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Markets Like Venezuela Money Float

February 14, 2002

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CARACAS, Venezuela (AP) _ Venezuela’s private sector and foreign investors welcomed a decision to float the currency, but demanded political stability and government austerity to restore investor confidence.

Hours after President Hugo Chavez announced Venezuela was abandoning a fixed exchange rate system, the bolivar plunged from 792.50 to 980.50 to the dollar Wednesday, at one point surpassing the 1,000 mark.

Economists said the bolivar had been overvalued by as much as 30 percent.

Chavez announced a drastic 22 percent budget cut and withdrawals from a rainy-day reserve fund to help Venezuela close a $8 billion gap in its new $25 billion budget. The original 2002 budget was $33 billion.

Share prices on the Caracas stock exchange rose 10 percent on news of the floating exchange rate, and bond prices rallied.

``The market interpreted the currency move as very positive for most (Venezuelan) companies,″ said Geronimo Paulino, chief trader for Valores Vencred.

The floating system is designed to stop capital flight, end a depletion of foreign reserves to support the bolivar, and make local products more competitive by raising the cost of imports. A weaker bolivar, however, tempts higher prices, with annual inflation now at 12 percent.

Starting Monday, Venezuela’s central bank will auction $60 million a day to banks as part of the system, said bank director Domingo Maza Zavala.

Fedecamaras, Venezuela’s largest business association, applauded the moves but said Chavez should have acted long before the government spent more than $6 billion in foreign reserves to prop up the bolivar.

Chavez must ``generate (investor) confidence in a climate of calm debate and abandon the hostile conflict of recent months,″ said Fedecamaras head Pedro Carmona. Fedecamaras called a successful Dec. 10 general strike to protest a package of economic laws decreed by Chavez, arguing the private sector wasn’t consulted.

International Monetary Fund spokesman Thomas Dawson said the Fund believes ``the measures go in the right direction.″ Venezuela is the last major South American nation to float its currency after Argentina did so on Monday at the IMF’s urging.

Chavez, a former paratrooper who led a failed 1992 coup, was elected in 1998 and has clashed repeatedly with business, labor, the news media and the Roman Catholic Church.

Chavez said Tuesday he was extending an olive branch to overcome Venezuela’s political and financial crisis. Business leaders reacted warily.

``It all depends on whether the government will comply with all these measures. We’ve heard a lot of government plans before that were never implemented,″ said Fedecamaras vice president Albis Munoz.

Some even called for new currency controls. Consecomercio, a national goods and services chamber, warned that the bolivar could plunge to 1,000 or even 1,500 to the dollar, making short-term planning virtually impossible for financial managers.

Venezuela’s foreign reserves have dropped from $19 billion in November to $13 billion. Capital flight last year was an estimated $10 billion.

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