(Bloomberg) -- Markets are overlooking odds that next weekend’s election ushers in regime change in Venezuela for the first time in decades, according to Barclays Plc.
Opposition candidate Edmundo Gonzalez is drawing large crowds at campaign rallies and holds a 20-point lead in polls ahead of the July 28 vote. While the odds are stacked decidedly against the election bringing an end to Chavismo, Barclays analyst Alejandro Arreaza said Gonzalez’s position gives him a “real chance” of getting enough votes to pressure President Nicolas Maduro to concede.
“The opposition never had a lead like this one,” he said in an interview. “The government has been committing a series of calculus mistakes that have contributed to the current situation being different.”
Arreaza, who’s Venezuelan, caused a stir last month when he published a research note saying there was a “significant possibility” of political transition in the South American nation — a scenario that would likely lead to sanctions relief by the US and pave the way for Venezuela to restructure a pile of debt and past due interest estimated at $150 billion.
It’s a long-shot call in a country where one political party dominates all branches of government, staying in power for the past 25 years by, at times, tilting elections in its favor. Maduro, a strongman leader who took over from the late Hugo Chavez, has banned his biggest threat, Maria Corina Machado, from running. Several of her staff members have been detained as part of a crackdown on dissent. And pundits warn that other last-minute maneuvers like banning Gonzalez or suspending the vote entirely are still a possibility.
Barclays itself estimates the market is pricing in only about a one-in-five chance of a change in government. But there’s a growing number of analysts that are coming around to Arreaza’s call. Polls that have consistently placed Gonzalez in front and the ongoing involvement of the Biden administration has bolstered that view.
“What polls are showing plus negotiations with the US are making the probability of a transition much higher,” said Felipe Gomez Bridge, a money manager at Ashmore Colombia. Ashmore Group is one of the largest holders of Venezuelan bonds.
A transition would pull forward the timeline for a potential restructuring process, said Arif Joshi, fund manager at Lazard Asset Management. He declined to disclose Lazard’s positioning, but the firm did hold both sovereign and state oil company, PDVSA, bonds as of early this year, according to data compiled by Bloomberg.
“It’s a binary type of outcome where the upside is very large and the market has that optimism,” Joshi said.
None of this optimism, however, is showing up in the bond market. Prices for the defaulted debt are stuck — with some government notes trading for around 19 cents on the dollar — despite being reweighted in widely followed JPMorgan Chase & Co. indexes in April.
“If you asked a few months back, a high percentage of investors would say the electoral council would declare Maduro the winner,” said Francesco Marani, head of trading at Madrid-based boutique investment firm Auriga Global Investors, which trades and holds the bonds. “But if you ask now, the possibility of a different outcome, as highlighted by some recent research, has risen.”
Analysts know well the risks of predicting regime change in Venezuela. Back in 2012, Barclays wrongly called a victory for the opposition against Chavez.
Alejandro Grisanti, a Barclays strategist at the time and current director of Caracas-based consultancy Ecoanalitica, said his base-case scenario is now that Maduro will retain power regardless of the outcome.
“Maduro is very different from Chavez,” he said. “He’s not going to concede.”
Restructuring Prospects
Former Bank of America economist Francisco Rodriguez, who got the 2012 call right, said this time around he’s not going to try to anticipate the results. Venezuela’s electoral authority will announce Maduro’s victory regardless of the vote count, he said.
“Elections for Maduro are like ‘heads I win, tails you lose,’” he said. “This is a dictatorship that comes from an electoral movement, they have a machinery designed to compete.”
Bond prices would benefit either from a Maduro victory with international recognition or from an opposition win because both mean a higher likelihood of a restructuring, Grisanti said
Some are convinced that a restructuring under a legitimized Maduro administration could be even better for bondholders.
An opposition government will face governability issues that could delay or hinder negotiations with creditors, according to Ramiro Blazquez, head of research and strategy at BancTrust & Co.
“Maduro has a higher incentive for closing a quick restructuring and capturing investment for the oil sector,” he said.
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