Venezuela: Elections Bring Possible Short Term Gain; Prospects however are uncertain

** Chavez v. Capriles** **Budget Worries Remain** This Sunday, October 7th, the much anticipated Venezuelan presidential election will take place to select a President for a six-year term. The two competing choices are the current incumbent, Hugo Chavez, and his rival Henrique Capriles Radonski, aka Capriles. Capriles is considered a market-friendly reformer, intent on weaning Venezuelans off of Chavez’s government interventionist style. Chavez has already governed for twelve years, turning Venezuela into a virtual command economy centered on oil and government largesse. The Venezuelan currency, the Bolivar forte, has a dual rate system. Essential imports such as medical equipment, refined oil and food receive a foreign exchange rate of USD/2.8 Bolivars. Foreign exchange for non essential items is valued at Bs.4.289/4.3 to the USD in a tightly controlled band. US dollars, however, also trade outside of the established rates among local money changers. Venezuela earns the majority of its foreign currency through oil sales conducted through the state- owned oil company PDVSA, Petroleos de Venezuela. Venezuela has established a sovereign wealth fund, known as the Fonden. After accounting for PDVSA’s operating expenses and debt servicing, excess capital is placed within the Fonden. The USD funds are converted into Bolivars which are then distributed to the populace as grants to equalize wealth distribution. The act though generates high inflation with more money chasing after ever scarcer resources. The latest annual inflation rate (September) registered 18.1 percent according to its statistical agency, INE (Instituto Nacional de Venezuela. With a fixed exchange rate and high inflation, the Bolivar after Argentina’s peso, is Latin America’s most overvalued currency. The best way to tap into the Venezuelan currency market is through its hard currency generating vehicle, PDVSA. The massive national oil company has issued international bonds denominated in dollars. As an example, bonds with a maturity of two years yield 8.235 percent and five year bonds yield of approximately of 10.17 percent. PDVSA is rated B+ by Standard and Poor and B2 by Moody’s. According to the Central Bank of Venezuela, as of October 1, international reserves stood at $26 billion. The country’s outstanding debt (both international and national) is in excess $75 billion. More worrisome is the country’s fiscal 2012 budget which was expanded by $25.3 billion to $94.6 billion. The rationale which is likely political is to meet public labor liabilities including pensions and funding gaps among government ministries. Sunday’s election will remove a cloud of uncertainty as either the incumbent or a new president will take control of the presidential palace. In either instance, the euphoria will be short lived as the President must confront a deteriorating economy dominated by income inequality and crime. Investing in Venezuela’s Bolivar through its cash cow, PDVSA, is risky yet so far it has not produced sour milk. John T. Sullivan. Latin America specialist, ForexSpace.com http://www.forexspace.com/forex-insights/1108/venezuelan-election-short-term-opportunity-longer-term-risks e-mail:jtpsullivan@gmail.com Article by: ForexSpace Team