Wednesday, 14 January 2009

Rumours that PDVSA is Selling Dollars in Parallel Dollar Market Abound. Will This Help Chavez Avert a Devaluation of the Bolivar?

I met former PDVSA and Venezuelan oil executives in recent days. Despite the tone of preoccupation that I felt when they referred to the current financial situation of the company, one thing particularly called up my attention: speculation over the growing extent of dollar sales carried out by PDVSA in the parallel exchange market.

For weeks, PDVSA has been selling U.S. dollars into the black market, and this is not new to those who follow Venezuelan affairs. As some of you might know, the spread between the official exchange rate of 2.15 bolivares fuertes per dollar and the black market dollar worth 5.5 bolivares fuertes (as quoted by a few sources in the Caracas currency market circles) is widening -- partly fueled by speculation the government will devalue the currency by mid-year. The government needs urgently the PDVSA dollars to keep the existing currency regime in full operation and scare away expectations of a depreciation of the bolivar fuerte, while PDVSA needs more bolivares to pay for increasing taxes, para-fiscal contributions and royalty payments the Chavez administration has imposed upon the company.

One of the former petro-gurus was emphatic: he doesn't expect the government to devalue or raise domestic fuel prices to ease PDVSA's beleaguered finances. I agree with him to some point. Both would be the last things that President Chavez would like to do in a political moment like this. So, if what the source says proves accurate, PDVSA is bound to enter a flurry of greenbacks in the currency markets in coming days to ease political and economic tension, especially now that President Hugo Chavez is trying to win approval for a referendum before March. PDVSA is still being paid for oil shipments from October and November last year, when prices were spiralling down but still remained quite high. The Venezuelan basket closed last week at $37 dollars, down 63 percent from Sept. 30. There is still money coming in, so, black market operators should expect downward pressures on the dollar spot market until the start of February.

One instrument that the government has resorted to in repeated occasions and that bore some short-term results was the offering of dollar-denominated debt in the local market to investors. The peculiarity of this instrument is that the buyer can pay for those bonds in bolivares fuertes and at the official exchange rate, to then sell them in the parallel market. The government is likely to resume those sales, in coming weeks.

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