LATIN MARKETS

The Miami Herald March 8, 1999 LATIN MARKETS

By DAVID PAPADOPOULOS
Bloomberg News

             CARACAS -- Venezuela, mired in recession and home to the world's
             worst-performing stock market this year, provided gutsy emerging-markets
             investors some of their best returns in recent months.

             That's because three-month currency contracts maturing last week provided an
             annualized return in dollars of 123 percent for those who bet on the Venezuelan
             bolivar.

Some say the payoff is likely to remain generous as long as the government holds
the line on the currency.

``It's our top pick,'' says Adam Weiner, emerging markets currency strategist for
ING Barings in New York.

             Weiner thinks the bolivar will hold near current levels -- as it has the past five
             months -- and there are plenty of investors on the other side willing to bet a
             collapse in oil prices makes a devaluation all-but inevitable.

             Granted, it's a short-term wager loaded with risk. If the bolivar does fall, it's likely
             to plummet. It dropped 40 percent in a week in both April 1996 and December
             1995.

             Venezuela's current account is widening as the price of oil, its main export, remains
             near 12-year lows; high inflation has stripped the local companies of their
             competitiveness against foreign products; and the government is saddled with an
             $8 billion deficit.

Capital flows squeezed

             What's more, the economy is mired in recession and capital flows to all Latin
             America are likely to remain squeezed in the wake of the devaluation in Brazil, the
             region's biggest economy.

All that supports economists' view that the bolivar is as much as 40 percent
overvalued and ripe for another fall.

``I would look for a maxi-devaluation at some point,'' said Larry Krohn, chief
Latin American economist with Donaldson, Lufkin & Jenrette in New York.

Still, Weiner has a ``buy'' recommendation out to clients on the bolivar
three-month forwards.

``Over the last year, bolivar forwards have been the best currency play in the
region,'' he said.

             In fact, they've been the best play among emerging markets. Future bets on the
             bolivar provided a 71 percent dollar return in 1998, according to J.P. Morgan &
             Co. That's more than double the 33 percent return on the Czech koruna, almost
             nine times the 8 percent return on the Egyptian pound and more than 20 times the
             3 percent return on the Mexican peso.

Here's why: Local investors take the government at its word there won't be a
devaluation.

             They got crushed betting against the bolivar last August in the wake of Russia's
             devaluation. That's when the Central Bank spent hundreds of millions of dollars
             from its $14 billion war chest and drove interest rates into triple digits to defend it.

Determined not to devalue

``The wounds are still open,'' said Pedro Palma, president of Heptagon Grupo
Financiero investment bank.

             Palma should know. Many of his clients were among those who lost. The central
             bank estimates investors lost $105 million betting against the bolivar in August and
             September.

He thinks investors would lose big again if they tried to take down the bolivar
today.

             President Hugo Chavez has said he is determined not to devalue, and he has more
             than enough foreign reserves to defend it. The Central Bank's hard currency
             reserves cover 170 percent of its local currency liabilities -- more than enough to
             implement an Argentina-style currency board.

``There aren't enough bolivars out there to buy up all the Central Bank's dollars,''
said Oscar Garcia Mendoza, president of Banco Venezolano de Credito.

That makes it nearly impossible for currency traders to outduel the Central Bank
and force a tumble in the currency.

While expectations of an imminent devaluation have eased, there is still a
money-making opportunity, Weiner says.

On the other end

             Here's how to do it: find someone who wants to bet against the bolivar. Many
             banks and brokerages in New York and Caracas can hook you up with someone
             on the other end of the bet.

             Traders estimate the outstanding stock of bolivar forward contracts is about $500
             million. The most active participants in the market include ING Barings, ABN
             Amro, Citibank and Santander Investment, traders say.

             You and your betting partner agree on a three-month future rate -- currently about
             628 to the dollar. By taking the bolivar, now at 576, you are betting that it will
             close in the spot market in three months at a stronger rate than 628 to the dollar.

When the contract matures, if the dollar is below 628 bolivars, you're a winner.

             Let's assume the bolivar doesn't move in the spot market and closes the day of the
             future contract maturity at 576. Your betting partner will pay you the difference
             between the future contract rate and the day's spot rate -- 52 bolivars. You will
             get paid in dollars, so you will get the 52 bolivar return divided by the day's
             exchange rate, 576, giving you a three-month return in dollars of 9 percent. That
             equals an annualized return of 41 percent.

Even if the bolivar were to slip to 610 on maturity date, your annual return in
dollars would remain 12 percent.

             While even Weiner says he has doubts about the bolivar much beyond three
             months, he thinks six-month bets could probably be money winners as well --
             though he isn't recommending them.

``Take the three months and take the money and run,'' he advised.