Venezuela After Chavez
The passing away of president Chávez has important implications ranging from the political spectrum to the economical spectrum. These implications will be crucial in assessments of the future of the country. Stratfor's Karen Hooper provides a succinct summary of the short-term (who will be the interim president until new elections take place? When will the elections take place, and what is the most likely result of the election), medium-to-long-term (Uncertainty about future economic management creates an additional downward bias in macroeconomic performance in a 1–2 year horizon), and Citi, despite the uncertainty-removing finality of Chavez' death, maintain an underweight as while neither political unrest nor a near-term default are likely, markets are also not pricing in much risk of either.
And Via Citi:
Chavismo without Chávez: What Is Next for Venezuela?
On Tuesday afternoon, Venezuela’s Vice-president, Nicolás Maduro, announced that President Chávez had died at 16:45 local time, after almost two years fighting cancer (it was initially diagnosed in June 2011). The passing away of president Chávez has important implications ranging from the political spectrum to the economical spectrum. These implications will be crucial to assess the future of the country.
The Short Term
There are three elements to consider over the short run: 1) who will be the interim president until new elections take place? 2) When will the elections take place, and 3) what is the most likely result of the election. According to the Venezuelan Constitution, if the president dies before the swearing-in ceremony, the National Assembly president will be the interim president. If the president dies after the swearing-in ceremony but before the fourth year of his mandate, the vice-president will be the interim president until new elections are held. Bearing that in mind, and given the previous Venezuelan Supreme Court (TSJ) ruling that a swearing-in ceremony was unnecessary for a reelected president, we think that Mr. Maduro will be the interim president until the new elections are held. At the time of this writing, Venezuelan Chancellor Elías Jaua has said that is the case, but we expect the National Assembly (AN) and the TSJ to make similar announcements to confirm this in the days to come. Regarding the date of the elections, the Constitution specifies that new elections will have to take place in 30 days independently of who is appointed as interim president. That means that we could see new elections in early April. As for the election outcome, we believe this has to be analyzed in two parts. First, from the opposition side, the most likely and natural candidate will be Henrique Capriles. How fast and coordinated the announcement of Mr. Capriles candidacy is made will be important elements to assess the unity within the opposition. Second, the candidate within chavismo will probably be Mr. Maduro, although we continue to believe that the power will be shared within “Chavismo’s power triangle” : Nicolás Maduro, Diosdado Cabello, and Rafael Ramirez.
In our view, the most likely election will be between Mr. Maduro and Mr. Capriles, with Mr. Maduro as the likely winner. The fact that Mr. Maduro was named by Mr. Chávez as his political heir during his last public appearance back in December, along with PSUV’s strong political base and the sympathy that Mr. Chávez’s passing away will create among the electorate, will most likely make Mr. Maduro the winner of the presidential election against Mr. Capriles. Also, we expect the government to make economic announcements that could boost popularity, such as an increase in the minimum wage and additional announcements regarding FX flexibility.
The Medium to Long Term
Maduro’s pragmatism won’t be enough to sustain economic growth, reduce inflation, or improve the fiscal accounts... Despite Mr. Maduro’s speech today, we believe his presidency will take a more pragmatic approach down the road. But initially, we expect him to show a continuation of Mr. Chávez’s policies and close political ties with Cuba. Mr. Maduro will have to be pragmatic over the medium term in order to avoid further macroeconomic unbalances, inflation, and scarcity. Nevertheless, we expect GDP growth, consumer prices, and fiscal accounts to continue with the expected path of deterioration. Also, uncertainty about future economic management creates an additional downward bias in macroeconomic performance over the 1–2 year horizon.
President Chávez’s death represents an inflection point in Venezuela’s political history. The importance, relevance, and impact of Mr. Chávez in Venezuela’s political arena are unquestionable. The chavismo movement and the PSUV are the strongest political forces in the country, and how strong they remain will determine if Venezuela continues in a socialist-driven policy mode or not. Also, the eventual degree of the power balance between chavismo and the opposition will be crucial for the future performance of the country.
Venezuela bonds are likely to rally given the removal of the uncertainty surrounding President Chavez's health. Indeed, bonds had rallied on Tuesday morning on speculation that news was forthcoming, before Maduro disappointed markets by failing to make an announcement when he first spoke on Tuesday. Bonds gave up their gains on this disappointment, combined with the rambling message in Maduro's speech.
Despite the likely rally on the news, we maintain our underweight recommendation, especially as it would be impossible to purchase bonds before capturing the move - which as the chart shows was a great call...
We believe the resultant rally will be short-lived as investors who were positive on Venezuela in a post-Chavez scenario are likely already long. The passing of Chavez has certainly not caught any investor off-guard as it had been expected for some time. The only question was when, and few expected it would not occur soon. As such, we would recommend selling into any rally. We do not expect a worst-case scenario, but we do not believe that current spreads reflect the risks.
Venezuela spreads are certainly high relative to other sovereigns, especially as many traditional EM investors no longer consider Argentina bonds an investable asset at the moment. A primary rationale for investing in Venezuela seems to be that there are few places to obtain yield in EM bonds. However, considering the recent weakness in technicals (EPFR data show EM hard currency funds have experienced outflows in 3 of the past 4 weeks), that may no longer be enough to sustain the rally. Neither political unrest nor a near-term default are likely, but markets are also not pricing in much risk of either.
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