US embassy cable - 04CARACAS162

C O N F I D E N T I A L  CARACAS 000162 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE FOR WHA/AND, EB 
NSC FOR CBARTON 
TREASURY FOR OASIA - GIANLUCA SIGNORELLI 
USCINCSO FOR POLAD 
 
E.O. 12958: DECL: 01/15/2008 
TAGS: ECON, PGOV, VE, FIN 
SUBJECT: GOV FLOATS USD 1 BILLION BOND ISSUE 
 
REF: (A) CARACAS 103 (B) CARACAS 101 
 
Classified By: Ambassador Charles S. Shapiro for reasons 1.4(b) and (d) 
 
------- 
Summary 
------- 
 
1. (C) Venezuela issued its fifth tranche of bonds in the 
past six months on January 7.  The new bonds raised USD 1 
billion for the GOV and were in heavy demand due to their 
high offered yield.  With a high rate of financing needed for 
the FY 2004 budget deficit and debt service, more bond 
operations can be expected.  However, external factors could 
lower the markets appetite for Venezuelan securities in the 
future.  End summary. 
 
----------------- 
New 30-Year Notes 
----------------- 
 
2. (U) The GOV issued USD 1 billion in new 30-year bonds 
January 7.  JPMorgan Chase was the agent for the transaction. 
 For the first time since 1998, Venezuela registered the bond 
issue with the US Securities and Exchange Commission. 
Therefore, the bonds can immediately be traded in US markets. 
 Final closing yield on the bonds was 9.38 percent.  The new 
issue raises Venezuela's total external debt operations since 
August 1, 2003 to USD 5.55 billion. 
 
-------------------------------------- 
Oil Makes It Attractive Despite Chavez 
-------------------------------------- 
 
3. (SBU) Luis Oganes, JPMorgan Chase Economist and Emerging 
Market Analyst for the Andean Region, told econoff January 8 
that the issue was oversubscribed by approximately USD 2.5 
billion dollars.  Investors were eager to snap up the 
relatively high yield bonds in light of continued high oil 
prices according to Oganes.  He added that the only hiccup 
was from an ill-timed threat from President Chavez to the 
Central Bank in the ongoing dispute over reserve transfers 
(ref A).  Oganes said that despite Chavez's remarks, only 
three smaller orders were cancelled.  The oversubscription of 
the issue pushed the yield almost a full point below the 
initially offered yield of 10.125 to 10.25 percent. 
-------------- 
Yields Are Key 
-------------- 
 
4. (SBU) Miguel Octavio, Executive Director of local 
investment firm BBO echoed Oganes in a conversation with 
econoffs January 14.  Octavio said higher offered yields were 
the key to Venezuela's successful debt offerings since 
August.  He said one only had to compare the 5 to 7 percent 
yields on recent issues from Mexico, Costa Rica, and Turkey 
to understand the attraction for Venezuelan bonds.  In a 
January 15 conference, Economist Cristina Rodriguez of local 
economic analysis firm Metroeconomica, predicted that the GOV 
would go to the markets again since it faces financing 
demands around 16 percent of GDP under the FY 2004 budget. 
 
------- 
Comment 
------- 
 
5. (C)  The appetite of international markets for Venezuelan 
debt seems remarkable, at least when viewed from here, the 
epicenter of political and economic chaos.  Low US interest 
rates, high oil prices, and a perceived recovery in 
Venezuelan oil production are factors that strengthen the 
Ministry of Finance's ability to sell up to a USD billion per 
month in GOV paper.  However, should the US recovery result 
in the Fed raising interest rates or should oil prices 
falter, market interest in Venezuela could slacken.  We have 
already reported our skepticism regarding the third leg of 
this triad, Venezuelan oil production levels (ref B).  If 
international financial options are limited, other vehicles 
such as Chavez's effort to tap Central Bank reserves (ref A) 
may become increasingly important as the GOV seek to push the 
pain of any adjustment in spending into the second half of 
 
 
2004 when the current referendum/electoral cycle will 
presumably have passed. 
SHAPIRO 
 
 
NNNN