Strike-Hit Venezuela Suspends Currency Market

reuters.com Wed January 22, 2003 03:23 PM ET By Patrick Markey

CARACAS, Venezuela (Reuters) - Venezuela on Wednesday suspended foreign exchange trading in a desperate bid to stem capital flight and a slide in the bolivar as the government battled an opposition-led strike which has drained its oil-reliant economy.

The Central Bank said it would close the foreign exchange market for five trading days and prepare temporary currency exchange and transfer curbs to fend off the impact of the shutdown, which aims to force President Hugo Chavez to resign.

Finance Minister Tobias Nobrega said the government planned also to slash its 2003 budget by 10 percent or $2.2 billion, extend a temporary bank debit tax through 2003 and continue with a domestic public debt swap to counter the economic damage of the strike.

Venezuela's bolivar has tumbled more than 28 percent during the seven-week-old work stoppage and its international reserves have fallen. Oil output in the world's fifth-largest petroleum exporter has been slashed by the strike to a fraction of its normal levels.

Economists said foreign exchange controls would give the government some short-term breathing room, but the economy would suffer the longer the controls were maintained.

"This looks more like a knee-jerk reaction of theirs to the currency weakness," Jose Cerritelli, a Bear Stearns Andean economist, said. "But in the long term, people look to escape the controls by taking their money out."

A government source told Reuters on Tuesday that the cabinet was still not clear what currency measures it would introduce. But the government did not plan to devalue the bolivar for now, the source said.

The economic crunch has raised fears that Venezuela may default on its foreign debt later this year. But the Central Bank said the government would maintain the necessary operations to make those debt payments.

Chavez, a fiery populist who was elected in 1998 and survived a coup in April, has branded his foes as "terrorists" who are trying to topple him again through an economic coup and by draining hard currency from Venezuela. He has refused to quit and vows to defeat the strike.

Venezuela's Trade and Production Minister Ramon Rosales said the suspension of the exchange market aimed to halt what he called the "attack against our international reserves."

"The aim of this measure is to preserve our reserves which are the only guarantee of Venezuela's recovery after this oil sabotage," Rosales told Reuters.

FALLING RESERVES, BATTLE FOR OIL

Venezuela's international reserves have fallen to $11.05 billion, a drop of 7.5 percent so far this year. The government also has $2.85 billion in its FIEM rainy-day savings fund and insisted recently that hard currency levels were sufficient.

Rattled by political uncertainty, the bolivar currency has lost more than 24 percent of its value this year alone. The central bank reference rate for the bolivar closed Tuesday trading down 5.1 percent at 1,849.50/1,853 bolivars.

Opposition leaders hope their strike, which began on Dec. 2, will pressure former paratrooper Chavez to agree to early elections. They say that rather than deliver on promises to ease poverty, he has wielded power like a dictator and driven Venezuela toward economic ruin and Cuba-style communism.

The bitter stalemate has raised international concern after the strike drove world oil prices to two-year highs. It has also severely disrupted domestic fuel and food supplies, pushing Venezuela's already weak economy deeper into recession and stoking social unrest.

But negotiations to break the deadlock have been stalled over the timing of possible elections. Former U.S. President and Nobel Peace Prize winner Jimmy Carter on Tuesday proposed to the government and the opposition a blueprint for elections that would also end the strike.

The currency trading shutdown is the latest government measure to combat the effects of the strike, now in its 52nd day. Many private businesses are still closed and the fuel shortages have forced Venezuelans to wait for hours outside gasoline pumps.

Chavez, who led a botched coup six years before his victory at the polls, has fought back, sending troops to seize control of oil installations and refineries and importing food and gasoline to offset shortages.

Strike leaders claim the government has failed to break the stoppage. But in a first sign of a crack in the oil shutdown, some tanker pilots in the key western oil and shipping hub of Maracaibo went back to work this week.