New Foreign Exchange Regulations enacted by the Central Bank of Venezuela

The Central Bank and Minister of Finance of Venezuela enacted the Exchange Agreement #18, giving authority to the Central Bank to issue Resolution #100601. 

The new foreign exchange regulations reestablished, after more than 2 weeks of suspension of the once known as “USD permuta market”, an alternative for foreign exchange transactions outside of the tightly controlled CADIVI system. The new parallel fluctuating USD market (SITME) replaced the once known as “permuta market”, and essentially re-opened the alternative of purchasing and selling USD denominated securities but now only through the banks. Pricing of the bonds should fluctuate within a band or range established by the Central Bank, according to international debt prices. The Central Bank will actively and closely intervene in the market and there is an e-platform for the transactions, giving the Central Bank sufficient indication of supply and demand, as well as the parties participating in each transaction. In practice, the exchange control has moved from a dual to a multiple exchange system, with two controlled pegged rates applicable to certain imports and transactions authorized by CADIVI at 2,60 or 4,40 Bs.F per 1 USD, and a fluctuating rate system administered by the Central Bank through the banks, based on this E-bond” platform using international bond prices as a reference within a band for fluctuation fixed by the BCV. The Central Bank has issued regulations regarding the access to this market. Corporate acquisitions are limited to US$ 50,000 per day per company, and there is a US$ 300,000 per month per company or corporation. Individuals are subject to specific restrictions.

Foreign Exchange companies legally authorized will operate in the market solely for certain foreign currency exchange services such as travelers checks, small remittances, and other individual needs pursuant to the terms of the regulations.

The SITME system is managing total volumes ranging from US$ 30 million per day, with peaks in the range of US$ 50 million. The implicit exchange rate is averaging Bs.F 5,3 per USD and the band for prices of the USD denominated securities traded through SITME are published daily by the Central Bank at:


Background. For several years the Venezuelan exchange control system excluded from its scope all transactions with “securities” allowing a very dynamic market of “USD denominated Bonds” to be swapped for Bs.F denominated bonds, thereafter sold for USD in the international secondary markets (know as the USD “permuta market”).

The USD “permuta market” offered a fluctuating alternative to access USD for those not eligible or not granted access to the pegged control rates through the CADIVI-Central Bank controlled system. After the devaluation and dual exchange system adopted early this year, President Chavez himself declared the war against the “price increases and speculative movements in the “USD permuta market”. As the crisis has evolved, and the CADIVI-Central Bank system has proven to be more inefficent, the market had shifted drastically to the flexible USD “permuta market” as a source to fund their foreign exchange needs. The increased demand has driven the implcit rate of exchange in the “permuta market” to tirpple and double the official pegged rates provided by the “dual controlled system” administered by the government.

Initially the government attempted to intervene this “permuta market” by influencing pricing in the bonds traded or swapped with the issuance of “Bonos Cambiarios” resulting in a lower implicit rate of exchange for the USD, and in an effort to provide more liquidity to he market. Lately, the gap kept widening showing “Bonos Cambiarios” placed at an implicit rate of BsF. 5 to 5.50 per USD, yet the “permuta market” kept pushing upwards the implicit value of the USD to almost BsF. 8 per USD. During the last quarter, the lack of efficiency of CADIVI to liquidate controlled USD petitions for imports and other essentials, has shifted most of the economy to this “permuta market” with a distortion affecting inflation. In an effort to control prices for essential goods and services, the government launched an aggressive consumer protection initiative” with an outcome including “expropriations”. The inflationary trend has not stopped, as well as the implicit devaluation of the USD in the permuta market bonds pricing. Scarcity of certain essential dietary items is resulting from the current situation, thus, activating a greater pressure over prices.

During the last few days the government has intervened several stock brokers and forex traders.

The Proposed Exchange Control Legal Reform. Today the National Assembly Finance Committee approved, for urgent discussion, a reform to the exchange control laws with the following proposed changes:

(i) To include “securities” in the scope of the law, thus treating “permutas” as a foreign exchange transactions covered by the exchange controls.
(ii) To include specific authority for the Central Bank to organize, intervene, regulate and control all forms of “foreign exchange transactions” including the transactions with USD denominated securities.

At the time of this LatAm Consulting Alert it is known that the legal reform proposed by the Finance Committee will come to the floor for discussion tomorrow. It is also known that cabinet members and Central Bank authorities are divided in regards to the next steps. Some voices claim the USD pemuta market should be made illegal, others, afraid of the practical implications, are promoting a “very regulated and institutionally organized and intervened market with the Central Bank as the clearing house for all transactions involving USD denominated securities”. The final outcome will depend on the regulations to be issued under the new law. Meanwhile uncertainty reigns.

