Left wing populist economics at work destroying another country

Chavez Currency ‘Burn’ Failing as $93 Billion Leave (Update1)
By Daniel Cancel

Jan. 26 (Bloomberg) -- Venezuelan President Hugo Chavez is selling dollars from central bank reserves for the first time in six years in what Goldman Sachs Group Inc. and Barclays Plc say is a futile bid to shore up the bolivar in unregulated trading.
The central bank, under orders from Chavez to “burn the hands” of speculators betting against the bolivar, said it sold $179 million since Jan. 13, the first dollar auctions since trading restrictions imposed in 2003 spawned the unofficial market. Chavez said on Jan. 15 he wanted to strengthen the bolivar more than 30 percent in unregulated trading, where it fetches 6.2 per dollar, to contain inflation after he devalued the official rate as much as 50 percent to 4.3.
The plan will fail because Chavez’s nationalizations and land seizures are prompting Venezuelans to pull money from the country, said Alberto Ramos, a Goldman Sachs economist. More than $93 billion has left the South American nation since 2005, according to the central bank’s capital account data.
“You have a problem that can’t be resolved by throwing reserves at it,” Ramos said in a phone interview from New York. Venezuelans “pay a huge premium to get their assets out of the country, out of the reach of the government, so that they can’t confiscate them,” he said. “Under that situation, $20 billion, $50 billion or $100 billion is not enough. The entire capital stock of the economy could leave.”
Phone calls to the Finance Ministry seeking comment weren’t returned. A central bank spokeswoman said no one was available to comment when contacted by Bloomberg News.
Cargill, Exxon, Cemex
The 55-year-old former Army lieutenant colonel has nationalized the oil, cement, steel, and utilities industries while seizing rice plants from Cargill Inc. and retail stores this month from French-Colombian run Hipermercado Exito in a bid to transform the country into a state-run socialist economy. Venezuela faces international arbitration hearings from Exxon Mobil Corp., the largest U.S. energy company, and Cemex SAB, the biggest cement maker in the Americas, over nationalized assets.
Companies and individuals in Venezuela, the fourth-biggest supplier of oil to the U.S., turn to the unregulated market to buy dollars when they can’t get authorization from the government to make the purchases at the official rate.
Devaluation
Demand in the unofficial market swelled last year as the government said it cut the amount of dollars provided at the fixed exchange rate by 38 percent to preserve foreign reserves after crude tumbled 54 percent in 2008. Private companies bought about 30 percent of their imports in 2009 with dollars acquired in the unregulated market, according to Asdrubal Oliveros, an economist at Caracas-based Ecoanalitica.
On Jan. 8, Chavez devalued the bolivar for the first time since 2005, saying he aimed to shore up a slumping economy by stimulating exports and cutting imports. He weakened the official exchange rate by 17 percent to 2.6 per dollar for “essential” imports and by 50 percent to 4.3 for “nonessential” items.
Morgan Stanley forecasts the devaluation will push inflation to a 14-year high of 45 percent this year from 27 percent in 2009, the fastest pace among 78 economies tracked by Bloomberg.
The central bank began selling dollars in the unregulated market on Jan. 13, driving the bolivar up 10 percent to 5.87 per dollar in the first week after the devaluation. Those gains prompted Chavez to say on Jan. 15 that he was “revaluing” the bolivar, not devaluing it, and that he planned to drive the unofficial rate to 4.3 per dollar.
‘Un-nameable’
Chavez picked up a copy of local newspaper El Mundo during the speech to point out a headline that highlighted the bolivar’s rally, a sign he’s backing off the 2007 law he signed that prohibited the media from publishing the unregulated rate or mentioning it on the radio. The rate, known as the “un- nameable” among Venezuelans, has begun appearing in other newspapers since the speech.
The bolivar has slid 5.3 percent since then.
Central bank dollar sales of about $100 million a week are insufficient to drive the unofficial rate to 4.3, said Alejandro Grisanti, an analyst at Barclays. Central bank President Nelson Merentes sells the U.S. currency through auctions of three-month dollar-denominated zero coupon bonds that Venezuelan financial institutions can buy with bolivars.
Reserves Slump
The government’s best chance to strengthen the unofficial rate may be to authorize more companies to buy dollars at the official rates, a move that would ease demand in the unregulated market, Grisanti said. Russell Dallen, the head bond trader at Caracas Capital Markets, estimates demand for dollars in the unofficial market to total as much as $100 million a day.
“At around 5 per dollar or so, the government would have to burn a lot of reserves to maintain it,” Grisanti said in a phone interview from New York. “It wouldn’t be sustainable.”
He said he’d recommend his Venezuelan clients buy dollars if the bolivar approaches 5.3 in the unregulated market.
Venezuela’s foreign reserves have slumped to $31.3 billion from a record high of $42.5 billion a year ago, in part because of Chavez’s transfer of $15 billion to a government development fund, according to central bank data.
Ecoanalitica’s Oliveros estimates the central bank would have to sell at least $11 billion to get the unofficial rate close to Chavez’s 4.3 target.
‘Psychological Element’
Goldman’s Ramos said assigning a dollar estimate to the plan is flawed because people will move money out of the country as fast as the central bank makes dollars available.
Venezuela, which last had a capital account surplus in 1998, the year before Chavez became president, posted a capital account deficit of $10.8 billion through the first nine months of 2009, the most recent central bank data show.
Only a more “market friendly” stance from Chavez would slow capital flight, Ramos said.
“There’s this psychological element,” Ramos said. “People don’t feel comfortable with the future of the country. They save in dollars.”