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Chavez Currency Market Takeover Spurs Bank Lines for Dollars

Every weekday, Ricardo Matamoros wakes up before dawn, travels to a branch of Banco Mercantil in Caracas and gets in line seeking to buy dollars from the central bank. It’s a futile effort, he says.

“They haven’t approved a single one of my requests during 45 days,” said Matamoros, 51, the president of a film production company, as he stood outside the bank on Feb. 7. “Let’s see if it happens today since I’m second in line.”

The U.S. dollar is becoming scarce in Venezuela nine months after President Hugo Chavez took over the currency market to slow capital flight and fight inflation. Companies including Kellogg Co. and Pernod Ricard SA have reduced imports since the central bank introduced a currency trading system that limits purchases to $50,000 a day.

The rationing may lead Chavez to further devalue the bolivar, said Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc. in New York. Chavez devalued the currency twice in the past 13 months, pushing inflation to a five-month high of 28.5 percent in January.

“There’s no doubt this foreign exchange regime is dysfunctional,” Ramos said in a telephone interview.

The government set two exchange rates. Companies can pay 5.3 bolivars at the central bank currency market, known as Sitme, or the official rate of 4.3 bolivars at the government Foreign Exchange Board, called Cadivi. Because of rationing at the official rate, the bolivar trades at more than 8 per dollar in the black market.

Dollar Supply Falls

In the central bank market, dollar supply has fallen 26 percent this year to $28 million a day, slowing commerce in South America’s largest oil producer. Goldman’s Ramos said Venezuela may devalue the Sitme rate to 6 per dollar this year.

The central bank said that $26.1 million in dollar- denominated bonds were traded at Sitme today, and that $6.07 billion has been sold since the market opened in June.

While Chavez received about $55 billion from oil exports in 2010, according to Barclays Capital estimates, he’s rationing the sale of dollars for imports and allotments for Venezuelans traveling abroad as part of currency controls to protect international reserves. Reserves have fallen 18 percent since the beginning of 2010.

Private imports tumbled 22 percent last year through September, according to the latest data available, as companies struggle to obtain dollars to buy goods considered non-essential such as cars, liquor and electronics. Total imports plunged to $38 billion last year from a high of $49.5 billion in 2008.
Trading Volumes

Dollar trading volumes are below the $30 million to $40 million range that central bank director Armando Leon said would be sold. A central bank official in Caracas who asked to not be identified for internal policy said the supply of dollars is falling because fewer are being sold by private companies needing local currency.

Kellogg, the Battle Creek, Michigan-based maker of Froot Loops cereal and Soft Batch cookies, said on Feb. 3 that it can no longer “cost effectively import” in Venezuela. A Kellogg’s unit bought an average of $15.8 million of dollars per year from the government between 2004 and 2009, according to Cadivi’s website. Last year, it purchased $2.6 million.

Pernod Ricard said in a Feb. 17 earnings report that currency hurdles led to a “sharp decline” in sales of Scotch whisky in Venezuela. The Paris-based spirits maker’s local units bought an average of $5.1 million a year from 2004 to 2009 and didn’t purchase dollars in 2010, according to Cadivi.

Seeking to Import

Outside a Banco Mercantil branch in downtown Caracas at 8 p.m. on a weekday, Ander Penaloza is second in line to hold a spot for his employer. Mercantil, one of about 20 institutions that have government authorization to sell dollars, won’t open until 8 a.m. the next day.

“If we don’t have the dollars, we can’t import, and if we can’t import the company closes,” Penaloza, who works for a company that sells brand name watches, said in an interview. “I can’t allow myself to go without a job.”

Chavez’s currency policy creates frustration, said Jorge Botti, a partner at telecommunications company Imr Netsystem CA in Caracas.

“My partners go to the bank everyday at 5 a.m. to get in line and maybe once a month are they given dollars for imports,” Botti said in a telephone interview. “Managers are spending more time in bank queues than working to make the company more efficient.”
Brokerage Ban

An official at the Banking Association of Venezuela declined to comment and e-mails and phone calls seeking comment from Banco Mercantil weren’t returned.

The government banned brokerages from trading foreign currency in May. Companies and individuals were able to buy dollars at rates as high as 8.2 bolivars, while the official rate was 4.3. About $100 million changed hands a day before the ban, said Russell Dallen, head trader at Caracas Capital Markets at BBO Financial Services.

Matamoros, the film producer, said he won’t give up on his quest for dollars. He has cut his requests to $10,000 a day from $25,000.

“The guy ahead of me in line today got here at 4:30 a.m., but I won’t come until the sun comes out because of the crime,” Matamoros said. “I stand in line myself because my company is small.”

To contact the reporters on this story: Corina Rodriguez Pons in Caracas at [e-mail]; Daniel Cancel in Caracas at [e-mail].

To contact the editor responsible for this story: David Papadopoulos at [e-mail]

http://www.bloomberg.com/news/2011-02-21/chavez-s-dysfunctional-currency-market-spurs-queues-at-banks-for-dollars.html