Monday, June 25, 2007

Growing devaluation fears in Venezuela

According to Pablo A. Bread, from Scotiabank, the increase in oil prices ‘have failed to boost Venezuelan debt securities amidst speculation that the authorities may respond to currency speculators with tighter restrictions, which will in turn fuel further capital flight.

The situation in Venezuela gets worse because the market data is not transparent and according to the VenEconomy we have observed a widened between the official exchange rate of Boliviar to the USD (2.150:1) and the parallel one set at 4.245 Bolivar to the USD.

Meanwhile, sovereign debt assets have not fully received the benefits of rallying crude oil prices, as the possibility of a distressed credit event has increased over the past few months. Even considering that oil prices remain at current high levels, Venezuela needs to sell bonds as a way to curb inflationary pressures from oil inflows, as suggested by Bloomberg. The eventual inability to issue bonds may force the government to devalue its fixed exchange rate in 2007.

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