Strong oil prices are powering Venezuela’s economy ahead. The economy grew 5.6% in the fourth quarter of 2000 and should reflect 5.2% growth in the first quarter of this year. Venezuela posted 3.4% growth in 2000 after a short but severe recession in 1999, when GDP contracted by 7.4%. Venezuelan assets have performed strongly this year. The main Caracas stock market index rose by over 20% in dollar terms this year through April. Venezuelan bonds also did well with a similar return over the same period. The economic recovery is being led by an expansion in public spending, fueled by growing oil revenues. Venezuela’s oil exports were worth $28.7 billion last year, more than 70% more than in 1999. However forecasters reckon that oil prices will fall below $20 per barrel this year.

GDP percent change on previous year 

Source: Dresdner Kleinwort Wasserstein

Oil prices and public finances 

Government spending climbed 30% to $2.3 billion in January, boosting economic expansion for a fifth consecutive quarter. But this is weakening public finances. The government is forecasting a 3% budget deficit for 2001, up from a deficit of 1.8% of GDP last year. In 1999, the deficit was 2.6% of GDP. Unfortunately, independent economists forecast a larger deficit for this year, growing to 5.5% in 2002. Inflation is still a problem. Prices are likely to rise by 12% this year against the originally expected 10% rate. This would still be an improvement over inflation of 13.4% in 2000. The government’s strategy of using the exchange rate to keep inflation down is likely to continue.


Bank Stocks Back in the Black

Percentage change in first quarter stock prices

Source: Deutsche Bank 

Brazil’s big private-sector banks were last year’s star stock market performers, but they fell sharply in the first quarter of this year. Unibanco declined 31%, Bradesco 24% and Itaú 18%. Banespa, the São Paulo state bank now owned by Banco Santander Central Hispano, was the great exception. In Peru, Credicorp saw its share price climb 35%. Credicorp recovered on stronger credit quality and an improving economic outlook. Two Latin American banks owned by Spain’s Banco Bilbao Vizcaya Argentaria produced strong gains. BBVA Francés in Argentina rose 25% and BBVA Bancomer in Mexico increased 22%. The outlook for the coming months is likely to hinge on interest rates trends and economic performance in the US. Argentina has the most to gain from positive economic news, as banks have for years suffered deteriorating credit quality and weak demand for loans. The Argentine central bank’s decision to cut bank reserve requirement to 18% of deposits from 20% could increase net income of BBBV Francés and Banco Galicia, Argentina’s biggest private sector bank, by about 5% this year. Mexican banks, which have done well in previous Fed easing cycles, should also do well. The recapitalized banking system has resumed lending. BBVA’s purchase of Bank of Montreal’s 9% stake in Bancomer for $548 million removed fears that a potential stock overhang would weaken its share price, although the government’s intention to sell its 10.5% stake in the bank continues to concern markets.


Sharing in the Take

Brazil’s Senate has begun debating legislation that would change the country’s corporate law on controlling shares. The lower Chamber of Deputies approved the measures in late March. Under current rules, a controlling group can issue two non-voting shares for each voting share in a company. These groups, usually families, hold a large majority of the voting, or ordinary, stock and sell most of the non-voting, or preferred, shares to investors. Among other provisions, the new law would entitle these non-core investors to share in the takeover premium when a company is acquired. The closely held ordinary (ON) shares have traditionally traded at a discount to more liquid preferred (PN) stock. Some analysts expect this gap to close. They are recommending ON shares in companies in which a change in control is likely. These are mainly majority state-owned companies likely to be privatized, and companies in industries likely to undergo consolidation, mainly telecoms. Controlling shareholders also have an incentive to increase their voting stakes given the large discounts on ON shares. This table, compiled by Renato Grandmont of Deutsche Bank, shows the range of discounts between ON and PN stocks in some key companies. Big business in Brazil has lobbied hard against the legislation and succeeded in watering down many of the original clauses. The Senate is likely to approve the legislation this year.


Recovering Value

In February, value recovery rights, which are esentially warrants to Mexican Brady bonds, began trading under separate ISIN numbers. These VRRs entitle holders to extra quarterly payments based on the average price of Mexican oil over the preceding four quarters.

Investors neglected VRRs for years when oil prices were weak. That has now changed. Economists at Germany’s WestLB have made three assumptions about future oil prices. Under the most optimistic forecast (scenario I), oil prices would remain close to their present strong level, giving VRRs a net present value of $2.20 per $100 face value. Under the intermediate scenario II, the value of VRRs falls to $1.36. With the third scenario, which forecasts steadily falling oil prices, these warrants are only worth $1.22 and would not pay out after March 2002. WestLB reckons this is the likeliest outcome.

Present value of expected VRR payments

Source: PEMEX, WestLB

Mexican oil prices 

Source: WestLB