Venezuela forex system sells dollars at eight times official price

CARACAS Mon Mar 24, 2014 7:37pm EDT

A woman counts bolivar notes as she pays for an electronic item at an store in La Guaira outside Caracas January 12, 2010. REUTERS/Jorge Silva

A woman counts bolivar notes as she pays for an electronic item at an store in La Guaira outside Caracas January 12, 2010.

Credit: Reuters/Jorge Silva

CARACAS (Reuters) - Venezuela launched a new free-floating foreign exchange system on Monday that offered dollars for eight times the official price in a move the government says will tame the black market but which critics see as a massive devaluation.

The central bank said the price for dollars on the inaugural day of the Sicad 2 system was 51.8 bolivars. Private bank operators who took part said demand was high but offers thin.

The new platform added a third state-sanctioned exchange rate to the South American OPEC member's 11-year-old currency controls, with dollars selling at 6.3 bolivars for preferential goods and around 11 bolivars for other items.

On the black market, greenbacks currently fetch around 57-58 bolivars. That price has fallen from 85 bolivars a couple of weeks ago on expectations of greater dollar flows via Sicad 2.

Though overseen by the central bank, the new system works on a supply-and-demand system, with individuals and companies allowed to participate in daily trading.

"Without doubt, it's the biggest monetary adjustment in Venezuela's history," said Henkel Garcia, of private think tank Econometrica, referring to the unexpectedly high price for dollars fetched on the first day of Sicad 2 trading.

President Nicolas Maduro denies that, saying the new market will account for only about 7-8 percent of dollar sales in Venezuela, with the 6.3 rate still applying for 80 percent of goods considered priority imports.

"To see the impact of this devaluation, we will have to see its weight in imports and the payment of things such as private debt and repatriation of profits," Garcia added.

Foreign companies have long complained of difficulties in getting profits out of Venezuela in hard currency. Sicad 2 gives them a clear legal alternative, reducing the temptation to turn to the illegal market.

Maduro's predecessor, the late Hugo Chavez, set up currency controls in 2003 as part of a socialist-style overhaul of the economy that he said would channel more wealth to workers rather than to wealthy people with bank accounts abroad.

BONDS RISE

Critics say the controls spawned corruption, curtailed business and gave birth to the black market for dollars.

Wall Street economists and bondholders have welcomed the new system as a much-needed easing of controls, though they want Maduro to go further across the economy.

Most Venezuelan bond prices were up on Monday, with the benchmark sovereign global 2027 gaining 2.22 percent to a bid price of 76.750.

Sicad 2 trading takes place daily until 1 p.m. local time (1730 GMT), with the bank announcing the average price afterward.

The new system revives a previous one, known locally as the "permuta" or "swap" market, which Chavez shuttered in 2010 after accusing speculators of manipulating it.

Opposition politicians have long criticized the government's currency controls. Still, they are lambasting Maduro for what they call a "stealth devaluation" via the new system.

"Today will be 'black Monday' ... This mega-devaluation is a harsh blow to all Venezuelans," opposition leader Henrique Capriles said on Twitter.

Venezuela's annual inflation rate, currently at more than 56 percent, is the highest in the Americas.

Analysts expect the price of Sicad 2 dollars to remain around the opening level in the short term, with the high rate likely to encourage initially reluctant private businesses to offer dollars alongside Venezuelan state institutions.

State oil company PDVSA is likely to be a big player.

"I think it's positive they are allowing the market to sell, to clear that price rather than trying to massage it as much as they can in order to avoid the price signal that the economy is demanding," said Goldman Sachs analyst Alberto Ramos.

"I think it is a reasonable range, between 50 and 60... It is indeed a stealth devaluation as many of the transactions in the economy are going to close at this rate, not the official rate. This is a massive devaluation, there's no doubt about it."

(Editing by Daniel Wallis, Dan Grebler and Eric Walsh)

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Comments (2)
Macedonian wrote:
Venezuela has the biggest oil reserves in the world but its people will suffer only because the oil cartel successfully demonized the socialist movement. Chavez offered oil at $40 per barrel money that he could use to payback the nationalized assets and make Venezuela the richest country in the world. But it would send a bad signal across the world so the oil cartel preffers to pay only the 7 % to the country with oil resrves and they pump the oil out.

Mar 24, 2014 5:57pm EDT  --  Report as abuse
ExDemocrat wrote:
Venezuela is a poster child warning symbol of the dysfunction of socialism. The government’s fiscal accounts are far out of control, which has indirectly led to the ongoing devaluation of the bolivar. Arbitrary government regulations and restrictions on enterprise of every description have virtually destroyed its agricultural sector, and all but paralyzed its private. If it were well-managed, Venezuela could be a Latin American version of Norway. Instead it is more like a tropical, rich, Bolivia.

Mar 25, 2014 5:35am EDT  --  Report as abuse
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