Venezuela this week launched a third official exchange rate in the latest attempt by the Socialist government of President Hugo Chávez to halt a rapid depreciation of the bolivar and capital flight.
Although the market welcomes the injection of a dose of transparency in the exchange rate system, the government collects a poor record in managing foreign exchange allocation and critics say that there will be sufficient liquidity to meet the demand.
Some foreign investors are cautious about new debt that the Government could use to feed the new system linked to the prices of government bonds.
Here are some questions and answers about the new foreign exchange market:
WHY VENEZUELA LAUNCHES A NEW KIND OF CHANGE?
Chavez wants to halt the rapid depreciation of the bolivar, which is pushing inflation to three months after parliamentary elections. Venezuela's inflation is among the highest in the world, reaching 31 percent annualized to May.
With exchange controls prevailing in the country, including two official rates, the Government decided last month to close the market "swap", obtained through the exchange of securities.
The new market released Wednesday is also based on the prices of government bonds, but under the auspices and control of the Central Bank of Venezuela (BCV).
The government blames the weakness of the bolivar to speculators "predatory," looking to make a quick profit, and ensures that the new market will be transparent enough to fend off speculation.
The BCV has said that the speculation was the bulk of demand in the Old Marketplace "parallel" and assured that the new conveyor system between 5,000 and 6,000 million dollars this year, compared with 30,000 million market parallel.
large extent, the bolivar was sunk by the low supply of dollars resulting from lower oil revenues of OPEC member country.
prices and oil production have not yet recovered to 2008 levels and the state oil company PDVSA has transferred less money to the Central Bank this year.
addition, the bolivar is being undermined by economic distortions such as savings rates below inflation fueling capital flight and the antagonism shown by Chavez to the private sector.
HOW DOES THE MARKET? Operating
Monday to Friday from 9.30 am (1300 GMT) to noon (1630 GMT), the new market is by the BCV and derived from the contributions shown in sovereign bonds abroad and PDVSA and its price in Bolivars Banded fixed by the issuer.
Individuals and companies seeking dollars should issue a request for at least $ 1,000 from a bank or savings institutions authorized. The request may be rejected by the Central Bank if it decides that the transaction is not "necessary."
The companies fear that the authorities can consider coverage of inflation or other foreign currency positions as unnecessary.
still not clear how the system for people, but the banks could create new services for its customers to liquidate positions in foreign bonds and deposit their earnings in foreign accounts.
a daily validate BCV price range.
The mechanism for this range is apparently arbitrary, but based in part on the contributions of global bonds in Venezuela and PDVSA.
On Wednesday, the first day of the new platform, the higher exchange rate was of 5.27 bolivar / dollar, much less than the 8 bolivar / dollar traded closed market in May. Only 5 million were traded on the first day, but the figure would rise quickly.
remains to be seen whether the system is sustainable. Critics say that the bondholders will have no incentive to supply the market if the price is artificially low.
The Government believes that importers need 2,500 million dollars to the market in 2010, in addition to 6,000 million in retained earnings repatriated from foreign companies.
WHAT ARE THE RISKS?
The Government is betting high this year. The ruling United Socialist Party of Venezuela (PSUV) expects to retain its majority in legislative elections in September, but risks losing the support of voters if the price of food keeps rising.
If the new market is not liquid enough, importers illegally acquire U.S. dollars at a higher rate and carried over the high costs to consumers in a country that imports most of its consumption.
Venezuelan bond yields touched Global 2027 to 15 percent during the last weeks of uncertainty over currency, fueled by the closure of the old market.
The cost of insuring debt Venezuela against credit default increased to 1488 basis points from 897 basis points in early May.
differential fell on Wednesday, but the Venezuelan debt is still considered by far the riskiest in the world by that measure.
bondholders are preparing to take the risk in its new sovereign issues this year, which could be launched to supply the foreign exchange market.
However, many economists believe that Venezuelan debt spreads are exaggerated and that the political risk to the elections is offset by the short-term solvency the country.
A default is unlikely in the short term.
A liquidity crisis could erupt next year if the economy does not improve, but the country maintains a relatively low proportion of debt to Gross Domestic Product. In addition, Chávez has maintained the previous debt payments difficult economic conditions. (Reuters)
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