Securities Investments by the Banks could increase in the coming months
<a href=www.vheadline.com>Venezuela's Electronic News Posted: Tuesday, May 20, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita
VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: Among the principal arguments for maintaining the current exchange control system, apart from preserving the foreign reserves, was the decline in deposits from the public held in the country's banks when the economic agents preferred changing their bolivares to US dollars.
Nominal deposits in the banking system have risen by 7.31% since the foreign exchange restrictions went into force, from 16.7 trillion bolivares in January to 17.9 trillion bolivares in March. As a result, the system has remained liquid in the period, as shown by some indicators of its behavior, but to the detriment of other variables.
The commercial and universal banking system's total credit portfolio has fallen by 9.7%, from 9 trillion bolivares to 8.1 trillion bolivares, in the same period. Other items in the banking system's asset portfolios have also been distorted. One is Investments in Securities, which have surged by 16.5%, gaining approximately 1.1 trillion bolivares (largely influenced by public sector placements). Significantly, their share of total assets rose to 30% in March, from 26% in January, while that of credit fell from 35% to 32% in the same period.
These changes in the national banking system provide a key to what is happening in the Venezuelan economy and what is about to happen, at least in the rest of 2003. The exchange controls are a boon to the National Treasury because they depress interest rates, making internal government borrowing less costly. But at the same time there is a massive repressed demand for dollars, which will have a powerful impact on the exchange rate when the controls are lifted (or relaxed).
The adverse trends in these variables will continue intensifying as long as current economic policies remain in force, because the paralysis of the foreign exchange market is doing enormous damage to Venezuelan productive industry. The government is also expected to place public bonds to cover part of the deficit in its fiscal accounts, and the country's banks will be the buyers. That will leave the system's assets even more strongly exposed to the public sector, and hence, make the system even more dependent on it.