GOV FLOATS USD 1 BILLION BOND ISSUE

C O N F I D E N T I A L CARACAS 000162

SIPDIS


SENSITIVE

STATE FOR WHA/AND, EB
NSC FOR CBARTON
TREASURY FOR OASIA - GIANLUCA SIGNORELLI
USCINCSO FOR POLAD

E.O. 12958: DECL: 01/15/2008
TAGS: ECON PGOV VE FIN
SUBJECT: GOV FLOATS USD 1 BILLION BOND ISSUE

REF: (A) CARACAS 103 (B) CARACAS 101

Classified By: Ambassador Charles S. Shapiro for reasons 1.4(b) and (d)

--------------
Summary
--------------


1. (C) Venezuela issued its fifth tranche of bonds in the
past six months on January 7. The new bonds raised USD 1
billion for the GOV and were in heavy demand due to their
high offered yield. With a high rate of financing needed for
the FY 2004 budget deficit and debt service, more bond
operations can be expected. However, external factors could
lower the markets appetite for Venezuelan securities in the
future. End summary.

--------------
New 30-Year Notes
--------------


2. (U) The GOV issued USD 1 billion in new 30-year bonds
January 7. JPMorgan Chase was the agent for the transaction.
For the first time since 1998, Venezuela registered the bond
issue with the US Securities and Exchange Commission.
Therefore, the bonds can immediately be traded in US markets.
Final closing yield on the bonds was 9.38 percent. The new
issue raises Venezuela's total external debt operations since
August 1, 2003 to USD 5.55 billion.

--------------
Oil Makes It Attractive Despite Chavez
--------------


3. (SBU) Luis Oganes, JPMorgan Chase Economist and Emerging
Market Analyst for the Andean Region, told econoff January 8
that the issue was oversubscribed by approximately USD 2.5
billion dollars. Investors were eager to snap up the
relatively high yield bonds in light of continued high oil
prices according to Oganes. He added that the only hiccup
was from an ill-timed threat from President Chavez to the
Central Bank in the ongoing dispute over reserve transfers
(ref A). Oganes said that despite Chavez's remarks, only
three smaller orders were cancelled. The oversubscription of
the issue pushed the yield almost a full point below the
initially offered yield of 10.125 to 10.25 percent.
--------------
Yields Are Key
--------------


4. (SBU) Miguel Octavio, Executive Director of local
investment firm BBO echoed Oganes in a conversation with
econoffs January 14. Octavio said higher offered yields were
the key to Venezuela's successful debt offerings since
August. He said one only had to compare the 5 to 7 percent
yields on recent issues from Mexico, Costa Rica, and Turkey
to understand the attraction for Venezuelan bonds. In a
January 15 conference, Economist Cristina Rodriguez of local
economic analysis firm Metroeconomica, predicted that the GOV
would go to the markets again since it faces financing
demands around 16 percent of GDP under the FY 2004 budget.

--------------
Comment
--------------


5. (C) The appetite of international markets for Venezuelan
debt seems remarkable, at least when viewed from here, the
epicenter of political and economic chaos. Low US interest
rates, high oil prices, and a perceived recovery in
Venezuelan oil production are factors that strengthen the
Ministry of Finance's ability to sell up to a USD billion per
month in GOV paper. However, should the US recovery result
in the Fed raising interest rates or should oil prices
falter, market interest in Venezuela could slacken. We have
already reported our skepticism regarding the third leg of
this triad, Venezuelan oil production levels (ref B). If
international financial options are limited, other vehicles
such as Chavez's effort to tap Central Bank reserves (ref A)
may become increasingly important as the GOV seek to push the
pain of any adjustment in spending into the second half of


2004 when the current referendum/electoral cycle will
presumably have passed.
SHAPIRO


NNNN