Two Scenarios That Would Have Traders Flipping Out About Venezuela
REUTERS/Jorge Silva
Venezuelan Vice President Nicolas Maduro raises his fist next to a painting of President Hugo Chavez during the commemoration of the 21st anniversary of Chavez's attempted coup d'etat in Caracas February 4, 2013. Chavez is still in Cuba recovering from a cancer surgery and has not been seen in public since December 8 last year.
Last night, Venezuela elected former bus driver Nicolas Maduro President by a more narrow margin than anyone expected, 50.66% to 49.07%.
As late President Hugo Chavez's successor and candidate for the reigning socialist party (the PSUV), Maduro enjoyed massive advantages in terms of media and political influence during the election. Now his mandate is less clear, and there's going to be a recount of 100% of the votes.
That said: It is shocking that Chavez's massive cult of personality didn't hand Maduro his victory on a silver platter (Venezuelans lined up to get Chavez tattoos before voting, for example), but a win is still a win.
This puts Wall Street in a weird place. A Maduro win had been priced in for the most part, but since the political process is still in motion and things are a bit uncertain, all is quiet in Venezuelan currency markets.
There are two things that could set the market off though, a Latin American currency trader told Business Insider.
The first is any indication from anyone that the Petrocaribe energy agreement may be modified. If you're not familiar, it's an agreement between Venezuela and 17 Latin American nations that allows participating nations to buy Venezuelan oil at a steep subsidy.
In exchange, countries like the Dominican Republic and Cuba send Venezuela items that have become scarce in the country, like food and medicine. The end of Petrocaribe, or even a limitation of the supply of oil that could be sent abroad, would impact trade all over the region.
Venezuela's economy may need to see an end to the agreement, however. The country has already undergone two currency devaluations this year to narrow its fiscal deficit. Analysts have said time and time again that the government will have to make difficult choices about cutting domestic programs that are very popular like homebuilding campaigns and cash handouts for poor mothers.
"We're going to see a reduction in government spending, most notably in the home construction program, and the devaluation is also going to limit growth," said Angel Garcia of consulting firm Econometrica, which is critical of the government.
"It's going to be a year of inflation with stagnant growth."
The next issue that could keep traders up at night is the USD to Bolivar (VEF) exchange rate in the Ancillary Foreign Currency Administration System (SICAD).
If you haven't heard of SICAD, it's because it's a uniquely Venezuelan system.
SICAD is a third bond market (outside the official and black markets) through which investors can buy Venezuelan bonds. It's the second incarnation of SITME, a bond swap market founded in 2010 and discontinued earlier this year.
SITME died with Venezuela's currency devaluation in February. At the time, SITME valued the VEF to USD exchange at 5.3 VEF per USD. The official USD-VEF rate after devaluation went from 4.3 to 6.3.
The government created SICAD to fall in line with the new VEF rate, though some investors complain that it's "confusing and cumbersome." Last month, the country had its first SICAD sale among 383 corporate bidders (yes, only certain investors can use SICAD) last month. The rate was not publicized, and in a note, Barclays said that isn't a good sign.
"First explanation about why the (Venezuelan) government did not announce the price of the first auction at Sicad seems to be a significant devaluation of the currency," the investment bank hypothesized in a note.
Traders told Business Insider that, from what they can see, the SICAD exchange rate was 6.30, not too far away from the Central Bank rate of 6.2845. Still, the government is holding its cards close to its chest. Wild movements in the newly minted SICAD could send investors scurrying.
One sign that current uncertainty is making an impact — right now the exchange rate on the black market is four times the official rate, says Reuters.
That is in part because whether Maduro is declared the winner or not, there's still plenty of reason to think things could still get rocky in Venezuela. According to global research group IHS, his weak mandate could not only spark confrontation between the social and opposition parties, but also between factions within the socialist party.
From IHS:
If Capriles refuses to recognize Maduro's victory, the new president's legitimacy will be questioned and the shadow of a possible electoral fraud would add to the economic and social challenges that he will have to face in the next year, including dealing with increasing inflation, crime and corruption, and shortages of food, medicines, basic goods, and even electricity and water.
Political stability is not guaranteed in Venezuela after Maduro's election... especially if Maduro fails to keep the different factions of the PSUV united. Chávez's death was a game changer for Venezuela and has led to a gradual process of reorganization of the political order. The deterioration of Maduro's leadership and the fragmentation of the PSUV are likely to take place after his first year in office if he fails to deal efficiently with the economic and social issues facing Venezuelans.
So traders should enjoy this break, it may be there last one for a while.
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