Analysis: Gold move highlights risks to Venezuela reserves

CARACAS Thu Aug 18, 2011 9:33pm EDT

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CARACAS (Reuters) - Venezuela's surprise move to bring home its international bullion reserves from Western banks shines a spotlight on the country's heavy reliance on gold, and the risks it runs if prices were to fall.

President Hugo Chavez said on Wednesday the government will repatriate almost all of its $11 billion in gold reserves held abroad, saying they will be safer than in states with mounting debt worries in Europe and the United States.

Caracas has fattened its coffers thanks to the recent steep rally in gold prices, but it could also be at risk if prices fall. And that could have implications for government spending as Chavez seeks to win a new six-year term at an election next year.

Venezuela holds more than 60 percent of its international reserves in gold, nearly eight times Latin America's average of just over 8.0 percent and twice that of the second highest in the region, Ecuador.

Merrill Lynch said that if spot gold prices fell back to their level at the end of 2008 of around $850 an ounce, Venezuela's reserves would amount to $19.4 billion, or six months of imports, instead of about nine months currently.

"This suggests Venezuelan current and capital account flows are not sustainable, even at the oil prices observed during this period," it said in a research note, adding that a decline in crude prices would also strip away billions more dollars.

"Given the high correlation between oil and gold prices, such a scenario should not be discarded," it said.

For a factbox on Venezuela's international reserves, please click on:

Gold rallied 2.0 percent to new high above $1,820 an ounce on Thursday.

Chavez's government is also moving up to $6.3 billion in liquid reserves from the United States and Europe to banks in China, Russia and Brazil. Venezuela uses its reserves primarily for debt payments and financing imports.

"SCRAMBLE FOR DOLLARS"

David Rees at Capital Economics said if Brent oil prices fell to $85 next year, the government would be forced to cut its import bill by 8 percent of GDP, or nearly $25 billion.

"Cutting the import bill is not desirable in the run-up to an election campaign when the dire state of the economy has already harmed Mr. Chavez's popularity," Rees said.

"So it seems to be more than likely that he will raid the central bank reserves, sell the gold and then spend the proceeds on imports ... it seems inevitable that there will be an increasingly desperate scramble for dollars ahead of next year's elections."

In a related announcement on Wednesday, the president said he would nationalize the country's struggling gold sector as a way of boosting domestic reserves.

OPEC member Venezuela mostly repays loans from China and Russia with oil. But it has been issuing bonds at a quickening pace recently, and analysts say it could become harder to repay that debt in coming years, especially if oil prices fall.

Chavez alluded to the possibility of unfriendly states seizing Venezuela's reserves and gave the example of Libya, where Western powers have frozen funds belonging to his friend and ally Muammar Gaddafi.

Some analysts speculate that his government may also be concerned about claims on its reserves relating to compensation for a string of nationalizations in recent years, including state takeovers of multi-billion dollar oil projects.

"Chavez's move ... could be the result of looking for alternative jurisdiction from the U.S. and Europe, as he sees in the future a threat of international seizure of those assets," said IHS Global Insight analyst Diego Moya-Ocampos.

"That said, such an outcome would be unlikely, given the immunity held by sovereign nations, with the repatriation of gold reserves therefore more attributable to Chavez's long-standing concerns rather than a genuine threat."

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