Venezuelans Free to Trade Dollars at Market Rate
Banks are limited to selling currency to their own clients and barred from interbank trading and purchasing hard currency for their own accounts, factors typically used in shaping exchange rates, according to Russ Dallen, a partner at brokerage Caracas Capital Markets. Any excess dollars at the end of the day go to the central bank.
By Ezequiel Minaya
CARACAS – The Venezuelan government allowed citizens to buy and sell dollars at exchange houses and banks on Thursday for the first time in several years, part of its attempt to create a limited free-floating currency market.
The new Marginal System of Foreign Exchange sold dollars at 172 bolivars, a far weaker rate for the local currency than the two official rates, at 6.3 and 12 per dollar, but stronger than the black market rate of about 190 bolivars.
Some ordinary Venezuelans lined up at exchange houses to buy dollars, a form of insurance in an economy where inflation is 68%.
“I am really thrilled about it,” said Sofia Valero, a 39-year-old secretary. “But at the same time I can’t help wonder just how long we will have this market.”
The new market keeps the country’s complex system of three different official exchange rates. While the two strongest rates were retained, the new market substituted another system called Sicad II that was more tightly managed by the government and sold dollars at about 50 bolivars.
While the market is touted by the government as being free, there are limits on what individuals can trade: $300 a day, $2,000 a month, and $10,000 a year.
The new market represents about a 69% devaluation of the bolivar versus the Sicad II rate, and is far closer to the country’s thriving black market rate.
Venezuela’s government hopes the new market will drain life out of the black market and ease a growing budget deficit that economists estimate at between 17% and 20% of annual economic output. The gap has grown because the government sells the majority of dollars it earns through oil exports at the 6.3 and 12 rates as a way to subsidize imports of key products like milk and meat.
“Venezuela has a very large budget deficit because it subsidizes imports through cheap dollars,” said Francisco Rodriguez, senior Andean Economist at Bank of America Merrill Lynch. “Venezuela needs to stop giving away cheap dollars and the way to do that is to sell them at a higher price.”
Most experts doubt that the new system will offer enough hard currency to significantly narrow the budget gap or breathe new life into the country’s moribund economy, which contracted 2.8% last year and may contract up to 7% this year, according to the International Monetary Fund.
President Nicolas Maduro has said that the new market will only feed between 5% and 7% of hard currency needs while Venezuela’s dominant 6.3 bolivars per U.S. dollar rate remains in place for 70% of dollar requests, with the 12 bolivar per U.S. dollar tier absorbing much of the remaining transactions.
“It is still premature to know if this will help the economy,” said Tamara Herrera, senior economist with Caracas-based research firm Síntesis Financiera. She estimates the market will only trade between $5 billion and $7 billion this year.
“I don’t think it will help with the lack of dollars in the economy, because Venezuela is collecting only half of the oil income of last year. That’s a deficit of around $30 billion dollars,” she added.
Banks are limited to selling currency to its own clients and barred from interbank trading and purchasing hard currency for their own accounts, factors typically used in shaping exchange rates, according to Russ Dallen, a partner at brokerage Caracas Capital Markets. Any excess dollars at the end of the day go to the central bank.
The government also hasn’t published the amounts traded, further stirring doubts of the effectiveness of the new market.
“Although the opening of the third FX Market could give the system some flexibility the initial proportion of the FX supply that the government seems willing to move on this market strikes us as too small to have a meaningful effect,” said Alejandro Arreaza, a Barclays analyst.
Calls seeking comment from government officials weren’t returned.
The government is caught in a difficult bind. If too much money goes through the new rates, that could cause the price of imports to jump, adding to inflation that is already the world’s highest at 68%.
Price controls and an overvalued local currency have led to a shortage of dollars and imports, causing frequent shortages of basic products. Mr. Maduro, whose approval ratings have sagged to the low 20s, blames the shortages on economic elites who want to undo his government by refusing to put products on the shelves in a plot to stoke political tensions.
The currency controls have become an increasing headache for foreign companies operating in Venezuela. Experts estimate the Venezuela government owes foreign firms some $23 billion dollars in unpaid bills and trapped profits.
Many firms periodically write-down the value of their Venezuelan assets using a weaker exchange rate. Many multinational firms have recently revalued their assets based on the Sicad II rate of 50, even though the rate has now ceased to officially exist.
Earlier this week, Spanish telecommunication giant Telefonica SA took a $3.2 billion write down of its Venezuelan assets and income after deciding to switch to a 50 bolivars rate to the dollar from 12.
Atlanta-based Coca-Cola Co. said last week it recorded net charges of $393 million in the fourth quarter and $661 million in 2014 from its Venezuelan operations after adopting an exchange rate of 50 bolivars to the dollar.
Kimberly-Clark took a $462 million charge in the fourth quarter after switching to the 50 rate from 12 last year. The change in the way it measures its business in Venezuela will hurt overall company sales by 3% this year and operating profit by 4%.
Most companies said it was too early to gauge the effect of the new currency market.
If enough dollars are made available in the new market, it could give companies a way to pull some of their money out of Venezuela, albeit at a steep loss.
Ricardo Montilla, president of the national association of brokerages, said the first days of the new market were slow, but would pick up steam as people gained confidence.
Some traders on the black market said it was denting their business. “It has had a significant impact. I personally have felt an 80% drop in the demand for dollars,” said one black market trader.
Many analysts feel that the government will eventually try to control the market
“Deep down I think the government desperately needs the bolivars to cover the deficit and then will begin to control this market like it does everything else,” said Robert Bottome, head of local business consultancy VenEconomia.
Christopher Bjork in Madrid, Paul Ziobro in New York and Christina Rogers in Detroit contributed to this article
http://www.laht.com/article.asp?ArticleId=2375059&CategoryId=10717
.
