Welcome to February’s Some Thoughts.
This month, in a change to our normal format, we shine a spotlight on Venezuela ….
Venezuela – the case for investment
It is estimated that last year Venezuela posted its first positive GDP number (+4%) since 2013, with the economy growing 7.6% in the third quarter of 2021. The current sovereign bonds trade at ~7 cents on the dollar despite it being the most oil-rich nation globally. For over fifteen years the US has imposed sanctions on Venezuela. These sanctions escalated under Trump in 2017 to include the state-owned oil company PDVSA and on the buying of Venezuelan sovereign assets by any US person. An internationally unrecognised political leadership, hyperinflation and sanctions have turned Venezuela, in the course of the last decade, into one of the world’s poorest nations.
We have produced a report on Venezuela detailing the history, the sanctions and the outlook:
Click here for the executive summary.
Click here for the full report.
Now the winds of change seem to be blowing in a more positive direction and, along with them, investment opportunities are arising which, due to US sanctions, are only open to non-US investors.
Various events are occurring which should force the US to reconsider their position on sanctions. In addition, President Maduro has stated that he is open to negotiations and dialogue with his country’s creditors once those sanctions are removed. Something of a catch-22 situation but at least the right noises are being made by both parties.
Below we highlight the key investment considerations on Venezuela:
Why?
- Venezuela sits on the largest oil reserves in the world, historically producing over three million barrels per day at peak productivity.
- Positive impact of dollarisation on the economy, with over half of every transaction in 2021 was done in a non-domestic currency – mostly USD.
- Years of crippling US sanctions on Venezuela are under consistent review from the Biden administration who are facing increasing pressure from US investors to remove limitations on accessing Venezuelan debt notes and from the Oil Industry to reopen supply lines.
- In January 2022, Maduro announced that GDP grew in 2021 for the first time in eight years, while Venezuela also had their 12th consecutive month outside of the hyper-inflationary environment.
Why now?
- Price – Current sovereign bond prices are trading at ~7 cents on the dollar, with a ~5 cents low seen in December 2021. Compare this to countries such as Lebanon which trade at ~11 cents but has no significant underlying natural resources.
- Oil – In-light of the current and ongoing global energy supply crunch, the price of oil seems certain to increase. This rise will most likely be the trigger for the removal of the US sanctions; oil pricing pressures will be felt most acutely by the USA.
- Supply – Bonds have been under selling pressure since December 2021 providing a good entry point with meaningful supply on offer. US investors are currently restricted from buying, so the largest natural pool of distressed debt investors is unable to add.
There is a linked investment opportunity that we believe is very interesting. Please contact Nick Lawson – nick@oceanwall.com for more information.