Central bank centralizes purchase of foreign currency-denominated notes
The supply of US dollars has declined amidst waning petrodollars inflow
Economy
May 10
Chávez urges to limit swap market transactions
President Hugo Chávez said on May 8 that US dollars sold in the swap market are traded at highly speculative prices and urged government authorities to take steps to restrict the swap market.
In a speech, Chávez rejected the transactions made by brokerage firms and sales of US dollar-denominated bonds. He ordered his economic team to take the relevant steps.
Last week, the parallel dollar soared. Such increase was spurred by inspections conducted by regulators in brokerage houses, which froze trading during inspections. Although regulators stopped checking these financial institutions on May 7, the swap market continued to rise.
Further, the US dollar in the swap market has continued to climb because supply is limited. At the time of devaluation in January 2010, the Venezuelan president instructed the Central Bank of Venezuela (BCV) to act in the market to lower the exchange rate, but the BCV has limitations.
In view of the declining inflow of foreign currency, the BCV cannot spend foreign reserves. Assets already declined 22 percent due to transfers to the National Development Fund (Fonden), and foreign exchange reserves must be used to pay imports in 2009 and foreign debt.
Economist José Guerra said that although the government wants to establish restrictions in the market, it is impossible to halt it. "The Central Bank has not enough foreign exchange reserves, and the interest rates are negative. This discourages savings and people do not want to save in Venezuelan bolivars."
Venezuela´s Securities and Exchange Commission blocks three brokerage houses
The Venezuelan Securities and Exchange Commission (CNV) ordered the intervention of three brokerage firms, namely Italbursátil, Banvalor and Positiva.
On its official website, the CNV said that the blocked financial institutions would cease operations according to the provisions of the Law on Capital Markets.
The CNV regulations do not mention the causes of the interventions, although the government has been closely monitoring the sector in the last few weeks.
May 11
Changes to law against exchange offenses pave the way to regulate the swap market
President Hugo Chávez said last weekend that the skyrocketing price of the US dollar in the swap market is speculative, adding that "speculators will get their medicine" eventually. This was a preamble to the announcement that the government is preparing economic restrictions. In fact, the National Assembly will take the first step: the amendment to the Law against Exchange Offenses.
Ricardo Sanguino, the president of the Committee on Finance, National Assembly, said that such reform would allow for correction of "some transactions made with securities that distort exchange rate stability."
The proposed changes envisage amendment of three articles, but Sanguino would not elaborate. The Venezuelan lawmaker said in a press release that the reform would be approved on May 11 in a first reading. He added that the amendment "will be passed this week and it will have a regulatory urgency."
Between May 6-7, the Ministry of Planning and Finance and the Central Bank of Venezuela defined measures to regulate the swap market. Officials with the Ministry of Finance were betting on regulations, while BCV officials suggested issuing US dollar-denominated bonds.
Following Sanguino´s announcement, however, the first step will be to further regulate transactions in the swap market, which continued its upward trend on May 10 due high demand and limited supply of US dollars.
In his speeches, the Venezuelan ruler rejected the transactions made by brokerage firms, as well as the bids of US dollar-denominated bonds. Therefore, he ordered his economic team to take the relevant steps to address the issue.
As a result, government actions will focus partly on brokerage houses. Analysts believe that these measures will have an additional impact on the behavior of the swap market.
Last week, regulators monitored brokerage houses, and transactions were halted. As a result, the market has become affected. On May 7, foreign exchange operations were resumed, but the market continued its upward trend. On May 10, financial authorities halted the operations of three brokerage houses. According to financial sources, although there were some transactions in the market, the supply of dollars was not enough.
The Executive branch of government has said that there is a highly speculative component in the market, but one factor has influenced its behavior: the lower inflow of foreign currency, which limits the Central Bank´s leeway.
In addition to lower inflow of foreign currency, the US dollars entering the country are used to pay pending foreign exchange allocations. Chávez has acknowledged that the country is paying debts that were due in 2009.
Venezuelan government rules out dismantling swap market
The Venezuelan government does not intend to dismantle the swap market of securities that set the price of the parallel dollar, a senior government official told Reuters on May 11. The source added that Venezuela is discussing a plan to ensure that Venezuelan bolivar exchange rate to the US dollar remains "rational."
In the last few weeks, the unofficial exchange rate has increased well above the regulated exchange rates of VEB 4.3 and 2.6 per US dollar, due to growing demand for foreign exchange and low supply of US dollars, amid stringent exchange controls in force since 2003.
"We are working on a methodology that will help us to keep the runaway exchange rate in the parallel market at a rational level, but there are no plans at all to eliminate the swap market," said the source, who spoke under condition of anonymity. One of options being examined is the creation of a price band linked to the price of sovereign bonds.
Venezuelan govn´t denies resignation of Finance Minister
Sources of the Venezuelan Ministry of Planning and Finance on May 11 said that Minister Jorge Giordani has not resigned.
A rumor circulated on May 11 according to which the Venezuelan Minister of Finance had resigned following the implementation of the measures proposed to regulate the swap market.