Actions. We are recommending to monitor events closely and commence a complete review of repatriation strategies, debt service, importation and any other transactions involving foreign exchange. Also, we are recommending to act prudently with regards to pricing of inventories.

We will follow the developments closely and issue updated Alerts.

LatAm Consulting Alert: Venezuela introduces Dual Foreign Exchange Control System with a significant devaluation

New foreign exchange regulation.
The Government of Venezuela has enacted the “Exchange Agreement No.14 between the Central Bank and the Ministry of Finance” published by Official Gazette 374.064 on 1/8/2010 (hereinafter “the new forex regulation”).
The new forex regulation creates a dual exchange system by introducing two official pegged controlled exchange rates: (i) 2.60 Bs.F per USD (applicable to what is herein defined as sector A); and (ii) 4,30 Bs.F per USD (applicable to what is herein defined as Sector B). Consequently, the devaluation of the official pegged control market rates is 20% and 100% for each sector respectively.
Sector A will only include the following essential industries, imports and transactions:
1. Food and health industries.
2. Heavy equipment imports
3. Public Sector transactions.
4. Remittances for dependents and students overseas.
Sector B includes all other listed remittances and non-essential imports authorized by CADIVI (the currency exchange board) at 4,30 Bs.F per USD. Payments of foreign debt, royalties and profit remittances (dividends) should be classified under Sector B. However, under article 7 of the new forex regulation it was not expressly defined which exchange rate will apply to foreign debt service. It is expected that royalties and dividends would be eligible tom the Bs.F. 4,30 per USD rate if CADIVI approves the remittances on a case-by-case basis; nonetheless, the authorities have not been very responsive to petitions for dividends and royalties lately.
Exporters will be allowed to retain up to 30% of their export proceeds.
The “Bond Swap” parallel market remains legal as an alternative, but the government has announced closer intervention. Towards that end, it is expected that the National Assembly will soon pass a reform to the exchange control law.
Finally, USD 7 billions will be transferred from the Central Bank international reserve to the FONDEM (Government Development Fund) to finance projects during 2010.


The Implications.


The government intends to loosen-up its CADIVI approvals to several imports and remittances at the new Sector B 4,30 per USD rates, but giving priority to Sector A. However, the Ministry of Light Industry and Trade (MILCO) have subjected non-essential imports to their prior approval. Unless and until the new implementing regulations become more flexible in regards to the MILCO approval requirement, the whole process should be problematic, thus, creating several distortions and further demand in the parallel “bond swap market”.
CADIVI currently supplies 60% of the foreign exchange market, and the government is planning to increase such allocations to 75% under new regulations. Uncertainty and increased demand in the parallel “bond swap market” will remain until the new forex regulations are fully implemented, and the tools of intervention by the authorities in the “bond swap market” are defined. Significant activity in the “bond swap market” has resulted in the last few days, with an implicit rate of exchange of approximately Bs.F 6.50 per USD, therefore, a 8% devaluation in the parallel market in a couple of days.
As a result of the new regulations, the resulting official average pondered pegged controlled rate could be estimated at 3,85 Bs.F per USD based on data indicating that sector A represented 26.5 %, and Sector B represented 73.5 % of CADIVI approvals during the last quarter of 2009. The bond swap market should continue to be the source for at least 25% of the foreign exchange transactions in Venezuela.
Inflation should have a significant increase in 2010 due to monetary expansion through government expenditures upon the devaluation and the transfer of 7 billions of international reserves to FONDEM by the Central Bank. Tension with the private sector pursuant to price controls and other intervention measures by the government is likely. The government has already intervened more than 70 businesses in the commercial sector for revising their prices after the devaluation.


Recommended actions.
1) Review cash repatriation strategies to determine if any remittances could be covered under sector B pursuant to the new regulations; or else determine whether to implement a repatriation strategy by means of the “bond swap market” monitoring the best rates that might be available in the following months.
2) Define an adequate financial strategy in this new context.
3) Review the availability and impact of larger domestic NOLs due to devaluation, as well as the inflationary adjustments impact of these measures, for tax purposes, in order to ensure proper planning.
4) Review the impact of the new regulations on pricing policies under tight consumer regulations and price controls.
5) Implement asset protection strategies to minimize the adverse impact of government intervention and eventual expropriation measures, which could be extended to commercial sectors and basic industries of the economy.