Venezuela to Allow Open FX Trade on New Market: Brokerages

Venezuelan companies and individuals will buy foreign exchange legally for a price set by market forces in a new parallel currency mechanism, a spokesman for the brokerages tasked with processing the transactions said.

“It will be an open, transparent market based on supply and demand and without price or volume restrictions,” Ricardo Montilla, president of the National Association of Securities Operators, said in a phone interview Thursday after meeting the finance minister, central bank president and securities regulator to discuss the mechanism. “The government is working at full throttle to start this market as soon as possible.”

President Nicolas Maduro said Jan. 21 that Venezuela would create its fifth parallel currency market in 12 years to inject dollars to a shrinking economy hit by declining oil revenue, the world’s highest inflation and record shortages of food and medicine. Tougher currency controls have wiped out 90 percent of the bolivar’s value on the black market in Maduro’s two years in office.

The president said Venezuela will continue importing basic products at 6.3 bolivars per dollar and will pay for other goods and services deemed important at a weaker secondary rate. Everyone else will buy foreign currency through brokerages on the new parallel market, he said.

Double-Digit

Venezuelan bonds gained just 2.4 percent since Maduro’s announcement, compared with a double-digit rally following the announcement of previous parallel currency mechanism in March 2014. The country’s benchmark security due in 2027 fell 0.13 cent to 35.88 cents on the dollar at 10:47 a.m. in New York today.

The new market will trade cash and bonds as well as swap bolivar- for convertible currency-denominated financial products, Montilla said. Thirty-six brokerages have been initially given permission to operate in the market, he said.

Former President Hugo Chavez in 2010 closed a so-called “permuta” currency swap market amid accelerated inflation and a weakening bolivar.

The crackdown led to more than 50 brokerages going out of business, while four partners at Econoinvest Casa de Bolsa CA, the country’s largest brokerage, were jailed, some for more than a year. Chavez called the financiers, who were accused of illegal currency trading, “a nest of mafiosos.” None of the jailed partners was ultimately convicted.

Former Economy Vice President Rafael Ramirez in February of last year said the country was planning a new currency swap market. He was removed from his post Sept. 2 and sent to represent the country in the United Nations.

More Transparent

The new market “will be better than permuta,” Montilla said. It will be more transparent and have more safeguards against corruption, he said.

To strangle illegal trading, the central bank started the previous parallel currency mechanism, known as Sicad II, in March 2014. The bank allowed the bolivar to weaken 89 percent from the official rate to 55 bolivars per dollar on Sicad II.

Insufficient dollar supply and price controls have wiped out the mechanism’s initial gains against the black market and the bolivar has lost 68 percent of its value since in unofficial trading. It traded at about 186 bolivars per dollar on Friday, according to data from dolartoday.com, a website that tracks the rate at the Colombian border.

“The meeting left more questions to answer regarding the new FX system,’ BancTrust & Co. analysts Hernan Yellati and Guillermo Quiroga wrote in a note to clients Friday after attending the meeting the previous day. ‘‘The speeches during the meeting resembled a lot what former Economy VP, Rafael Ramirez, said when presenting Sicad II.’’

Brokers will only be able to see their own prices on the new system, without knowing the prices other brokers are bidding, the analysts wrote, adding that the government will intervene in the price if it sees ‘‘market distortions.’’

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