Venezuelan bonds rallied as the government said it will ease exchange controls and get as much as $7 billion in financing from China and Russia as it attempts to damp three-week-old protests that are expected to continue.
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 yesterday. 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. “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. With the economic crisis fueling protests against President Nicolas Maduro, Ramirez said the government signed a $5 billion financing deal with China in exchange for oil deliveries and may sign a $2 billion loan with Russia
At least 19 people have died in demonstrations that started Feb. 12. Opposition Governor Henrique Capriles, who lost to Maduro in elections last year, called for national demonstrations today against shortages.
Venezuela’s benchmark 9.25 percent dollar bond due 2027 rose 1.41 cents on the dollar to 73.75 cents yesterday. The yield fell 29 basis points, or 0.29 percentage point, to 13.53 percent.
Late President Hugo Chavez created currency controls in 2003 that allow the central bank to select companies and citizens that have access to dollars at the government-set rate. It is unclear if Maduro now 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.
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.”
Panama President Ricardo Martinelli yesterday 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.
Discontent over Venezuela’s economy is putting the future of Maduro’s government at risk, Steve Ellner, a political scientist at the Universidad de Oriente in Puerto La Cruz, said.
“If they can’t turn around the economic situation, they won’t be around for too long,” he said yesterday about Maduro’s government. “They’ll be voted out of office in two years in legislative elections.”
The president has called opposition groups, who have spurned two invitations to meet with him at the presidential palace, “fascists” trying to oust him from office.
“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 yesterday. “We’ve been the target of an economic war.”
To contact the editors responsible for this story: Philip Sanders at email@example.com Randall Woods, Bill Faries