February 10, 2015 / 3:25 PM / 4 years ago

UPDATE 3-Venezuela announces new currency system, large devaluation seen

(Adds reaction, details)

By Corina Pons and Brian Ellsworth

CARACAS, Feb 10 (Reuters) - Venezuela on Tuesday launched a new foreign exchange platform that will likely devalue the bolivar heavily in efforts to bolster state coffers amid tumbling oil revenue, but risk a spike in already soaring inflation.

The change amounts to an easing of 12-year-old currency controls and marks a small step toward market economics as the state-led model created by late socialist leader Hugo Chavez struggles with shortages, swelling grocery lines and recession.

However, the changes by Nicolas Maduro’s government do not eliminate the unwieldy three-tiered exchange structure seen by investors as the country’s principal stumbling block to economic growth.

The change will likely lead to billions of dollars in write-downs by foreign corporations with exposure to Venezuela including General Motors Co, household goods maker Procter & Gamble Co and drugmaker Merck & Co Inc.

The new platform, called Marginal Currency System or Simadi, is the third system in a three-tier exchange control mechanism and will allow for legal trading of foreign currency based on supply and demand, said Finance Minister Rodolfo Marco.

“This third mechanism is open, free, in which bidders and buyers exchange offers,” Marco said during a press conference with Central Bank President Nelson Merentes.

The currency controls have been providing U.S. dollars at three different rates: 6.3 bolivars for food and medicine, and two complementary rates of around 12 bolivars and 52 bolivars for other goods through systems known as Sicad I and Sicad II.

But dollars fetch nearly 190 bolivars on the black market, according to widely referenced website dolartoday.com.

Marco and Merentes did not offer details on what the open rate would be when the market kicks off in coming days. Merentes said the new platform would help lower the parallel rate.

Brokerage sources consulted by Reuters say the rate could begin at around 120 bolivars, substantially lower then the black market but still more than double the lowest existing rate.

A representative of the country’s primary business organization, Fedecamaras, said via telephone that the group was still studying the measure and did not have immediate comment on how the country’s businesses would be affected.


Opposition critics slammed the announcement as an insufficient measure that will do little to address the decaying economy, which one former government minister recently described as becoming the “laughing-stock” of the region.

“If devaluation were the solution, we would be Switzerland!” wrote opposition-leaning economist Miguel Angel Santos via Twitter, noting repeated devaluations during the 16 years of rule by the late Chavez and Maduro.

The tumbling price of oil, which provides nearly all of Venezuela’s hard currency, has left the 12-year-old exchange controls struggling to provide dollars to ensure steady supplies of such as detergent and milk that are increasingly going missing.

Venezuela had the worst economic performance in Latin America last year with 2.8 percent GDP contraction and officially-estimated 64 percent inflation.

Dismay over the state of the economy, and particularly of product shortages, has pushed Maduro’s approval rating down to 22 percent, according to local pollster Datanalisis.

A further spike in inflation due to the higher cost of imports could spur voter indignation and leave the ruling Socialist Party unable to maintain its majority in legislative elections to be held later this year.

Both Marco and Merentes, however, denied there would be an inflationary impact.

The Sicad I auction system will continue to hold periodic auctions for specific sectors of the economy and will for the moment continue providing dollars at the rate of 12, Marco said, adding that rate would change over time.

The new Simadi market will replace the Sicad II system.

Investors generally interpret devaluations positively because they leave the government with more hard currency available to service debt.

Venezuelan bonds, which have been trading at distressed levels on fears of a possible default, were up across the board on Tuesday, with yields on several dropping to one-month lows.

The Global 2026 bond was up 2.750 points in price to yield 26.841 percent while the Global 2022 rose 3.180 points to yield 31.717 percent.

Equities investors face billions of dollars in write-downs by U.S. corporations with exposure to Venezuela, as many have been unable to repatriate bolivars back into dollars due to delays in the currency controls.

At least 40 major U.S. companies together carry at least $11 billion of bolivar assets on their books, concentrated among 10 companies that have disclosed about $7.3 billion in assets linked to the country’s currency system.

Others foreign companies with notable exposure to Venezuela include Spain’s Telefonica and Germany drugmaker Bayer .

Some companies have already taken charges on their Venezuela exposure, including Kimberly Clark, Ford and Schlumberger. General Motors last week said in its annual report that instability in Venezuela could lead to a $900 million hit to earnings.

The Coca-Cola Co said during a conference call on Tuesday that it expects Venezuela pricing provisions will continue to negatively impact net revenue. (Additional reporting by Deisy Buitrago in Caracas, Daniel Burns in New York and; Tim McLaughlin in Boston; Editing by Andrew Cawthorne)

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