http://www.bloomberg.com/apps/news?pid=20601086&sid=aVKNJK43MiOo&refer=newsVenezuela Bonds Tumble as Chavez Changes Constitution (Update4)
By Lester Pimentel
Nov. 30 (Bloomberg) -- Venezuelan President Hugo Chavez's bid to amend the constitution is turning the country's bonds into the world's worst-performing debt even as oil revenue rises to a record.
The government's 9 1/4 percent dollar bonds due in 2027 tumbled 22 percent this year, with almost half the losses coming this month before a Dec. 2 referendum on the proposed changes. Chavez wants to end presidential term limits and make it easier to seize private property.
``When you're transforming the political landscape into an effective dictatorship, that makes people nervous,'' said Jonathan Binder, who oversees $1.3 billion of emerging-market assets at INTL Consilium LLC in Fort Lauderdale, Florida and sold all his Venezuelan bonds. ``We're completely out. It's too unpredictable.''
While oil exports fueled annual economic growth of more than 8 percent over the past four years, the South American country has a credit rating below investment grade. Chavez, 53, is eroding investor confidence by molding the economy to what he calls ``21st-century socialism.''
He seized control of oil joint ventures, prompting Exxon Mobil Corp. and ConocoPhillips to pull out of the country, and nationalized electric and telephone utilities. He shut the country's biggest television network and replaced it with TVes, one of three state-run stations he created.
`One Man's Decisions'
``The country is mainly reliant on one man's decisions,'' said Tomasz Stadnik, who manages $3.1 billion of emerging-market debt at ABN Amro Asset Management Services in London. ``The policies aren't market-friendly.''
Growth has overwhelmed government price controls designed to hold down inflation. Consumer prices rose 16 percent in the 12 months through October, the fastest pace in Latin America, according to data compiled by Bloomberg.
Chavez wants to take control of the central bank and shorten the workday to six hours from eight as part of the 69 constitutional changes he proposed. The National Assembly, dominated by his ruling coalition, approved the measures on Nov. 2, paving the way for the referendum.
Venezuela's 9 1/4 percent bonds due in 2027 have declined 28 cents this year to 98.9 cents on the dollar, according to JPMorgan Chase & Co. The yield increased 2.57 percentage points to 9.37 percent. The rise was exacerbated by investor flight from all except the safest assets in August as losses from securities linked to subprime mortgages contaminated credit markets.
AAA Rating
Venezuelan bonds yield 5.25 percentage points more than Treasuries of similar maturity, up from 1.82 percentage points at the start of the year, according to JPMorgan's benchmark index. Only Ecuador, whose president has threatened to default, has a wider spread, 6.14 percentage points, among countries in the index.
The only other time Venezuela's bonds and oil prices moved in different directions was in 2000, when a 39 percent drop in the Nasdaq Composite Index cut into demand for higher-yielding, emerging-market assets. That year, oil rose 4.7 percent while the bonds fell 2.3 percent.
Oil has increased 46 percent in 2007. Petroleum accounts for almost 90 percent of Venezuela's exports. The nation is the world's fifth-largest crude producer, according to data compiled by London-based BP Plc.
Venezuelan bonds are rated BB-, three levels below investment grade. The last time oil had a similar rally, in the 1970s, the country's debt was rated AAA.
``A country with the oil wealth of Venezuela should be investment grade,'' said Alberto Ramos, a Latin America economist in New York at Goldman Sachs Group Inc.
`Rock Solid'
Crude climbed to a record $99.29 a barrel on the New York Mercantile Exchange on Nov. 21, more than triple the $31.61 price four years earlier.
The government gets more than half its revenue from oil sales. Debt equals 22.4 percent of the country's gross domestic product, below the 33.9 percent average for developing nations, according to ING Bank NV.
``The fundamentals are rock solid,'' said Gianfranco Bertozzi, a Latin America economist at Lehman Brothers Holdings Inc. in New York. ``We still like it as a credit.''
Finance Minister Rodrigo Cabezas, speaking in an interview today on state-run Venezolana de Television, said the government will keep paying its debts after the referendum.
Students have marched daily against the constitutional changes, staging protests from Merida in the Andes Mountains to Barcelona along Venezuela's Caribbean coast.
`Little Rich Kids'
Chavez called the students ``spoiled little rich kids'' in a Nov. 4 speech. The next day former defense minister Raul Isaias Baduel said the constitutional overhaul amounted to a ``coup,'' sparking the biggest decline in the bonds in three months. Chavez called Baduel, who helped put him back in power during a 2002 coup attempt, a ``traitor.''
Merrill Lynch & Co. recommended on Nov. 6 that investors reduce their Venezuelan bond holdings, saying Baduel's opposition increased the chance of ``violent confrontations.''
``What we are seeing is the last vestige of electoral democracy in Venezuela,'' said Michael Coppedge, a political science professor at Notre Dame University in South Bend, Indiana. ``It's going to be more authoritarian after the referendum. There won't be truly democratic elections.''
To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net
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