Government Re-opens Bond Market, Now Regulated by Venezuelan Central Bank

Merida, June 8^th, 2010 (Venezuelanalysis.com) – Venezuela’s foreign bond market will reopen tomorrow under new regulations. The Central Bank of Venezuela (BCV) and its new Transaction System for Foreign Currency Denominated Securities (SITME) will determine the buying and selling rates of foreign currency bonds and the requirements that participating institutions should meet. Government officials hope the measure will lead to a decrease in inflation and greater transparency of such trading.

The BCV will publish its price band for the foreign exchange bonds daily, from tomorrow, on its site www.bcv.org.ve, its president Nelson Merentes informed the press today. Once the price band is published, buying and selling will be possible between 9am and 12pm, with a minimum price of US$ 1,000 and in multiples of $1,000.  

The bond market reopens after being closed for three weeks since the government suspended it after it reformed the law against illicit currency exchange and declared foreign currency bonds as included in the definition of foreign currency and nominated the BCV as the only institution that may buy and sell foreign currency bonds. At the time, the bolivar had fallen to one of its lowest rates ever on the black market, worth half the officially controlled exchange rate of 4.3 bolivars to the dollar. Trading of foreign currency bonds was the main means for accessing the parallel exchange market.

Merentes said the bank has around US$2 billion in foreign currency available for trading. Private media had expressed concern that the government might not have enough bonds to meet the demand for dollars.

AP, for example, said that due to the three week suspension there would be a high demand for bonds, and quoted consulting firm Ecoanalitica as estimating that US$15-17 billion in bonds would be needed to meet demand.

However, although government authorities did not stipulate a maximum trading amount, they said large amounts would not be allowed. Merentes estimated the demand would be US$5-6 billion per year.

Merentes stressed that the SITME is for those who truly need dollar denominations, not for those who just want to speculate.

“This system has to eliminate distortion [of the value of the bolivar], and above all, speculation. If a person thinks that they are going to enter this market to speculate, the system will reject them,” Merentes warned.

“If someone has a Venezuelan bond and they want to change it overseas, they can do that, there’s no limitation. What is limited is the use of the foreign currency, if they want to bring the currency to Venezuela to speculate, this they can’t do,” he explained.

He also said those stockholders who want to participate in the SITME market must have residency in Venezuela and most prove their need to operate with foreign currency securities.

Bond buying and selling regulations

The BCV and the government published agreements and regulations they had made regarding how the SITME will work, on Friday, in the official gazette, making those regulations applicable.

Such regulations include for example, that banks can sell investors government bonds for dollars with approval by the BCV, and those participating in the foreign exchange market should publically announce the exchange rate and any commissions they receive.

Only currency exchange offices in Venezuela that are situated on the borders will be able to conduct currency purchases and sales in cash, and only Colombian pesos or Brazilian Reais. They will have to provide all exchange information to the Foreign Currency Administration Commission (CADIVI) and the BCV will set a daily per customer limit. However, exchange offices will be exempt from the obligation of selling foreign currency to the BCV.

Tourist establishments would be legally obliged to announce the official exchange rate to their customers but will be able to exchange traveller’s checks and foreign currency if they sell the foreign currency to the BCV through an authorised exchange operator.

Failure to comply with the regulations and provisions, apart from other penalties, will see the relevant institution suspended from the SITME, and only the BCV board of directors, should it see circumstances that merit it, will be able to authorise reincorporation in the system.

Social and economic implications

Elias Eljuri, the president of the National Statistics Institute (INE), said the SITME would benefit Venezuelans because producers and businesses, if the measure is successful, would not be able to use black market prices to determine the prices that goods and services are sold at.

Therefore, the measure is important in combating the country’s inflation, he said. Inflation has been higher over the past year with cumulative inflation in the first quarter of this year at 11.3%, compared to 6.7% in the same time period last year.

Ex-minister for economy and finances, Rodrigo Cabezas, also agreed that the most important aspect of the new BCV regulations was that it would put an end to the “mafias who, through their web pages, chose an arbitrary price for the parallel dollar, which had an impact on inflation.”

“The price that the stocks will have [in the BCV regulated market] won’t affect inflation…and this will favour the workers, all Venezuelans, because we’re going to regulate this distortion of the market,” Cabezas continued.

“We believe that in the next months inflation should go down. The inflation that we had in April was really too high. I think that in the upcoming months we’re not going to have that inflation behaviour of 5% [per month],” Eljuri said, and also emphasised that the government is fighting inflation “at its roots” by increasing national food production and distributing food at subsidised prices.

Government intervention into 80 bank-connected companies

In related news, on Sunday president Hugo Chavez authorised government intervention into 80 companies of bankers implicated in “robbing money from depositors.”

Chavez said some of the bankers are in prison, while others are in the United States, “because they are protected there.”

“It is important to be very careful with the private banks. They are champions of the parallel market, in false dollars, and dollar laundering. However, they continue to dominate the majority of the national banking sector,” he said.

Towards the end of last year the government nationalised two small banks and liquidated two others for banking law infractions. The government arrested one bank owner, Ricardo Fernandez, and three other bank executives fled to the U.S.