Venezuela's Great Dollar Drought

Every weekday, Ricardo Matamoros wakes up before dawn, travels to a branch of Mercantil Banco Universal in Caracas, and gets in line seeking to buy dollars. It's a futile effort, he says. "They haven't approved a single one of my requests during 45 days," said Matamoros, 51, the president of a film production company, as he stood outside the bank on Feb. 7. "Let's see if it happens today since I'm second in line."

The U.S. dollar is becoming scarce in Venezuela nine months after President Hugo Chávez banned local brokerages from trading foreign currency—a move intended to clamp down on capital flight out of the country and fight inflation. Since then businesses and individuals in need of greenbacks have had to turn to the central bank, which limits purchases to $50,000 a day. The result: Companies have been forced to sharply curb imports. Kellogg (K), the Battle Creek (Mich.) maker of Froot Loops cereal and Soft Batch cookies, said on Feb. 3 that it can no longer "cost-effectively import" into Venezuela. Paris-based spirits maker Pernod Ricard said in a Feb. 17 earnings report that currency hurdles led to a "sharp decline" in sales of Scotch whisky in Venezuela.

Alberto Ramos, a senior Latin America economist at Goldman Sachs (GS) in New York, calls Venezuela's exchange system "dysfunctional." There's an official rate—currently 4.3 bolívars to the dollar—available to companies that go through the country's Foreign Exchange Board, called Cadivi. That's only for so-called essential imports, such as food and medicines. Businesses pay 5.3 bolívars at the central bank currency market, known as Sitme. On the black market, where transactions take place curbside, the bolívar trades at more than 8 per dollar.

Goldman's Ramos says the government may devalue the Sitme rate to 6 bolívars per dollar later this year. Devaluation is a tried-and-true method of boosting government revenue in Venezuela. The country took in some $55 billion from oil exports last year. Those dollar earnings multiply when the local currency is devalued. Chávez has resorted to the tactic twice in the past 13 months. Sending the prices of imports skyrocketing, 12-month inflation hit 28.5 percent in January, the highest rate in Latin America.

Jorge Botti, a partner at telecommunications company Imr Netsystem in Caracas, bemoans the loss of productivity caused by Chávez's baroque system of exchange controls. "Managers are spending more time in bank queues than working to make the company more efficient," he says.

The bottom line: Venezuela is poised for another devaluation, as Chávez's currency controls lead to a dollar shortage.

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