Merida, May 18th, 2010 (Venezuelanalysis.com) – After president Hugo Chavez signed the reform to the law against illicit exchange on Sunday and it came into effect Tuesday, the government has now temporarily suspended foreign currency bond trading, which was a key factor in the black market devaluation of the bolivar, and has made the Central Bank of Venezuela (BCV) the only means for buying and selling foreign currency bonds.
“This is to regulate the bourgeoisie more... we’re going to really give the dollar speculation hell,” Chavez said, saying that if it were necessary he wouldn’t have a problem with eliminating the stock exchange altogether. He also encouraged the population to denounce speculation through phone numbers and his twitter account.
Venezuela has a two-tiered official exchange rate of Bs 4.3 per dollar, for most imports, and Bs 2.6 per dollar for transactions identified as priorities such as food and medicine.
However, in the parallel or unofficial market the Bolivar is currently nearly twice as weak as the official rate, trading at Bs 8.5 per dollar. This parallel market is largely conducted through the buying and selling of bonds.
In the reformed law, the main changes are that foreign exchange is understood to mean not just currency, but also foreign currency bonds, and that the BCV will have exclusive rights to authorise the buying and selling of foreign currency bonds, and brokerage firms will be completely excluded from such transactions.
Specifically the law declares, “Whoever, in one or multiple transactions, within one calendar year, without intervention of the BCV, buys, sells, or in any way offers, transfers, or receives foreign currency between an amount of 10,000 dollars to 20,000 dollars, of the United States of America or their equivalent... will be sanctioned with a fine valued at double the amount of the operation, in bolivars.”
The minister for finances and planning, Jorge Giordani, explained to the press today that the stock exchange has been highly speculative, hence the government modified the law to allow the BCV to take on a “protagonist role” in the foreign currencies market, meaning it would be the only institution allowed to set currency prices, to the exclusion of the stock exchange and brokerage systems.
Giordani said that on the stock exchange, stocks were worth 33% of their original value in just one day, “a phenomenon that isn’t seen in any other part of the world... this was a mechanism for the extraction of foreign exchange...they were trying to end with our international reserves through this mechanism.”
The president of the National Commission of Stocks, Tomas Sanchez, said the government was temporarily suspending the selling of stocks and bonds in foreign currency, which is basically equivalent to closing the parallel exchange market, with the exception of cash exchanges made in the street or overseas bank account deposits.
“The National Commission of Stocks initiated a series of investigations...and we obtained a range of evidence of possible speculation operations. Likewise, we’re verifying everything related to custody of these bonds because we have some suspicions that these institutions [stockbrokers] are involved in currency exchange crimes.”
The president of the BCV, Nelson Merentes, explained to the press how the BCV would attempt to control the bond and stock trading. It will define a price band with upper and lower limits of the value of the bolivar, or basically create a floating parallel market rate fixed by the bank, but in which there will be transparency in the transactions. The BCV will base this band on international market prices.
“We want to substitute the level of possible financial speculation that existed with something that becomes a routine procedure of mediation of the bonds in foreign currency,” Merentes said.
He said the BCV, through its technological mechanisms, will call on those who want to sell bonds and those who want to buy them in order to form a kind of compensation chamber, turning itself into a mediator between demand and offers, which would allow both sides to be happy with the transaction.
“We believe that with this mechanism in place, speculation won’t exist, because the bank’s job isn’t to make money but rather to look for balance between the two sides, according to clear rules,” Merentes said.
Previously, the value of the Bolivar would drop every few days, without any real reason, Merentes explained. Now, there will be a web page where the number of offers, the amounts, and the number of claimants will be displayed.
The price of the bolivar on the parallel market is important because it affects the cost of imports. According to national assembly legislator Rafic Souki, 90% of importing companies in Venezuela go to Cadivi, the government foreign exchange institution, to obtain the dollars they need, meaning only 10% look for dollars on the parallel market. He said the reason why they don’t go to Cadivi is because they don’t meet the requirements.
“These companies have debts with the Venezuelan Social Security Institute (IVSS) and with the Obligatory Housing Savings Fund (Faov),” Souki said. “In the end all Venezuelans are victims of this speculative wave that pushes up the prices of goods and services”
Souki used the example of car assembly companies in Venezuela, who “even though they receive dollars through Cadivi to import car parts, once they come to selling the car on the national market they sell it at a price based on the parallel market exchange rate.”
Already the government has started cracking down on illegal speculation, inspecting one company yesterday, Heptagon, a brokerage firm, for possible irregular management of foreign exchange in order to alter the exchange rate. On 14 May four other such establishments were inspected for not complying with legal requirements
One man, Jaime Renteria, a representative of companies that act as stockbrokerage firms, was also arrested for presumed illegal foreign exchange and undue exchange rate intervention.