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Venezuela Opens Foreign Exchange Market as Protests Continue

Venezuela’s government said it will relax exchange controls imposed over the past decade as it attempts to ease shortages of basic goods and damp deadly protests over the rising cost of living. Bonds rallied.

The state won’t impose restrictions on trading in the so-called Sicad 2 market when it starts on March 10, Economy Vice President Rafael Ramirez said. The government will offer “significant” foreign currency to the new market while it continues to ensure an exchange rate of 6.3 bolivars per dollar for essential imports such as medicines, he said. Francisco Rodriguez, a Latin American economist at Bank of America, said the move amounts to a devaluation.

“There will be no pre-set band or rate, it will be a market with a free supply of foreign currency,” Ramirez told reporters in Caracas today. “We will also supply currency to help the market flow.”

A shortage of dollars has crimped imports, leaving supermarket shelves partially empty and pushing annual inflation to 56 percent, the fastest in the world. The economic crisis in Venezuela, which has the world’s biggest oil reserves, has fueled protests against President Nicolas Maduro’s government that have left at least 19 people dead.

Venezuela’s benchmark 9.25 percent dollar bond due 2027 rose 1.41 cent on the dollar to 73.75 cents today. The yield fell 29 basis points, or 0.29 percentage point, to 13.53 percent.

‘Policy Incompetence’

It is unclear if the government will allow the bolivar to trade completely free on the new market, said Siobhan Morden, head of Latin America fixed income at Jefferies Inc.

“The implementation/execution risk is high for what has been gross policy incompetence,” Morden said in a note to investors. “But it’s the last chance for Maduro to reduce stagflation, the main cause of social unrest.”

The government could either try to fix the rate at about 20 bolivars to the dollar, or allow a “market clearing level” of 50 to 60 per dollar, she said. A dollar trades for around 81 bolivars on the black market, according to dolartoday.com, which tracks the exchange rate along the Colombian border.

Private entities from all sectors of the economy will be able to participate in the new market along with state-owned Petroleos de Venezuela SA, Ramirez said.

More Dollars

The prospect of more dollars in the market has already helped bring down the black market rate, Bank of America’s Rodriguez said. The Sicad 2 rate may range between 25 and 40 bolivars to the dollar, he said.

“This is positive because the government is devaluing the currency,” Rodriguez said in a phone interview from New York. “If the government is effectively channeling dollars that were previously used in the Cadivi or Sicad 1 systems and selling them at a higher rate, this would allow it to reduce its budget deficit and they would have to print less money.”

Venezuela also signed a $5 billion financing deal with China in exchange for oil deliveries and may sign a $2 billion loan with Russia, Ramirez said.

Panama Debt

Panama President Ricardo Martinelli today called on Venezuela to pay a $1 billion debt to his country for use of a free-trade zone. Maduro on March 5 broke off diplomatic and commercial relations with Panama, accusing Martinelli of stoking foreign intervention after he called for the Organization of American States to take up the Venezuela crisis in a special meeting.

“Venezuela is very wealthy and they owe Panama more than $1 billion, the state must pay,” Martinelli said today in comments broadcast on Telemetro television. “Panama is only searching for peace with Venezuela.”

Venezuelan opposition groups have sustained daily protests in Caracas and other cities since Feb. 12. Governor Henrique Capriles, who lost to Maduro in elections last year, called for national demonstrations tomorrow against shortages.

Maduro has called opposition groups, who have spurned two invitations to meet with him at the presidential palace, “fascists” trying to overthrow his government.

“Rest assured that with the measures we are implementing right now, the economic measures, all these factors will be balanced,” Maduro said, according to the transcript of an interview on CNN broadcast today. “We’ve been the target of an economic war.”

To contact the reporters on this story: Corina Pons in Caracas at crpons@bloomberg.net; Jose Orozco in Caracas at jorozco8@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Philip Sanders, Bill Faries

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