Chávez Struggles to Tame Black-Market Dollar Strength
By DAN MOLINSKI
CARACAS, Venezuela—President Hugo Chávez has vowed to strengthen Venezuela's currency 40% in the black market, but he is finding the U.S. currency a tough opponent.
Nearly two weeks after devaluing the bolivar's fixed official rate to 4.3 bolivars per dollar from 2.15 bolivars, its value in the "parallel," or black, market, which according to Mr. Chávez would soon "revalue" sharply, is virtually unchanged. The parallel market is a pseudo-legal market that involves brokered desk trading but isn't formally authorized or regulated by authorities.
If the government cannot strengthen the bolivar, or, worse, if the currency begins to weaken sharply, that could threaten a rise in inflation already running near 30% annually and would put more pressure on an economy mired in recession.
Not even a flood of government-issued, dollar-denominated 90-day bonds has been able to unhinge the bolivar from its range-bound trading over the past couple of weeks.
"I think the government is surprised" by the bolivar's inability to rise faster in the black market, said a Caracas currency trader.
The rate in the black market closed Wednesday at 6.0 bolivars to the dollar. That puts the bolivar only a tad stronger than the 6.05 bolivars-per-dollar rate it was on Jan. 7, the day before Mr. Chávez devalued it.
Venezuela's strictly regulated official currency-exchange system has two pegged rates, one at 2.6 bolivars per dollar for purchases of "essential" imports such as basic foods and medicine, and another at 4.3 bolivars per dollar that is designed for imports of most other goods, everything from furniture to tobacco.
Receiving dollars at either of those rates requires government authorization, which is hard to obtain and often takes months even if approval is given. That has opened the door to the unregulated black market, which has become the most common way for Venezuelan companies and individuals to access greenbacks in a timely and efficient, albeit more costly, manner.
On Sunday, Mr. Chávez said that by devaluing the official rate to 4.3 bolivars per dollar his government also is setting out to revalue the "parallel" market rate to the 4.3-bolivar rate, which would imply a 40% gain from its predevaluation level. "What we've really done is a revaluation, not a devaluation," he said.
In theory, it shouldn't be too difficult to boost the bolivar's black-market rate, because the government controls the sale of virtually all the dollars in the country, whether in official or unofficial markets.
It simply could increase the amount of dollars it sells in the black market, which should drive the bolivar higher and the dollar lower.
That is exactly what the Chávez government has been trying to do in the past two weeks. It has held three local auctions of dollar-denominated bonds this month, including a $40 million sale Tuesday, with the stated aim of strengthening the bolivar in the black market.
Still, the bolivar has barely budged. "The market ate up that $40 million rather quickly," the Caracas trader said.
That could suggest the government isn't increasing its authorizations of dollar sales at the 4.3-bolivar or 2.6-bolivar rates, as was expected when the devaluation was announced. This would force importers to head back to the black market for foreign-currency needs, and thus increase demand for dollars, which would explain the greenback's toughness.
Officials at Cadivi, the state's dollar-management agency, weren't available to comment on how many dollars they have sold recently.
The bolivar's failure to rise faster, and the fact that the government is issuing short-term debt to boost dollar supply, also might suggest the government doesn't have enough dollars to meet demand in both the black and official markets.
One problem might be a lack of confidence in the bolivar, which has never been strong, even after Mr. Chávez renamed it the "strong bolivar" two years ago and lopped off three zeros from the currency.
The latest devaluation likely further eroded confidence in the currency, which already was being questioned amid the recession, fiscal deficits and the government's inability to meet residents' electricity and water needs in recent months due to a lack on investment in those sectors.
Moreover, as bank-deposit rates are about half the level of inflation, Venezuelans have little incentive to keep bolivars.
So, those with access to dollar-based U.S. bank accounts are trading in bolivars for dollars and shipping them overseas.
Venezuela gets the lion's share of its dollars from oil sales. But global oil prices are about half off highs seen in 2008, and analysts warn that oil production is slipping in Venezuela, threatening revenue further.
Still, if global oil prices can remain near their current level near $80 a barrel and the Chávez government mends its free-spending ways, the market's dollar needs could be met.
Otherwise, to dent the dollar's strength, the government will have to dip into the central bank's foreign reserves, which amounted to $35 billion two weeks ago, and sell more greenbacks.
But Mr. Chávez apparently has other ideas for the reserves.
On the same day Mr. Chávez devalued the currency, he also ordered $7 billion of the reserves set aside for social spending. Deflating the reserves cushion by one-fifth for more spending rather than meeting dollar demand isn't bolstering the bolivar in the black market.
