Venezuela’s Central Bank to relaunch bond market with daily band of permitted prices

Venezuela to relaunch market for currency exchange

CARACAS, Venezuela — The Central Bank on Wednesday will relaunch the bond market widely used for foreign currency trading in Venezuela under new restrictions that will include a band of permitted prices updated each day.

Central Bank president Nelson Merentes said Tuesday that enough government bonds are available to meet expected demand as the new system opens for trading.

The market controlled by the Central Bank will allow Venezuelans and businesses to buy bonds in local currency and sell them for foreign currency. The market has been an important outlet for dollars and was shut down by the government three weeks ago to impose tighter controls.

Speaking to reporters, Merentes didn’t give details about the maximum or minimum prices the Central Bank will set. He said the rates will be posted daily on the Central Bank’s website.

The government ordered a halt to bond trading May 19 as it moved to stem the falling value of the Venezuelan bolivar on the bond market.

President Hugo Chavez’s government maintains strict currency controls aimed at preventing capital flight and sets official exchange rates.

But the market in dollar-denominated bonds that people can buy with bolivars has been a legal route for trading currency — and a crucial source of hard currency for businesses that could not get dollars at the low official rates.

The government took steps to control the bond market after Chavez blamed speculative trading for eroding the bolivar’s value. Before the government intervened, the currency had fallen to about half the official rate of 4.30 to the dollar for nonessential goods.

The new bond trading system will translate into the creation of a third exchange rate. The government already has a second preferred exchange rate of 2.60 bolivars to the dollar for imports of priority items such as food and medicine.

Merentes said there is an “important stock” of bonds available to feed the market.

“The magnitude that we’ve estimated for demand — not speculative but real for the economy to grow stronger — is around $5 billion, $6 billion annually,” Merentes said at a news conference.

He said that private banks have about $2 billion in government bonds of the sort to be used in the market and that state banks have an additional $700 million in bonds ready to offer.

Experts have predicted there could be a significant shortage of bonds because of high demand. The Caracas-based consulting firm Ecoanalitica estimates between $15 billion and $17 billion in bonds will be needed to meet demand this year.

Some economists expect the new restrictions could contribute to inflation, which at 31.2 percent is by far the highest in Latin America.

Venezuela imports much of its consumer goods as well as parts and machinery for its factories, and in the past between 30 percent and 40 percent of imports were being purchased through trading in government bonds. Some business leaders have warned that many companies are close to running out of inventory because they haven’t been able to legally buy imports for about three weeks.

In the past, private brokerage firms largely handled trading in the bond market. But they were shut out of the lucrative business last month when the National Assembly, controlled by Chavez allies, approved measures granting the Central Bank exclusive control of bond trading.

Under the new system, commercial banks will take requests for trades from individuals and companies and process the transactions through the Central Bank.

Since trading was halted last month, securities regulators have taken over management of 36 brokerage firms while investigating alleged violations of currency controls or other irregularities. At least nine executives of those companies have been arrested.