Venezuela lifts forex controls, cash dries up

  • Market: Crude oil, Oil products
  • 08/05/19

Foreign oil companies operating in Venezuela could benefit from a new central bank resolution that lifts exchange controls by reducing their local operating costs, financial sector executives say.

Resolution No. 19-05-01 dated 6 May effectively puts the government out of the foreign exchange business after 16 years of controls. Commercial banks and exchange houses had been banned from forex trading since the controls were first enacted in 2003 in a failed effort to stabilize Venezuela's currency and discourage capital flight.

But the central bank, which was [sanctioned by the US government](https://www.argusmedia.com/en/news/1887237-us-imposes-sanctions-on-venezuelas-central-bank

) in April, has not abolished its Dicom currency auction system, leaving the door open to re-intervene in the exchange market at a later date.

The new measure implicitly acknowledges that the central bank has exhausted its liquid hard currency. Total official hard currency reserves as of 6 May were $8.53bn, but only a fraction of this is liquid.

The bank will not supply dollars to the banks and exchange houses, hoping instead that dollars transacted by banks and exchange houses will be supplied by the private sector, mainly foreign oil companies. But up to now, the oil companies have conducted all currency transactions offshore, and there is no sign that they would do any differently through private banking channels. As a result, the new measure is unlikely to lead to a meaningful increase in the supply of dollars entering Venezuela's depleted financial system.

The resolution also tacitly recognizes the primacy of the black market over 11 different government currency control mechanisms created and abandoned since 2003. In recent years, the official controlled rate has creeped up to the parallel rate anyway. According to the latest exchange rate data, the Dicom rate is 5,200 bolivars per dollar, while the black market rate is Bs5,886/USD.

The effective depreciation of the currency could benefit Russian state-controlled Rosneft, Chinese state-owned CNPC and western companies Chevron, Repsol, Eni, Total, Equinor and Shell by reducing the costs of labor, supplies and services in Venezuela. Companies consulted by Argus declined to comment.

But state-owned oil company PdV, whose exports provide almost all government revenue, probably will not be allowed to make unrestricted foreign currency transactions through the private-sector channels. The company is also subject to US sanctions.

Details about how the new private-sector system will work remain sketchy. The mechanism effectively floats the exchange rate, with buy/sell prices negotiated individually by banks and exchange houses and their corporate clients.

A daily referential exchange rate would be posted by the central bank, consisting of the average price of all individual currency transactions reported each day to the bank by the commercial banks and exchange houses.

The de facto end of government exchange controls would make all imports more expensive in local currency. Venezuela's economy is heavily dependent on imports as two decades of state controls and nationalizations have wiped out local suppliers.

Local currency traders said the foreign currency trading desks could benefit larger oil and non-oil companies in need of US dollars and euros to pay for imports, repatriate locally generated profits and honor overseas debts.


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