Venezuela: Chávez bans brokerages

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By:
Jason Mitchell
Published on:

President tries to eliminate parallel FX market; Claims irregularities taking place

Chávez announces his threat to close brokerages on his weekly TV programme Alo Presidente

Chávez announces his threat to close brokerages on his weekly TV programme Alo Presidente 

Hugo Chávez, the president of Venezuela, has decided to ban securities brokerages to try to curb the parallel foreign exchange market and to stem the sharp depreciation of the country’s currency, the bolivar, this year.

During an appearance on state television on May 14, Chávez said he was prepared to close the brokerages – the larger of which are controlled by the nation’s main banks. He sees this as an essential measure for maintaining foreign exchange controls. The drastic step provoked fears that imports might be severely hindered, pushing inflation even higher and leading to further shortages of basic goods.

The government says it will introduce a new trading band for the bolivar’s value, in a market that has never been regulated before. The crawling band is expected to be between five and seven bolivars per US dollar. The government says it will continue an investigation into what it perceives to be irregularities among brokerages, which came to light following recent raids on several financial institutions’ offices.

Government control

Brokerages will be completely banned. The currency market will now be placed under the sole control of the central bank, which will decide which securities houses can participate in the new market. The market, which will use international bond prices as a reference point, was expected to take a few weeks to be established.

Chávez said on television: "If that whole mess of brokerages has to be eliminated, then they’ll be eliminated. This country doesn’t need them. Brokerages today are no longer places where [Venezuelan] paper can be traded. We’re going to hit them where it hurts."

The move puts paid to a swap market that had enabled banks to get around FX controls by purchasing bolivar-denominated debt and exchanging it for dollar-denominated debt (the parallel FX market).

Stifling the economy

Paulo Leme, Venezuela analyst at Goldman Sachs, says: "By directly centralizing the trading in bond markets the government hopes to rein in the growing pressures for the exchange rate to devalue. We believe that suppressing market prices would eventually increase the scarcity of foreign exchange, further stifling vital sectors of the economy and weakening the shadow or rationing price for foreign exchange."

The step is likely to worsen Venezuela’s already difficult economic situation; inflation is running at more than 30%. It is forecast to be the only Latin American country with negative economic growth this year. It is also expected to severely discourage foreign investment into the country.