Venezuela needs to converge its three official foreign exchange rates soon to slow the world’s fastest inflation and promote economic growth, Economy Vice President Rafael Ramirez told investors in London.
As part of the government’s effort to shore up Venezuela’s economy, international reserves that are near a 10-year low will be reinforced by dollars currently kept in off-budget funds, Ramirez said, according to an e-mailed statement sent June 14 by Petroleos de Venezuela SA. Ramirez is also the president of the state-run oil company.
The London presentation was the first in a series of meetings to re-establish relations with the financial markets, according to the statement. A decade of currency controls has made dollars scarce in the South American country, making it harder for importers to buy goods and foreign companies to repatriate their cash. The central bank said in February that one in four basic goods was out of stock.
“Venezuela’s economic cabinet believes the adjustment has to be done this year to stabilize the economy before the congress elections in 2015,” Francisco Rodriguez, senior Andean economist at Bank of America Corp., who’s been predicting the unification of Venezuela’s exchange rates since April.
Venezuela’s benchmark bonds due 2027 rose 0.2 cents at 11:46 a.m. in New York to 83.34 cents on the dollar. Yields on the note fell 4 basis points to 11.76 percent.
On the black market, a dollar sells for about 72 bolivars, compared with the primary official rate of 6.3, according to rate-tracking website dolartoday.com.
Since President Nicolas Maduro came to power in April 2013, pledging to deepen late president Hugo Chavez’s socialist regime, the bolivar has lost about 70 percent of its value on the black market and annual inflation has more than doubled to 61 percent. Venezuela’s economy will contract 1.1 percent this year, compared with growth of 1.4 percent in 2013, according to the median estimate of 16 economists surveyed by Bloomberg.
For the past four years, the government has experimented with different foreign-exchange rate tiers that prioritize imports deemed essential. Under the current system, food and medicine receive greenbacks at a rate of 6.3 bolivars per dollar. Manufacturers apply for foreign exchange at 10 bolivars per dollar in weekly auctions, while individuals and importers of non-essential products can buy currency in restricted amounts for about 50 bolivars per dollar in the daily government-run currency market.
“I think the 6.3 exchange rate is going to disappear,” Asdrubal Oliveros, director of Caracas-based consultant Ecoanalitica, said by telephone yesterday. “Ramirez is sending a message here. He’s looking for allies to defeat opponents of reform inside the government.”
Maduro told lawmakers in January that the 6.3 rate will remain for the rest of the year.
Some foreign companies in Venezuela, including Kimberly-Clark Corp. (KMB), Revlon Inc. (REV) and Energizer Holdings Inc., continue to book bolivar assets at the 6.3 rate, which since early 2014 is only available to importers of basic foods and medicine.
Investors demand 9.7 percentage points of extra yield to own Venezuelan government bonds instead of U.S. Treasuries, the biggest premium in emerging markets tracked by JPMorgan Chase & Co.’s EMBIG index.
Confidence in the country has declined as increased spending on poverty reduction led international reserves to fall by half in the past five years to $22.5 billion.
To accelerate spending, Chavez set up off-budget funds that are not subject to parliamentary oversight. The funds have spent $112 billion since 2005, according to the Finance Ministry’s 2013 annual report. They still had between $22 billion and $24 billion at the end of last year, according to estimates by Bank of America. (BAC)
Some of the money held in off-budget in funds such as the National Development Fund and the so-called Chinese Fund will be moved to the central bank, Ramirez said in the statement. Opposition political parties say the funds’ holdings remain secret because most of the money had already been spent.
PDVSA, as the state oil company is known, has issued $5 billion of bonds this year to provide dollars to the economy and help ease shortages.
The company, which provides 97 percent of Venezuela’s export earnings, won’t issue more debt in 2014, Ramirez said in the statement. Instead, the oil producer is considering refinancing bonds nearing maturity, he said.
PDVSA is trying to refinance almost $15 billion in debt due through 2017, including a $3 billion loan to pay off the bonds maturing this year, a company official familiar with the matter, who asked not to be identified because he isn’t authorized to speak publicly, told Bloomberg this month.
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