November 30, 2007 / 9:52 PM / 12 years ago

Venezuela's currency likely loser from referendum

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.

People take part in a closing campaign rally against Venezuelan President Hugo Chavez's proposal of constitutional changes in Caracas November 29, 2007. REUTERS/Daniel Aguilar

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.”


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.

The parallel market’s legal status is also unclear, but established banks and brokerages trade the “parallel” bolivar.

“The bolivar black market parallel rate is hovering at 6000 plus versus 4000-4500 in July August,” said RBC’s Biszko.

A year ago the parallel rate was about 3,234 bolivars to the dollar, said Lehman Brothers analyst Gianfranco Bertozzi.

At its weakest, the parallel bolivar sank close to 7000 to the dollar at the end of October this year before the government launched billions of dollars of bond issues to absorb bolivars which could otherwise chase dollars.


But on Friday, on the eve of the referendum, Finance Minister Rodrigo Cabezas attacked the parallel trading of the bolivar as “illegal” and described it as “black market”.

Cabezas told state television that the parallel rate was being manipulated in “under the table” transactions to win market players “a pile of dough.”

In what are believed to be his first statements on the recent magnitude of the parallel trade, he said its monthly volume was estimated at $140 million to $150 million.

That was much less than the $3.2 billion to $3.5 billion that Cabezas said the government plans to provide to the businesses and individuals at the official rate in December.

The parallel bolivar has plummeted since Chavez in mid-August unveiled his plan to amend 69 of 350 articles of the constitution he backed in 1999.

Passage of the referendum would give Chavez full control of the central bank and its reserves, would abolish presidential term limits, allow Chavez to censor the media if he declares an “emergency”, offer free education, and cut the working day to six hours from eight, among other measures.


Chavez himself said Monday he expects to win the referendum by 10 percentage points, but said his opponents will cry fraud and promote violence if they lose.

Assessing the scenario of a big win for Chavez, RBC’s Biszko said: “The big risk is that the opposition will in turn cry fraud, triggering a harsh reaction from Chavez (possibly the use of military force) that could fuel violent social unrest.”

If violence were to result, “the combination of civil unrest and rising inflation expectations ... is bound to send investors scrambling for dollars,” said IDEAglobal analyst Alvise Marino. “Dollar supply remains limited in Venezuela: an abrupt surge in demand could easily push the parallel bolivar exchange rate above 7,000 in the short term,” he added.

If a no vote prevails some see the parallel rate bolivar strengthening.

“We recognize a (Chavez) defeat on Sunday night presents a bullish scenario for markets, as it would weaken the executive, scrap the credit-unfriendly reforms considered in the referendum, at least temporarily, and potentially lead to a less radical line of policy,” said Gianfranco Bertozzi of investment bank, Lehman Brothers in a research note.

“Yet the referendum is unlikely to result in a rejection of reforms,” he added, writing that if the government truly sensed defeat it would more probably postpone the referendum.

Even if the “no” vote prevails, the instability it could engender may weaken the bolivar by Venezuelans rushing to buy dollars worried about how Chavez could react.

“If the ‘no’ vote wins, or if the outcome of the vote is close, Fitch is concerned this could lead to more political and social instability,” said Fitch Ratings analyst Theresa Paiz.

“In this scenario, the parallel rate could still have room to widen significantly from the official rate,” she said.

Venezuela is one of the world’s largest oil exporters and high crude oil prices in recent years have funded Chavez’s expansion of welfare and subsidies for the poor, but price controls and nationalization of large economic sectors have also led to shortages of food staples like milk, eggs and flour, while inflation is the highest in Latin America.

Additional reporting by Fabian Cambero in Caracas; editing by Clive McKeef

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