Gold repatriation: What is Chavez up to?

Venezuelan President Hugo Chavez's plan to repatriate the country's external gold reserves could weaken its credit ratings, causing losses for bondholders while attracting a new wave of high-risk investors.

The 57-year-old socialist leader announced last month he was nationalizing the country's gold industry and bringing back some $11 billion in international bullion reserves that Venezuela holds in banks abroad. The question is whether or not the repatriation will make the finances of South America's biggest oil exporter even murkier as Chavez gears up to run for re-election in 2012.

``His decision to repatriate the gold reserves is a potential credit negative to the extent that it makes the handling of Venezuela's reserve cushion all the less
transparent,'' said Moody's analyst Patrick Esteruelas.

A lower rating would be bad news for investors holding Venezuela bonds. It would raise the government's already high borrowing costs while attracting yield-hungry investors, mostly hedge funds, looking for high-risk/high-reward assets.

``This government has already been characterized by a general lack of transparency and a very highly discretionary use of government funds,'' Esteruelas said.

Moody's Investors Service rates Venezuela at B2, five notches into junk bond territory, with a stable outlook.

On the positive side, oil revenues have been steady and Venezuela's foreign debt payment schedule is well spread out. The government does not face amortizations of more than $5 billion in any one year over the decade ahead.

``The two factors that are currently supporting Venezuela's rating are a sizable external asset cushion and the fact that the debt is so well termed out. If the gold repatriation results in a depletion of Venezuela's asset cushion, the rating could come under pressure,'' Esteruelas said.

Venezuela holds more than 60 percent of its international reserves in gold, nearly eight times Latin America's average of just over 8.0 percent.

Having announced in late June that he is being treated for cancer, Chavez has cut back his once prodigious schedule of public appearances. But he remains the region's most vocal critic of the U.S. ``empire''. With about 50 percent support after 12 years in office, Chavez stands a good chance of winning another six-year term in next year's election if he can beat the illness.

While analysts scratch their heads over the bullion repatriation being announced at a time of high gold prices -- if Chavez wanted to sell the ingots it would make more sense to do so outside the country -- credit ratings agencies are watching closely to see how the project is implemented.

``If after the gold gets back home you see the level of reported reserves going down, that could put further downward pressure on the rating,'' said Roberto Sifon, who analyzes Venezuela for Standard & Poor's, which rates Venezuela at B-plus, four notches into junk bond territory, outlook stable.

``It's not exactly clear why they are repatriating reserves at a time of high gold prices,'' he added.

But a good bit of uncertainty is already factored into Venezuela's low sovereign rating. ``There is some cushion, at a rating of B-plus, for the situation to degenerate a bit before the rating moves again,'' Sifon said.

The opposition accuses his government of wanting to use the bullion to stock Chavez's campaign war chest. The government says it is just being prudent by moving its gold, and some $6 billion in liquid reserves, out of European countries with mounting debt worries and the United States, which itself recently got slapped with an historic credit rating downgrade.

Some Venezuelans see the gold return as classic Chavez populism, bringing the nation's treasures home and out of the hands of Western nations in a move that could play well among the majority poor who are his power-base.

Erich Arispe, an analyst at Fitch Ratings, said he will be watching to see when and how much Venezuelan gold is brought home and how transparent the government is about the project.

``This could be another obstacle in assessing the actual financial strength of Venezuela,'' he said. ``The lack of transparency is already a credit weakness for Venezuela in terms of the administration of government-managed funds."