Analysts warn that the BCV will print money to support investment fund

Experts say that the Central Bank of Venezuela (BCV) will have to print money to provide loans through the investment fund (File Photo)

Economy
The president of the Central Bank of Venezuela Nelson Merentes has managed to reach a consensus among a diverse group of economists. These experts have said that the investment fund to be used by the BCV in order to grant loans will mean cash creation and rising prices.

Before year's end, Merentes is preparing to inject loans amounting to USD 232.5 million to sectors "that can boost the economy." The funds will come from the "savings from monetary policy."

Efraín Velásquez, the President of Venezuela's National Economic Council; Luis Mata Mollejas, a member of the Academy of Economics; Jesús Rojas, former chief financial officer at the BCV, and José Guerra, ex manager of economic research at the BCV, said that the monetary policy does not produce any savings that can be used to grant loans to government companies or agencies.

However, as far as they know, based on Merentes' remarks, the main tool of the monetary policy is that, in order to cut the cash flow and contain climbing prices, the BCV sells financial entities 28-day and 56-day maturity bonds, known in the market as certificates of deposit.

Last May, the BCV board of directors curtailed its bonds interest rates to 56 days, from 12 to 7 percent, and from 11 to 6 percent for the bonds expiring within a 28-day term.

Concomitantly with the lower amount payable in interests, the Central Bank is selling fewer certificates of deposit.

On August 7th, the Central Bank had contained, via certificates of deposit that make it pay interest, USD 10.8 billion. By October 23rd, such amount went down to USD 3.6 billion.

Financial sources noted that banks stopped renewing certificates of deposit to buy foreign currency denominated bonds issued by state-run oil holding Petróleos de Venezuela and the Treasury.

No magic
Does it mean savings to be delivered in loans? Analysts suggest that the BCV prints money to pay the interests of certificates of deposit. Therefore, the money printing machine has only slowed its pace due to the monetary policy.

"What is happening now is that, instead of printing Venezuelan bolivars to pay certificates of deposit, the money will be printed to grant loans. As these bolivars are not supported, they will surely have an impact on inflation," Jesús Rojas said. He stressed that growing demand versus unchanged supply means rising prices.

"At the end of the day, there will be no savings here, but troubles with monetary aggregates," Efraín Velásquez said.

There is every indication that in the mid term there will be a hike of liquidity. In addition to the Venezuelan bolivars to be granted by the Central Bank in loans, a large number of the bonds purchased from Pdvsa and the Ministry of Finance come from the money that was frozen in certificates of deposit.

Pdvsa and the Treasury will expend the earnings from the sale of notes and will inject them in the economy.

Debt brokers reported that, together with rising inflation rates, the pressure on the parallel dollar could increase, once a portion of the Venezuelan bolivars is used to buy foreign currency.

By the end of October, the BCV recorded a hike of 20.7 percent in accrued inflation; according to its forecast, it may end around 26 percent this year.

The government goal for 2010 is 22 percent, compared with 30 percent estimated by investment banks.

Translated by Conchita Delgado

http://english.eluniversal.com/2009/11/13/en_ing_esp_analysts-warn-that-t_13A3050371.shtml