Analysis: Bolivar slides on reform rumors

CARACAS, Venezuela, May 9 (UPI) -- Venezuela's currency, the bolivar, fell sharply in early trading against the U.S. dollar Thursday, further exacerbating the week's downward spiral.

The U.S. dollar closed at 954 bolivars after the third of the Central Bank's three daily dollar auctions Thursday, 8.3 percent down on Monday's opening rate of 881.

The slide of the Venezuelan bolivar reflects rumors in the oil-rich country that the government's new economic team is likely to reform the current exchange rate rules.

President Hugo Chavez appointed two economists, Tobias Nobrega and Felipe Perez, to head the finance ministry and the central planning office Sunday.

The business sector is hopeful Nobrega will end the Central Bank auctions, which maintain the bolivar at what many consider to be an artificially high level.

Venezuela's most important business association, Fedecamaras, called for the new economic team to change policy to be more "realistic," in a public statement made earlier this week.

"We hope the new minister of finance will manage monetary and exchange rate policy in a more realistic manner, thereby allowing necessary adjustments to take place," the statement read.

Chavez scrapped Venezuela's old system of exchange in early February and replaced it with a system of daily dollar auctions run by the Central Bank. The Central Bank currently makes a total of $60 million available to the markets every day in three separate auctions.

The Venezuelan authorities argued that the auction system would regulate dollar supplies and prevent a scarcity of currency from artificially driving up the exchange rate.

The system has successfully limited excessive fluctuations in the exchange rate, but critics argue it prevents the markets from deciding the true value of the bolivar against the dollar.

When the government first abandoned the exchange rate band system, most analysts predicted the bolivar would fall around 30 percent against the dollar.

The auction system, however, limited the overall fall in the bolivar's value to around 15 percent -- a figure many economists believe still does not reflect the currency's true value.

Many financial institutions and investors are therefore betting that any reform to the auction system will cause a new fall in the bolivar's value, and are rushing to buy dollars before the government's new economic team makes any official announcement about the future of the exchange rate.

Investors are also looking to shelter their funds in dollars in response to the continued poor performance of the Venezuelan economy. The unemployment rate is currently estimated at 15 percent. Inflation, driven by the falling value of the bolivar, reached 9.3 percent in the first quarter.

Meanwhile the country's business sector is struggling to cope with interest rates that are running at as much as 50 percent, and the Federation of Industry estimates that at least 25 percent of all small industrial firms could face bankruptcy in 2002 unless the situation improves.

"We have few illusions about the country's economic performance in the first quarter of 2002," Central Bank Director Domingo Maza Zavala said this week, refusing to rule out suggestions by analysts that the Venezuelan economy could record zero growth in 2002.

"Certainly, the growth rates we are observing are much weaker than we experienced last year," the Central Bank director said. "The situation is very complex, especially as there seems little chance we will reduce the fiscal deficit.

"The problem is that the income from petroleum exports is not sufficient to meet external and internal debt repayments as well as the costs of constitutional reforms, new spending plans and transfers to decentralized bodies," the director said.

The government's budgetary proposals for 2002 contemplate a deficit equivalent to around 3 percent of gross domestic product, but more recent estimates suggest the deficit could reach 7 percent by the end of the year.

The government still must negotiate a new round of public-sector pay claims. To date, Chavez has shown little enthusiasm for cutting public spending, particularly at a time when his government cannot afford to alienate its core working-class supporters.

Instead, the Chavez government has preferred to borrow, or, controversially, to raid its savings held in a Venezuelan investment fund.

In early January 2002 the government had $1.014 billion saved in the fund, but repeated withdrawals left it with just $49 million in early May. Francisco Rodriguez, head of the National Assembly's economic assessment office, said he was very concerned about the government's decision "to clean out the fund."

The economist added that legislation regulating the fund was specifically designed to prevent the government from withdrawing in one fiscal year more than two-thirds of the deposits made during the previous year.

"In the opinion of this office, the last withdrawal (in late April) of $300 million does not meet the terms of the regulatory legislation and is therefore an illegal transaction," Rodriguez said. "It is highly questionable that in just four months of financial operations the executive has withdrawn all the reserves it had saved in the fund."