Venezuelan crisis could provide opportunities for investors

With their eyes set on an eventual recovery, Venezuela’s currently worthless bonds could be turned around for big profit even if they were to default on debt.

Venezuela’s economic situation is dire. Three-digit inflation, hunger and an almost total lack of pharmaceutical and medical supplies all strike Venezuela, and the signs point to total economic collapse and a default on debt.

Despite the grim outlook, foreign investors have not lost their faith in Venezuela, because even if they were to default on debt, they expect the recovery from collapse to provide them with outsized returns on their investments.

Investors are banking on Venezuela’s colossal oil reserves and a bounce back in the price of oil to make this assertions, also, they consider that economic collapse could trigger a favorable change in government.

In fact, Venezuelan bonds, regardless of their lack of value, are already showing signs of considerable return. This year alone they have returned 14.1 percent, a respectable showing that has accounted for over $3.5 billion dollars, three times what Venezuela expects to spend on imports to cover the scarcity of pharmaceuticals.

What also benefits investor confidence in the OPEC nation is the precedent that Argentina set this year, losing a court battle with the so-called vulture funds and being forced to pay their debt even though they defaulted in 2002.

Jan Dehn, head of research at Ashmore, an emerging markets asset manager said: "This is one of those situations where the bond prices have simply sold off so much that even in a very bad outcome we still think you're going to make money,".
President Maduro has stated on several occasions that he will honor all debts, and reminds investors that the ruling socialist party has never missed a bond payment.

The state run oil company PDVSA is one of the main emitters of Venezuelan bonds, although most of their bonds will reach maturity in 2018, through 2016-2017 they are expected to pay $8 billion much of which they will avoid after they quietly bought back some of their bonds earlier this year.

PDVSA has also reassured investors that they have a total commitment to paying their debt.

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