO Roger Agnelli first proposed making rules more flexible in early December, alleging the global recession would force companies to shed jobs and shut plants. Labor laws stem from the early 1940s, and were conceived to please unions and make them hostage to government pressure. President Luiz Inacio Lula da Silva promised to overhaul them -- but changed his mind halfway through his first term. Now he will pay the price for it: apart from costing companies too much, labour rules are rigid and are an obstacle to the fight against income inequality.

U.S. -- Citigroup May Be Reduced by a Third (WSJ): Well, the legacy of Sandy Weill has gone up in smoke. The question remains -- will this scaled-down lender be able to sustain growth in Brazil? or in other Latin countries?

U.S. -- Obama Seeks Compromise With Lawmakers to Release TARP Funds (Bloomberg): Quick disbursement of the funds would allow President-elect Barack Obama tap the second half of a $700 billion financial-markets rescue fund just after taking office.

VENEZUELA -- Chavez Says Argentina Debt Purchases Rendered Country 'Decent Dividends´(Nacion): No comments on this one. After seeing what happened with Ecuador, let's see whether the Argentine government agrees to repay some defaulted bonds (Chavez, as a bondholder, might benefit from that.)

ECUADOR -- Correa Readies Land Reform Legislation That Includes Confiscation of Idle Farms (Comercio): Ecuador's agriculture minister visited Venezuela -- where land seizures became routine and were unjustified, as the case of Lord Vestey farms -- Colombia -- where land reform has been at the heart of a five-decade war, -- and Peru -- where rural inequality is outrageous, -- to draw what should be done. Uhhmm ...

COLOMBIA -- Better Late Than Never: Colombia Oil Output to Surge in 2009 (Tiempo): After four years of disappointing results in terms of exploration and extraction, domestic oil output may jump by 650,000 barrels/day in 2009. The problem is, the good news come as prices fell to the lowest in four or so years. No hay felicidad completa en la vida, we Colombians sometimes say.