Venezuela Government Shocks Market With $3 Billion Bond Offering

| Oct. 14, 2011 |

Published by Minyanville

In offering $3 billion worth of bonds this week, the Venezuelan government has confirmed suspicions that President Hugo Chávez intends to spend whatever he deems necessary in order to win presidential elections in a year’s time. The Latin American country has offered a total of $15.2 billion this year alone, with $8 billion coming from state oil firm Petróleos de Venezuela.

This is greater than the total government issuance in the international market from the rest of Latin America combined, notes a report from Barclays Capital. The offering has shocked markets, especially now when conditions are so volatile. Taking this into account, the 11.75% bonds have been issued at a 5% discount. They will mature in 2026 and have been assigned a rating of B+ by Fitch.

“This operation confirms that the government is planning a large increase in public expenditures in the next 12 months ahead of the presidential election,” write Alejandro Arreaza and Alejandro Grisanti for Barclays Capital.

With hope that his treatment for cancer is finally over, Chávez is ramping up rhetoric with bullish announcements as he prepares for what could be his tightest election rate in his last 12 years of power. One of his most eye-catching moves came last week with the threat to expropriate property on an unspoiled archipelago just off the country’s coast.

The expropriations are a heavy burden for Venezuela’s economy. As the battle with ExxonMobil (XOM) rolls on—the company is fighting for $7 billion it believes it is owed after a 2007 expropriation—the full weight of compensation claims is becoming apparent. At least a third of the government’s congressionally-approved budget is being demanded by foreign companies. This, points out AP’s Ian James, could hinder Chávez’s ability to boost spending ahead of elections.

Conindustria, a local industry business organization, claims that the government has made 1,045 “interventions” since 2002, seizing property or expropriating companies entirely. This year alone has seen 459 incidents. With many cases brought before the International Center for Settlement of Investment Disputes, Venezuela will have to pay something in compensation, at least.

Chávez’s belligerence against the rest of the world was evident as the country accepted a $4 billion loan from Russia, in order to purchase weapons and in return for access to Venezuela’s number one asset: its heavy crude and offshore gas fields. The news prolongs a warm relationship between the two nations and follows $5 billion worth of loans between 2008 and 2010. Since 2005, Venezuela has spent at least that amount on Russian Sukhoi fighter jets, Mi-17 combat helicopters and Kalashnikov assault rifles.

There are concerns in Washington that the loan is simply for the attention of the United States. Russia’s Deputy Prime Minister Igor Sechin – who was in Venezuela last week signing the deal – is known to be strongly anti-American. Last Year, in Moscow, Chávez said, “We are simply doing the task of defending the fatherland from the threat of empire and its allies.”

“What you’re seeing now is the maintenance of that relationship because Russia isn’t going to walk away from Venezuela just like it’s not going to yield its relationship with Iran or North Korea or other countries that are a thorn in the United States’ side,” says Latin America analyst at Stratfor Karen Hooper, adding that the move will play well to a domestic audience. “It’s a chance for Chávez to say, ‘Look at the new toys I’ve got you.’” This is especially important as elections take place in a year’s time.

The main contender against Chávez is Henrique Capriles Radonski, a charismatic state governor who is expected to win opposition primaries in February before taking on Chávez in October 2012. He launched his campaign on Wednesday. "This is not the moment of the left or the right, it is the hour of all Venezuelans. The new Venezuela is for everyone," he told supporters at a rally in Caracas.

It promises to be an exciting battle over the next year, as Chávez recovers from his cancer treatment and becomes ever more vocal against the first real contender for the presidency in more than a decade. The president is off to Cuba this weekend and has said that doctors are to finally give him a clean bill of health.