Venezuela to Set Currency Trading Band, Merentes Says

By Daniel Cancel and Corina Rodriguez Pons

May 18 (Bloomberg) -- Venezuela will establish a trading band on its free-floating exchange rate in a bid to halt a four- month tumble in the currency and stem an inflation surge that is undermining the country’s economic recovery.

The country will use prices on government dollar bonds that investors trade in the currency market to set the range, said central bank President Nelson Merentes. He declined to specify what the range will be. The free-floating rate, known as the parallel rate, plunged 26 percent this year to 8.1 per dollar, leaving it more than 45 percent weaker than the official exchange rates, as President Hugo Chavez’s seizure of private companies prompts investors to pull capital from the country.

“We’re going to seek a balance between buyers and sellers of securities, and setting clear rules for the market,” Merentes said. “We believe that with this trading band there won’t be any speculation.”

Chavez, who devalued the official exchange rate in January by as much as 50 percent, has called for a “strong hand” against currency speculators he blames for a surge in consumer prices and the tumble of the bolivar to a record low. He pledged earlier this year to drive the bolivar down to 4.3 per dollar to “burn the hands” of investors. The currency band may hurt foreign companies that used the parallel market as a legal mechanism to get around the controls.

40 Percent

Venezuelan consumer prices surged 5.2 percent in April from March, the biggest increase in seven years, after food prices were adjusted for the devaluation and due to higher import prices from the weaker bolivar. Venezuela, which has the highest inflation rate of 78 economies tracked by Bloomberg, may see annual inflation accelerate to 40 percent this year, according to RBS Securities Inc.

The trading band will begin in a maximum of 15 days and the bank will look to sell dollar-denominated instruments already circulating in the market, Merentes said in a phone interview. Operations may begin sooner if the trading platform is ready, he said.

“Merentes has said that the new set-up is likely to take 15 days; given the authorities’ track record, we would expect this period to last longer,” Boris Segura, an RBS economist who forecasts that the economy will contract 3 percent this year, said today in a research note. “Imports are likely to come to a halt, with the associated higher inflation and increased shortages.”

‘Far Lower’

Venezuela, which will keep the official rates of 2.6 and 4.3 per dollar for imports, has sold $8.9 billion at those rates this year to importers, Merentes said during the press conference.

The implicit exchange rate from the currency transactions at the central bank will be “far lower” than the rates in the parallel market in recent weeks, he said.

People and companies turned to the parallel market when they can’t get government approval to buy dollars at the official rates. They used brokerages to access U.S. currency by buying and selling dollar-denominated securities in the parallel market.

The yield on Venezuela’s 9.25 percent bonds maturing in 2027 rose 34 basis points to 13.75 percent at 4:06 p.m. in New York, according to JPMorgan Chase & Co. The bond’s price fell 1.72 cents on the dollar to 70.54 cents, the lowest since Dec. 22.

Securities trading will be temporarily suspended in the local market and brokerages will be excluded from participating in the currency band at the central bank, securities regulator Tomas Sanchez, said on state television.

Brokerages

The regulator, which closed five brokerages in the last week, and the attorney general will begin an investigation to determine whether traders were involved in money laundering through the swap of bonds to obtain dollars, Sanchez said.

The government also blocked websites that published the parallel exchange rate after Chavez said they were partly responsible for currency speculation.

Finance Minister Jorge Giordani said traders in the parallel currency market were fueling capital flight and trying to sap the country’s international reserves. Traders may have been laundering capital from drug trafficking through the market and were setting “illogical exchange rates,” he said.

“If they can’t prove the origin of funds, we’d be before a situation of laundering,” Giordani said. “I think there’s been a high level of laundering in these operations.”

Reserves

Venezuela’s central bank reserves have plunged 23 percent this year to $27 billion after $5.5 billion was transferred to an off-budget development fund controlled by Chavez. Bank efforts to shore up the currency by selling $523 million of 90- day zero-coupon notes in the local market this year were unsuccessful.

Goldman Sachs Group Inc. said on May 14 Venezuela is nearing a currency crisis and the country may have to devalue the official rates again in 2011.

Venezuelan importers used the parallel market for 30 percent of imports, or about $12 billion, last year, according to estimates by Barclays Plc. The new central bank trading band will spark a bigger black market, Barclays economist Alejandro Grisanti said in a phone interview from New York.

“If the government can’t supply the market, a black market is inevitable,” he said. “People will look for alternative means that aren’t necessarily legal to acquire currency.”