Emerging markets move in line with Treasuries; late drop hits Venezuela; Bahrain, Oman weaker

By Rebecca Melvin

New York, July 31 – Emerging markets moved pretty much in line with U.S. Treasuries in the early going on Monday, the last trading day of the month, according to market sources.

Venezuela and Petroleos de Venezuela SA traded weakly, but mildly during most of the session until the last hour when the bonds dropped sharply after U.S. Treasury Secretary Steven Mnuchin announced sanctions against Venezuelan President Nicolas Maduro.

The Treasury department’s move freezes any assets Maduro may have in the United States and makes it illegal for U.S. entities to have dealings with Maduro. The sanctions followed Maduro’s decision to hold national elections on Sunday to establish a constituent assembly despite widespread political unrest and violent protests inside the country and pressure by the international community outside.

The opposition in Venezuela held an unofficial referendum earlier this month in which an estimated 7.6 million Venezuelans voted against establishing a constituent assembly.

In contrast, only 3.6 million Venezuelans were estimated to have voted Sunday, according to an exit polling company hired by New York-based investment bank Torino Capital LLC.

Last week, the U.S. Treasury department announced sanctions against 13 high-ranking officials including the head of the Electorate Council and the former PDVSA treasurer and warned that further actions would be forthcoming if the vote was held.

As for the debt capital markets, it is expected that there is more to come.

“Mnuchin said that additional actions are on the table, so we don’t know,” a New York-based trader said. “Everyone in the market was hoping they would call it off and now that it has happened, we don’t know what the U.S. will do.”

Sanctions were expected to fall short of banning imports of Venezuelan crude oil into the United States.

Meanwhile, trading in Venezuela credit was quiet in the early going with retail buying out of Asia and Europe. It was mixed around midday, holding in roughly where it closed on Friday, and then it traded down on the U.S. sanction news, the trader said.

In his announcement, Mnuchin called the Sunday elections illegitimate and Maduro a dictator who disregards the will of the Venezuelan people.

Both Venezuela sovereign and PDVSA bonds fell 1.5 points to 2 points, a New York-based trader said.

Prior to the news that came at 3:12 p.m. ET, investors were in a wait-and-see mode, a second New York-based trader said.

The PDVSA 8½% notes due 2017 slid down to 74 bid, 75 offered, from about 75 bid, 76 offered before the news.

The PDVSA 6% notes due 2026 moved down closer to 30, from 32 bid, 33 offered earlier in the day.

The Venezuela bonds due 2019 were seen at 43 bid, 44 offered before the latest U.S. sanctions on Monday, and the Venezuela bonds due 2031 were at 42 bid, 43 offered.

Elsewhere, emerging markets were quiet as the calendar was about to flip to August, sources said. But Bahrain was weaker on the heels of a downgrade by Moody’ Investors Service by two notches to B1 from Ba2 on expectations that the government’s credit profile will see continued material weakening amid a lack of comprehensive consolidation strategy. Moody’s also downgraded Oman’s long-term issuer and senior unsecured bond ratings to Baa2 from Baa1. The downgrades left both sovereign ratings with a negative outlook.

Regarding Bahrain, “I think people, including myself, weren’t expecting the double notch downgrade and outlook still negative,” Andrew MacFarlane, a credit strategist for BNP Paribas told Prospect News.

With a single-B rating from Moody’s, Bahrain is now in the same grouping as many African countries, and this represents a dramatic deterioration, considering that Bahrain had an investment-grade Moody’s rating in 2015, MacFarlane, who focuses on the Central and Eastern Europe, Middle East and Africa region, said.

“Bahrain is just inside Egypt now in spread terms (Egypt is B3/B-/B), so the market is arguably already pricing in the rating,” MacFarlane said, noting that Bahrain has the implicit support of Saudi Arabia.

“At these levels investors will start questioning if that support is recognised in spreads,” he said. “In many ways Bahrain and Egypt show similarities in that they have large deficits and debt burdens and are both reliant on external support,” such as Saudi Arabia and the International Monetary Fund.

Oman, on the other hand, trades similarly to Turkey, which has high-yield credit ratings.

“We think Oman will see further downgrades given the rapid deterioration in public finances and the large increase in external debt, but a second downgrade, which would pull it into high-yield territory is unlikely for several months, MacFarlane said.

In May S&P lowered its long- and short-term ratings on Oman to BB+/B from BBB-/A-3 with a negative outlook, saying the downgrade reflected its view that the Omani government’s heightened external financing needs resulted in the economy’s large net external asset position (external assets exceeding external liabilities) declining to a level insufficient to mitigate the risk from its volatile export revenue base.

The agency estimated that Oman’s net external asset position had declined to 30% of current account receipts in 2017, from 60% in 2016.

But it also estimated that Oman’s fiscal and current account deficits were higher in 2016 than anticipated and GDP per capita lower. Based on projections for continued sizable current account deficits, S&P said it expects Oman to be in a narrow net external debtor position of 12% in 2020.

© 2015 Prospect News.
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