By DAN MOLINSKI
CARACAS, Venezuela—President Hugo Chávez has vowed to strengthen Venezuela's currency 40% in the black market, but he is finding the U.S. currency a tough opponent.
Nearly two weeks after devaluing the bolivar's fixed official rate to 4.3 bolivars per dollar from 2.15 bolivars, its value in the "parallel," or black, market, which according to Mr. Chávez would soon "revalue" sharply, is virtually unchanged. The parallel market is a pseudo-legal market that involves brokered desk trading but isn't formally authorized or regulated by authorities.
If the government cannot strengthen the bolivar, or, worse, if the currency begins to weaken sharply, that could threaten a rise in inflation already running near 30% annually and would put more pressure on an economy mired in recession.
Not even a flood of government-issued, dollar-denominated 90-day bonds has been able to unhinge the bolivar from its range-bound trading over the past couple of weeks.
"I think the government is surprised" by the bolivar's inability to rise faster in the black market, said a Caracas currency trader.
The rate in the black market closed Wednesday at 6.0 bolivars to the dollar. That puts the bolivar only a tad stronger than the 6.05 bolivars-per-dollar rate it was on Jan. 7, the day before Mr. Chávez devalued it.
Venezuela's strictly regulated official currency-exchange system has two pegged rates, one at 2.6 bolivars per dollar for purchases of "essential" imports such as basic foods and medicine, and another at 4.3 bolivars per dollar that is designed for imports of most other goods, everything from furniture to tobacco.
Receiving dollars at either of those rates requires government authorization, which is hard to obtain and often takes months even if approval is given. That has opened the door to the unregulated black market, which has become the most common way for Venezuelan companies and individuals to access greenbacks in a timely and efficient, albeit more costly, manner.
On Sunday, Mr. Chávez said that by devaluing the official rate to 4.3 bolivars per dollar his government also is setting out to revalue the "parallel" market rate to the 4.3-bolivar rate, which would imply a 40% gain from its predevaluation level. "What we've really done is a revaluation, not a devaluation," he said.
In theory, it shouldn't be too difficult to boost the bolivar's black-market rate, because the government controls the sale of virtually all the dollars in the country, whether in official or unofficial markets.
It simply could increase the amount of dollars it sells in the black market, which should drive the bolivar higher and the dollar lower.
That is exactly what the Chávez government has been trying to do in the past two weeks. It has held three local auctions of dollar-denominated bonds this month, including a $40 million sale Tuesday, with the stated aim of strengthening the bolivar in the black market.
Still, the bolivar has barely budged. "The market ate up that $40 million rather quickly," the Caracas trader said.
That could suggest the government isn't increasing its authorizations of dollar sales at the 4.3-bolivar or 2.6-bolivar rates, as was expected when the devaluation was announced. This would force importers to head back to the black market for foreign-currency needs, and thus increase demand for dollars, which would explain the greenback's toughness.
Officials at Cadivi, the state's dollar-management agency, weren't available to comment on how many dollars they have sold recently.
The bolivar's failure to rise faster, and the fact that the government is issuing short-term debt to boost dollar supply, also might suggest the government doesn't have enough dollars to meet demand in both the black and official markets.
One problem might be a lack of confidence in the bolivar, which has never been strong, even after Mr. Chávez renamed it the "strong bolivar" two years ago and lopped off three zeros from the currency.
The latest devaluation likely further eroded confidence in the currency, which already was being questioned amid the recession, fiscal deficits and the government's inability to meet residents' electricity and water needs in recent months due to a lack on investment in those sectors.
Moreover, as bank-deposit rates are about half the level of inflation, Venezuelans have little incentive to keep bolivars.
So, those with access to dollar-based U.S. bank accounts are trading in bolivars for dollars and shipping them overseas.
Venezuela gets the lion's share of its dollars from oil sales. But global oil prices are about half off highs seen in 2008, and analysts warn that oil production is slipping in Venezuela, threatening revenue further.
Still, if global oil prices can remain near their current level near $80 a barrel and the Chávez government mends its free-spending ways, the market's dollar needs could be met.
Otherwise, to dent the dollar's strength, the government will have to dip into the central bank's foreign reserves, which amounted to $35 billion two weeks ago, and sell more greenbacks.
But Mr. Chávez apparently has other ideas for the reserves.
On the same day Mr. Chávez devalued the currency, he also ordered $7 billion of the reserves set aside for social spending. Deflating the reserves cushion by one-fifth for more spending rather than meeting dollar demand isn't bolstering the bolivar in the black market.
