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Friday, 8 February, 2002, 18:42 GMT
Fears grow for Venezuelan currency
Dissident with sign saying:
President Chavez has come under pressure to resign
Venezuela's currency has renewed its slide, after support measures failed to stop investors, citizens and businesses converting cash into US dollars.

The currency, the bolivar, lost further ground on Friday to close at 792 to the dollar, bringing its total losses for the week to 3.3%.

The slide came despite further buying of bolivars by Venezuela's central bank. which on Thursday raised interest rates by 10 percentage points to 50%, and spent £300m snapping up the currency, in an effort to defend its value.

Investors, who have ditched the currency over concerns about political unrest and economic gloom, fear officials are poised to decide on drastic action to support the bolivar.

Devaluation fears

Concerns have grown that the bolivar will be allowed to devalue, or that controls on foreign exchange will be introduced.

"People think that this weekend there could be some decision with regard to the currency market," one trader said.

"They are afraid, and the expectation of capital controls is the principal factor which is driving dollar purchases."

Both central bank and government officials have repeatedly denied that they are poised to introduce trading restrictions.

"Our position is not to turn to exchange controls," Domingo Maza Zavala, director at the Venezuelan Central Bank, said on Wednesday.

"A devaluation has not been considered at any point," he added.

Downgrade

But observers have questioned how long the government could continue to rely on 'conventional' methods for supporting the bolivar.

"To increase rates that much is a sign of desperation," Benito Berber, analyst at research firm Ideaglobal.com in New York, told Bloomberg after Thursday's interest rate rise.

"I would not be surprised if they raised rates to 70%. But it may not matter - nobody wants to have their money stuck when exchange controls are imposed."

And rating agency Fitch, which has downgraded Venezuela's sovereign debt, urged the country to embrace devaluation to "help stabilise creditworthiness".

A continued flight to dollars, and a worsening of Venezuela¿s business climate "could result in a further downgrade", Fitch added.

The agency issued the downgrade over fears that a fall of $1.9bn in the country's foreign currency reserves last year could leave it unable to keep up debt repayments.

"In this environment, the country's willingness to service debt would be tested," Fitch said.

A political agenda including land redistribution, and growing state interference in economic matters, followed by Venezuela's left-wing government, under President Hugo Chavez, has been blamed for undermining confidence in the country.

Fears have been further heightened by a fall in the price of crude, which Venezuela, a member of the oil producers' cartel Opec, depends on for earning foreign currency.

'Overvalued'

But Mike Noone, Latin American analyst at WestLB, doubted whether a full devaluation was needed.

He proposed instead that reforms may be introduced to a "creeping peg" which allows the bolivar to fall by 10% a year against the dollar.

"The currency has been massively overvalued," he added, echoing a widespread opinion that the bolivar is trading about 30% above an appropriate level.

See also:

16 Dec 01 | Americas
Chavez warns Venezuela banks
11 Dec 01 | Americas
General strike paralyses Caracas
01 Dec 01 | Business
New law sparks Venezuela oil row
30 Jul 01 | Country profiles
Country profile: Venezuela
31 Jul 01 | Americas
Timeline: Venezuela
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