Venezuela’s Currency Platform Dive

Venezuelan bonds continued as the main EMBI year-to-date positive performer after President Chavez ordered a long-awaited one-third devaluation from his Cuba sickbed bringing the official value to 6.3 to the dollar, as the SITME trading platform was also disbanded leaving no hard currency  outlet other than the capital control authority which has dribbled out only $75 million daily. The resulting dollar-denominated oil windfall could halve the fiscal deficit to GDP ratio, but will aggravate near 30 percent inflation and imported goods shortages as well as the bottom line of consumer goods multinationals still operating there, including giants like Colgate. Domestic debt outstanding also falls by 30 percent in international terms as that route may be preferred for sovereign and state petroleum enterprise borrowing. The central bank and finance ministry announced the changes under the temporary chief executive capacity of Vice President Maduro who has been in charge since the mid-January absentee inauguration. The opposition labeled the moves “economic destruction” as representatives continue to call for Chavez’s resignation and new elections on constitutional grounds. Military leaders have not intervened outright in the succession issue, as comparisons are increasingly drawn with Cuba’s transition where power was unilaterally transferred. However the island’s Communist party brass recently agreed to future term limits and elevating a younger generation in the hierarchy. It may also seek alternative concessional oil providers to Caracas’ Petrocaribe scheme, with Angola reportedly a primary target. In the region Ecuador may be worth courting as President Correa cruised to re-election on the slogan of “hope replacing despair.” Other candidates include a banker and former general, but with government revenue tripling over his tenure social spending has cut the poverty rate to 25 percent. While cracking down on the courts and media, he has hinted at a return to external bond markets after deliberate default as $3.5 billion in Chinese loans are to be repaid with natural resources. His campaign rhetoric regularly lambastes “savage capitalism” although the US dollar has been in use for over a decade.

In Andean contrast the sol grab is pronounced in Peru as direct and portfolio investment pour in and central bank intervention at almost $1 billion a week in mid-January turns more aggressive. The foreign share of local government debt is 60 percent, and appreciation may hurt exporters whose shares have suffered under Lima exchange retreat so far in 2013. Although economic growth tops the continent at 6 percent, the current account deficit has doubled to 4 percent of GDP and annual credit expansion has been 20 percent. Bank reserve requirements have again been raised and no new global bonds will be issued this year. On the political front President Humala retains 50 percent popularity despite local community mining project disputes as he favors a “balanced” platform protecting the poor while propelling a commodity boom to rival nearby Chile’s.