Nevertheless, Giordani was responsible for promoting the reform of the Law against Exchange Offenses, which states that the Central Bank of Venezuela (BCV) will be the agency responsible for arranging the purchase and sale of US dollar-denominated securities.
May 12
Central Bank to manage operations in swap market
Under the proposed amendment to the Law against Exchange Offenses, the Central Bank of Venezuela (BCV) will centralize operations in the exchange market, as it will take control of purchases and sales of US dollar-denominated securities, in an effort to control the swap market.
The National Assembly approved on May 11 in a first reading the draft amendment, under which the BCV powers to manage the foreign exchange system are enlarged.
Under the draft amendment, the BCV will have exclusive competence on currency trading either in hard currency or in securities.
Congressman Ricardo Sanguino, the president of the National Assembly´s Finance Committee, said that according to the provisions of the law, the Central Bank would decide who could take part in the market. In this sense, he added that "banks will largely be the institutions carrying out the operations."
Referring to brokerage firms, he said that "there will be a restricted trading floor (...) The BCV will designate the firms (that will take part in the transactions). Only serious brokerage firms will participate."
The BCV, under resolutions, will notify brokers about the procedures and conditions for purchases and sales of securities.
According to the explanation provided by the lawmaker, financial institutions may sell the bonds to the BCV before maturity and may continue offering them to third parties. He reiterated that the goal "is to get to know who are participating in the market, and who are purchasing bonds, and at which prices."
Sanguino stressed that "foreign exchange-denominated bonds must be used to settle debts abroad, not to create speculative securities."
According to the draft amendment, Venezuela´s Securities and Exchange Commission is expected to oversee and monitor operations.
Amendment to the legal instrument was prompted by skyrocketing prices of the US dollar in the swap market. Authorities attributed the increase to speculation in the market, and claimed that actions were needed.
Analysts said that the situation is the result of lower supply of US dollars and the fact that the Central Bank has little room to step in the swap market, as it has an obligation to preserve foreign reserves, which have decreased by 22 percent so far this year.
During the debate to pass the amendment in a first reading, opposition congressmen, such as Deputy Pastora Medina, said that the inflow of foreign currency has declined because state-run oil firm Pdvsa has not sold all the petrodollars to the BCV.
Central Bank of Venezuela to choose exchange houses
Ricardo Sanguino, the president of the National Assembly´s Finance Committee, said that the Central Bank of Venezuela would choose a small group of brokerage houses to purchase and sell US dollars in the swap market.
In Venezuela, there are 63 brokerage houses and 44 brokerage firms, and operating will be hard for those that are not chosen by the Central Bank.
"If you can not make transactions in the swap market, it will be very difficult, if not impossible, to maintain the operating structure, to continue working and justify the number of workers," said the president of a brokerage firm who asked to remain anonymous.
The purchase and sale of shares have been reduced to a minimum in Caracas Stock Exchange.
May 13
Venezuelan govn´t to take additional measures to curb dollar in swap market
Given recent developments in the swap market, Venezuela´s President Hugo Chávez warned on May 12 that "speculators will be hardly hit." In fact, some measures are under way.
The Committee on Finance, National Assembly, okayed the draft reform of the Law against Exchange Offenses, which is expected to be passed on May 13 in a plenary session. Further, the Central Bank of Venezuela is likely to make additional efforts to regulate the swap market.
Ricardo Sanguino, the president of the Committee on Finance, said at the end of the regular meeting of the Committee that if the amendment of the law failed to correct market distortions, the BCV would take further decisions. He would not elaborate.
Congressmen approved the amendment to the Law against Exchange Offenses, under which the BCV will centralize trading of US dollar-denominated securities.
Before the meeting, the lawmakers were ready to make some changes to the articles. However, they later decided to leave the text unchanged.
When the law comes into force, the Central Bank, through several procedures, shall designate the institutions that will be participating in the market. Authorities are targeting a greater participation of banks in the swap market, thus restricting the activities of brokerage firms.
Amendment to the Law against Exchange Offenses has the Congress blessing
The National Assembly (AN) approved on May 13 the Law against Exchange Offenses, aimed at centralizing the purchase of foreign currency-denominated notes at the Central Bank of Venezuela (BCV).
The legal instrument will be referred to the Executive Office to be released in the Official Gazette. This could be made immediately, in view of the government decision to regulate the swap market.
Under the amendment, the BCV is to decide which banks will take part in the market. As for brokerage firms, trading floor will be restricted.
May 14
Forex legislation to damage Venezuela´s ratings
The law on foreign exchange crimes passed in Venezuela could adversely affect growth prospects and increase the inflation rate, undermining the country´s ability to pay its debt, said on May 14 the credit rating agency Fitch Ratings.
Venezuela´s National Assembly passed on May 13 a legal reform aimed at curbing the increase of the US dollar in the swap market. Analysts have said that this measure would eliminate the foreign exchange parallel market and would establish an illegal market where the US dollar could skyrocket, Reuters reported.
