Venezuela’s central bank plans to increase sales of dollar-denominated bonds

Venezuela’s central bank plans to increase sales of dollar-denominated bonds that have to become the leading provider of foreign exchange to importers in the coming year, a government official said.

Central Bank of Venezuela will sell up to $ 40 million a day in government bonds and the state oil company to supply the foreign exchange market Sitma for at least the first three months of the year, said the official, who asked not to be identified because t is not 'authorized to speak publicly. In June the government ordered commercial banks to sell dollar-denominated bonds to provide BRT.

President Hugo Chávez tightened controls to curb capital flight in May and the new rules imposed on currency transactions in January, which limited the sale of dollars. The central bank's plan signals that the supply of dollars are tight and that the government will have to issue more bonds to avoid running out of the U.S. currency, said Milton Guzmán, an economist at Caracas-based consulting firm Guzman Fortuny & Associates.

"Sitma government needs to keep the sale of bonds to power the system, and can even see the government buy back bonds to sell in the market," Guzman said in a telephone interview today. "The central bank should have enough to supply the market until March."

Bond transactions

One of the ways in which the government supplies of dollars to importers is allowing them to buy dollar-denominated debt with Bs in the system and then Sitma dollars by selling securities abroad. Sitma has negotiated $ 4,660,000,000 in bonds since June 9, when it created the market at a average rate of 5.3 per dollar.

The market trading securities 78.5 million U.S. dollars today, the second highest amount since the market opened, including 32.5 million U.S. dollars of government benchmark bonds maturing in 2027.

The yields of 9.25 percent due in 2027 fell 20 basis points to 13.12 percent at 3:28 pm in New York, according to JPMorgan Chase & Co. The price rose 1 cent to 74 cents.

The central bank is now the leading provider Sitma dollars and buy the $ 2 billion of bonds that Petroleos de Venezuela SA plans to sell at the end of the year, the official said yesterday in Caracas.

Barclays Capital estimates that the bank has about $ 3.5 billion of bonds denominated in dollars that could be used to feed the foreign exchange market.

The devaluation of the bolivar

Chavez, the Venezuelan bolivar devalued by 50 percent in January, has created a multi-level exchange, where some companies are able to buy dollars at 2.6 or 4.3 to the dollar. Companies that do not get government approval to buy dollars in fees Sitma can use to buy up to $ 50,000 per day.

A black market there are also cases in which pay up to 8.4 per dollar in the street.

The currency board, known as Cadivi, deals with dollar sales at 2.6 and 4.3 per dollar, which are made to companies that import food, medicine and other goods deemed important by the government . Cadivi has approved the sale of 33.4 billion U.S. dollars this year, or about 123.1 million U.S. dollars a day, according to a statement by e-mail sent yesterday.

Multinational expected to repatriate dividends from Venezuela will not be able to do so through Sitma and Cadivi have to wait for the approval of their applications, the official said.

Sitma Funds

While Sitma only funds a quarter of all imports into the country, the market has helped the country to prevent shortages, Bret Rosen, Latin American debt strategist at Standard Chartered Bank in New York, said. The concern among investors, said Rosen, is that the government and PDVSA will continue to sell bonds to manage the foreign exchange needs.

"We have had several billion dollars of the issues that are right to be primordial to feed the foreign exchange market," Rosen said in a telephone interview. "That risk is a continuous supply of the reason why Venezuela spreads have remained high."

The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries fell 24 basis points, or 0.24 percentage point for 1039 at 3:28 pm New York time, according to JPMorgan Chase & Co. This is the most widespread among emerging market countries.

The government and PDVSA has sold a total of $ 7.6 billion of bonds this year to meet demand for dollars and their own funding needs. Local investors buy the securities in bolivars and sell them abroad to earn foreign exchange.

Barclays is expected that the government and PDVSA will sell a total of $ 10 billion of bonds in 2011 and devalue the three fixed rates by 15 percent, according to a research report dated December 01, Alejandro Grisanti and Alejandro Arreaza.

The decision to devalue the exchange rate is a strictly political decision, not a misaligned currency, Daniel Volberg Morgan Stanley said in a telephone interview.

"Sitma has played the role of alleviating some of the most acute pressures of demand for dollars," said Volberg, America's Morgan Stanley economist in America, by phone from New York.