Venezuela's Bolivar Trades Near Seven-Month Low Amid Oil Rout

By Matthew Walter

Sept. 17 (Bloomberg) -- Venezuela's bolivar held near a seven- month low in the parallel market as a two-month tumble in oil, the country's biggest export, fueled speculation the government will devalue the official exchange rate.

The bolivar weakened as much as 2 percent today to 5.05 percent before rebounding to 4.8 per dollar at 4:20 p.m. New York time, traders said. The bolivar has fallen 19 percent since Sept. 5. Oil, which accounts for about 90 percent of Venezuela's exports and half of tax revenue, has dropped 16 percent this month to $96.61 per barrel amid concern a deepening U.S. financial crisis will add to a slowdown in global growth.

``If oil prices get closer to $80 a barrel, the government is going to have to adjust the exchange rate,'' said Asdrubal Oliveros, a director at Caracas-based consulting firm Ecoanalitica.

Venezuelans turn to the parallel market when they can't get permission from the government to buy foreign currency at the official exchange rate of 2.15 per dollar. President Hugo Chavez imposed restrictions on currency trading amid a nationwide oil industry strike in 2003.

Chavez, emboldened by a six-year oil rally that sent prices to a record $147.27 on July 11, has ramped up spending this year, using public funds to nationalize the country's biggest cement maker, third-biggest bank and top steelmaker. [great timing - LOL]

The government will likely pay $11.6 billion for the nationalizations announced this year plus payments leftover from last year's takeover of four heavy crude joint ventures in the country's Orinoco belt, Ecoanalitica said last month.

November Elections

Chavez has said repeatedly he has no plans to devalue the bolivar. Yesterday he said he isn't ``alarmed'' by the recent drop in oil prices.

Oil rebounded today, rising 6 percent, after its biggest two-day decline in almost four years. Crude oil futures have dropped 34 percent from the July 11 record high.

A devaluation is unlikely before year-end because Chavez's socialist party candidates are campaigning for state and city elections scheduled for November, said Miguel Octavio, head of research at BBO Financial Services Inc. in Caracas.

``The government has a lot of money right now, but it also has a lot of obligations,'' Octavio said. ``I don't think they'll devalue this year because of the elections.''

A devaluation bolsters the government's finances because it puts more bolivars in treasury coffers for each dollar from oil exports.

Venezuela-U.S. Relations

The bolivar has also weakened in the black market in the past week because the deteriorating relationship between Chavez and the U.S., Venezuela's top trading partner, has further eroded confidence in the South American country. Chavez last week expelled the U.S. ambassador in Caracas. Venezuela is the fourth- biggest supplier of foreign crude oil to the U.S.

The financial market rout in the U.S. has pushed down the price on Venezuelan bonds, making it difficult for the government to sell dollar-denominated bonds in the local market. The sale of dollar bonds has been one of the government's main tools to provide investors access to dollar-based assets and shore up the parallel market rate, Oliveros said.

``The government is going to have to do a debt buyback before it can sell any more dollar bonds,'' Oliveros said. ``This makes you think the exchange rate is going to continue to weaken.''

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net.

Last Updated: September 17, 2008 16:46 EDT