Morgan Stanley warns about foreign exchange crunch in Venezuela

PDVSA to announce on Monday prospectus for US$3 billion bond sale

El Universal: Venezuela keeps borrowing as a mechanism to ease foreign exchange crunch in the domestic economy, and to find new funds that will help the country to improve the profile of liquid assets.

State-run oil company Petróleos de Venezuela (PDVSA) announced on Tuesday the issuance of $3 billion in bonds in a press release. The issue will have a semi-annual coupon and mature in 2015, 2016 and 2017, with equal repayment. Bonds may be purchased in the primary market, at the official exchange rate of Bs.F 4.30 per US$.

Despite the issuance, the foreign currency crunch in the Venezuelan economy is worrisome. According to a report prepared by investment bank Morgan Stanley, based on limited data and transparency about the supply and demand of foreign currency in Venezuelan economy, the fact that "Venezuela is expanding debts rather than foreign exchange reserves suggests that the government could be facing a foreign exchange crunch."

Morgan Stanley warned that Venezuela may face a demand of $61.8 billion in 2010, and $65.9 billion in 2011. The investment bank stressed that in an economy that gets 95% of its foreign currency from the sale of oil and byproducts, there is great uncertainty regarding the volume of PDVSA's oil production and exports, and doubts about the price of such negotiations or whether they are paid in foreign currency.

The report added that as a result of oil exports to countries in Asia, the Caribbean, Central and South America, which represent about 40% of total exports (2.7 million bpd), Venezuelan oil revenues could total $50.8 billion in 2010 and $55.1 billion in 2011, which would result in a $17 billion deficit. Morgan Stanley said that there is evidence that Venezuela would be facing a "foreign exchange crisis."

Implicit exchange rate

The Transaction System for Foreign Currency Denominated Securities (Sitme) approves $40 million per day, an amount that does not meet market expectations. This is the reason why the Venezuelan productive sector has been waiting for PDVSA bond issue to meet their currency needs.

Economist Angel Garcia Banchs said that the implicit exchange rate of the issue would be about Bs.F 6 per dollar, and it would adjust later to Bs.F 5.3 per US$, after the market absorbs the "punishment" that would affect the bond when the government starts to pay in foreign currency.

The economist warned that "the issue is likely to be bought by the Central Bank of Venezuela and private and state-run banks to feed the Sitme and only a small part of the $3 billion would be sold to natural persons and companies."