UPDATE 3-Venezuelan dollar bonds rise after opposition beats Socialists

(Updates prices, adds investor quotes)

By Sujata Rao

LONDON Dec 7 Venezuelan dollar bonds rose strongly on Monday soon after the opposition beat the ruling Socialists in a parliamentary election at the weekend, raising hope of at least some financial reform in the crisis-ridden nation.

Bonds from the sovereign as nicely as state oil firm Petroleos de Venezuela (PDVSA) rose as significantly as 4.2 cents on the dollar, moves expected to extend further if the opposition fulfils its expectations of a two-thirds majority.

Opposition Democratic Unity leaders said on Monday they had reached the crucial bar of two-thirds of seats – but there was no confirmation of that from the national election board.

The opposition coalition has so far won 99 seats, against the Socialists’ tally of 46 seats, with some districts nevertheless to be counted. President Nicolas Maduro has called on his supporters to accept defeat.

Sovereign bonds retreated from the highs reached earlier on the day. Troubles maturing in 2022 had been final up 3.05 cents after reaching a 10-day high of 52.800 earlier in the day. The 2028 rose 2.six cents, while the 2038 troubles firmed up two.six cents. The 2027 issue, considered the benchmark for Venezuela, had been final up 2.59 cents , according to Thomson Reuters data.

PDVSA’s 2024 concern rose as significantly as 1.9 cents , while the 2027 bond had been final up 1.9 cents .

“Bonds have been up four or 5 points at the open and financial adjustment to currency regime, cost controls, fuel subsidies could also be forthcoming,” said Anthony Simond, emerging market place debt study analyst at Aberdeen Asset Management. Aberdeen added to its Venezuelan bond holdings two weeks ago on the expectation the opposition would win the election.

The outcome makes Venezuela the most recent Latin American country to swing away from the left, soon after the opposition’s election win in Argentina and the diminishing recognition of Brazil’s President Dilma Rousseff.

Venezuelan bonds have outperformed in recent months on hopes the opposition would trounce Maduro’s increasingly unpopular government. But they trade around 35 to 43 cents in the dollar, levels that price tag in a sturdy probability of default as the OPEC state’s economy has bucked under the oil value collapse.

Socialists have lost help soon after presiding more than a declining economy, the highest inflation in the Americas, chronic shortages of fundamental goods and sky-higher crime rates. The economy is expected to contract far more than 5 percent this year whilst inflation is more than 80 %.

The average premium of Venezuelan bonds over U.S. Treasuries contracted 18 basis points to 2,680 bps on the EMBI Worldwide index on Monday.

Although nevertheless the highest yielding emerging industry credit with much more than double the premium paid by Mozambique or Iraq, spreads have contracted much more than 600 basis points since August.

Investors expect more price gains if the opposition scores a two-third majority.

“The opposition weighing in Congress does not change oil rates, but it does give them energy to modify foreign exchange policies and allocation of resources that could enhance the economy and the country’s potential to spend its debt,” mentioned Jim Carlen, a Minneapolis-primarily based senior portfolio manager for the emerging markets fixed-revenue group at Columbia Threadneedle Investments.

But a lot of remain pessimistic provided the scale of the challenge, with Jan Dehn, head of research at emerging markets asset manager Ashmore, saying Venezuela would not be “a sudden turnaround story”. Crude rates around $ 42 per barrel are a severe dilemma, given oil tends to make up 95 % of exports.

“It is clear the opposition won, even without having the distinct number but, but we do not know the specifics of what will come about going forward,” said Yong Zhu, senior portfolio manager of the DuPont Capital Emerging Markets Debt Fund. The fund is keeping its overweight position in Venezuela.

“Can they move forward in a constructive way and take Venezuela away from the brink?” Dehn stated. (Further reporting by Claire Milhench and Tariro Mzezewa Editing by Janet Lawrence and Alistair Bell)