Venezuela's currency likely loser from referendum

By Walker Simon - Analysis

NEW YORK (Reuters) - Wall Street is betting that Venezuela's currency will likely be the loser if Sunday's constitutional referendum on expanding the powers of President Chavez ends up, as most polls predict, in a narrow victory for either side.

Polls show Chavez may struggle to win an overhaul of the constitution that would allow him to run for president indefinitely and expand his program of nationalization of the economy.

Venezuela officially has long had a fixed exchange rate, last pegged in 2005 at 2,150 bolivars to the U.S. dollar VEB=, and Wall Street analysts doubt the government will devalue that rate any time soon, no matter what the outcome of the vote.

More relevant though is the unofficial "parallel" exchange rate market in which the bolivar is trading at around 6,000 to the U.S. dollar LCDEBT.

The "parallel", or black market, bolivar rate is increasingly seen by Wall Street as a sign of domestic confidence in the economy, reflecting the impact of what Chavez calls his "21st century socialism".

Wall Street analysts say they have heard businesses increasingly have to import goods at the parallel rate, but there is no official data from Venezuela on trade at the parallel rate.

"Without a doubt, this Sunday's referendum proposing changes to the constitution is weighing heavily on market sentiment." said RBC Capital Markets' analyst Paul Biszko.

Analysts' opinions vary on the impact on the bolivar of a large "yes" pro-Chavez vote or a big "no" pro-Chavez vote, but the most likely scenario is a narrow victory by one side or the other, followed by more weakness in the parallel rate bolivar.

"If the margin of the victory is narrow...we could go to a few weeks of exacerbated political instability,," said Goldman Sachs political analyst Alfredo Ramos.

"That would be negative and prompt refuge buying of dollar assets and weaken the bolivar in the parallel market."

DE FACTO DUAL CURRENCY SYSTEM

Venezuela's de facto dual currency system grew out of foreign exchange and capital controls imposed by Chavez in 2003, when the country sank into recession after an opposition-led general strike.

The official rate is used for most imports and government transactions, like debt repayments.

The parallel rate is used for Venezuelans seeking dollars as a safe haven investment, as well as for imports for which the government declines to provide dollars at the official rate.

Despite its importance, the parallel rate is shrouded in mystery. No real-time quotes are believed to be available. Wall Street bankers even consult Caracas-based Internet sites to plumb the parallel market range.