Oil Bonds Slake the Thirst for Dollars in Venezuela

CARACAS, Mar 27 (IPS) – Thousands of Venezuelans have been registering at their bank branches since Monday in order to buy some of the five billion dollars’ worth of bonds put on the market by the state oil monopoly PDVSA.

“The bank managers say that it’s a dead cert, so I’m going to use my savings to buy 5,000 dollars worth of bonds,” bank employee Antonio Suárez told IPS. “Later on, when the value of the dollar climbs, I’ll be able to sell the bonds.”

Finance Minister Rodrigo Cabezas was proud of the fact that in Venezuela “there are 300,000 savers who are beginning to understand the culture of capital and bonds markets. They are also supporting PDVSA’s effort to increase its current production of 3.3 million barrels per day (bpd) to six million bpd by 2012,” he said.

Economist José Guerra, a former manager at the Central Bank, which is managing the bond issue, told IPS that “the Venezuelan state, in spite of its socialist and nationalist rhetoric, is telling citizens to save in dollars, not bolivars, with these bond issues.”

This week’s bond issue follows in the footsteps of the successful Southern Bonds, launched by Argentina and Venezuela in November 2006 for one billion dollars, and again in February for 1.5 billion dollars, which were sold out amid market demand that, had it been fully satisfied, would have taken up bonds for 12 billion dollars.

The government of President Hugo Chávez pointed to that level of demand as proof of the success of its policies, and a reflection of strong economic growth over 12 consecutive quarters. Gross domestic product (GDP) growth was 10.3 percent in 2006, and is expected to grow at between five and seven percent in 2007.

>From the opposition benches, analysts like Teodoro Petkoff, who was minister of planning under Rafael Caldera (1994-1999), Chávez’s predecessor, warned that “the government is pronouncing the economy healthy when it is sick, because the demand for bonds in dollars shows the difficulties the productive sector has in securing hard currency.”

Venezuela’s exchange controls oblige members of the business community and travellers to apply for hard currency at a government office for their operations abroad, and industrialists and traders alike say that this impediment is almost entirely responsible for the shortages of some foods and other goods in the last few months.

Although goods ranging from powdered milk to cars are in short supply amidst rising demand, the country is awash with money, injected mainly through public expenditure of billions of dollars in oil profits.

At the beginning of March, the amount of money in circulation was approximately 117.7 thousand billion bolivars (55 billion dollars), or nearly 40 percent of GDP. Liquidity is now four times what it was three years ago.

The pressure of so much money driving consumption threatens to wreck the government’s goal of keeping inflation below 14 percent a year (it was officially 15 percent in 2006), and it also widens the gap between the official exchange rate of 2,150 bolivars to the dollar and the parallel (black market) rate, which is sometimes twice as much.

The bond issue is intended to soak up liquidity, and may absorb up to 10 percent. At the same time PDVSA will raise funds for 60 billion dollars of projected investments to boost production by 2012, Energy Minister Rafael Ramírez said.

International investors will be able to purchase the PDVSA bonds, as well as Venezuelans, who may buy upwards of 1,000 dollars worth and pay for them in bolivars at the official exchange rate.

“I think all the bonds will be taken up,” said Rufino González, head of the Fidevalores stockbroking firm. “By using this escape valve the government will make everyone happy, because it relieves pressure on the parallel currency market, and PDVSA is returning to the international market after a period of many years.” PDVSA’s last bond issue was in 1997, for 1.2 billion dollars.

By means of this bond issue PDVSA will raise an amount similar to the 4.98 billion dollars with which it funded the government’s broad range of social programmes last year.

The bonds are being sold at 105.5 percent of their face value, in combination packages which constrain buyers to purchase 40 percent in paper expiring in 2017, 40 percent expiring in 2027, and 20 percent in bonds due in 2037. Economists and stockbrokers estimate that, taking into account fees and deductions, the bonds in effect allow people to buy dollars at between 2,900 and 3,000 bolivars apiece.

On the parallel market, at its peak the dollar traded at 4,500 to 4,600 bolivars a month ago, but fell to an exchange rate of 3,900 to 4,000 bolivars when the PDVSA bond issue was announced. It fell further to 3,650 bolivars on the first day of buyer registration for the new PDVSA paper.

“But PDVSA will receive a vast quantity of bolivars, which it will have to spend, and when that money is injected back into the economy in a few months’ time, liquidity in the hands of people on the street will rise again, and the dollar will be under renewed upward pressure,” Guerra warned.

Even before that happens, bond holders will have paper in dollars at a lower cost than in the parallel market, and industrialists and traders will be able to use them to get round the difficulty of obtaining hard currency from the state.

Meanwhile, Antonio Suárez made a brief list of his relatives who can buy bonds, in the knowledge that small investors are to be served first. “What do you say? Maybe this popular capitalism is the beginning of the kind of socialism our president wants,” he said jokingly to this correspondent.