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Jitters in Venezuela
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August 21, 1998: 11:16 a.m. ET
Rumored devaluation of bolivar prompts cash exodus, sinks stocks
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NEW YORK (CNNfn) - Mounting fears of a currency devaluation similar to that of Russia's prompted investors this week to flee the Venezuelan stock market, cash in their bolivars for dollars, and give neighboring Latin American markets cause for pause.
Word on the street is the country's currency is overvalued by as much as 50 percent and the government, unable to support an overinflated currency with tapering cash reserves, could devalue the bolivar by the end of the month.
According to analysts, they're right on the money.
Christian Stracke, Latin America economist for BT Alex Brown, said he predicts the Venezuelan government will devalue the bolivar by about 20 percent in the next two weeks.
"Right now what we are seeing is concern of devaluation in Venezuela, that's really the thing that is stirring [Latin American markets] up," he said. "It has become a self-fulfilling prophecy partly set by concerns on Wall Street but mostly people in Venezuela realize reserves are falling and currency is overvalued."
The country's cash reserves, which now hover at about $14.15 billion, have dropped more than $750 million in the last two weeks.
Stracke added Venezuela's December presidential election also is adding fuel to the fire. The country's leading candidate, he said, has mentioned the possibility of defaulting on overseas debt and the need to impose stricter capital controls.
Other concerns are that a devaluation of the bolivar would drive down oil prices, one of the country's largest exports.
"These are things foreign and domestic investors don't like to hear and its sparked a capital flight," he said.
"For the last few months there's been a slow drain on reserves of about $40 million or $50 million a week," he said. "Now it's really in the last four days an open wound drying up the reserves."
Still, Stracke said, Venezuela's monetary crisis is much less dire than Russia's, which essentially devalued its currency, the ruble, on Monday. Venezuela has nearly no short-term overseas debt.
"Devaluation could actually be a really good thing, at least for the [Venezuelan] government," he said. "For the first few days it'll be a disaster in the equity and bond markets, but then people will stop changing bolivars to dollars and you won't see the drain on reserves we see now."
Moreover, he said, a devaluation of the bolivar should spark international investors
"Venezuela will be much less wealthy and won't invest in the markets there but foreigners will be 30 percent richer in Venezuela terms and you might see a return to the country's stock exchange," he said. "The foreigners will say these price-earnings ratios are out of control and they become more attractive, even with political uncertainty."
Russia's ripple effect
The Caracas Stock Exchange in Venezuela, already the region's worst performing this year, dropped 9 percent Thursday to its lowest point since April 1996.
David Chon, Latin American strategist for Bear Stearns, said the thin volume of trade in regional stocks has held prices down.
"On a fundamental basis, I think that Latin American stocks are worth quite a lot more," he said. "But I realize that people are nervous and the lack of buying interest does wonders in a thin market."
Another sign of investor pessimism was the drop in Brazilian telephone issue Telebras SA. Telebras, Brazil's former telephone monopoly, was privatized July 29 for $19 billion, well above the government's asking price.
In efforts to calm investor worries, Venezuela's Finance Minister Maritza Izaguirre said in a press statement Thursday that "rumors that appeared in the market place concerning an imminent devaluation and the imposition of an exchange control … are completely unfounded."
Russian leaders said the same thing days before they implemented a new floating exchange rate that could cause the ruble to lose up to 50 percent of its value.
Latin American jitters also rippled through Madrid, where Spain's biggest blue chips sank Friday.
"People start thinking that all of Latin American currencies will be subject to pressure, and interest rates will rise, prompting falls in the stock markets," said Fabian Ramon, head of research at Ahorro Corporacion Financiera.
He added such a move would have little impact on Spanish companies, even those that are heavily vested in Latin America.
Despite the negative effect Venezuela's troubles have had on Brazil, Argentina and Mexico, Stracke said, rumors those countries might follow suit with a devaluation of their own currencies are generally without merit.
"This is mostly due to deteriorating investor confidence leading to yet another self-fulfilling prophecy," he said. "We are not ready to say Brazil is ready to devalue anytime soon.
Still, a swirl of rumors are hovering over Brazil, where its currency is also moderately overvalued.
Stracke said Brazil has more cash in its coffers to fend off a devaluation, helped by the recent sale of Telebras, and it has little short-term debt.
Its mounting fiscal deficit, however, remains "well above any sustainable level," he said. 
-- from staff and wire reports
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