Thursday, December 4, 2008

Venezuelan Overnight Bank Rate Rises to 15-Month High

Venezuela’s average overnight lending rate rose to 29 percent today, the highest since September 2007, as a shortage of liquidity sent banks searching for short-term loans.


The oil-exporting country’s biggest banks began reducing credit lines to smaller lenders last month on concern that a drop in crude prices will slow growth in Venezuela. That forced those banks to turn to the overnight market, said Kristhian Krstonosic, a trader at Banvalor Banco Comercial in Caracas.

“Banks are estimating that in Venezuela, this crisis is going to arrive sooner or later,” he said in a telephone interview. “Interest rates are going to rise significantly.”

The overnight rate rose from 27.5 percent yesterday, and as low as 6.5 percent Nov. 6. Banks that depend on deposits from the government are suffering because the state is withdrawing large sums of money to pay for year-end bonuses, said Oscar Garcia Mendoza, chairman of Caracas-based Banco Venezolana de Credito.

The central bank has been injecting liquidity into the market to bring the rate down. Banks that aren’t able to borrow from larger lenders or unable to pay high rates in the overnight market are seeking short-term loans from the central bank, Mendoza said.

Liquidity in the banking system is distributed unequally and the banks with money aren’t willing to loan to those with depleted deposits, he said.

“There are banks beginning to show fatigue because their investment portfolios are in bad shape,” Mendoza said in a telephone interview. “Their business decisions haven’t turned out well and the state is pulling its deposits.”

50% Peak

The overnight rate rose to as high as 50 percent during trading today, Krstonosic said.

Venezuela’s banking sector has escaped relatively unscathed from the global financial crisis. The banking regulator ordered banks holding securities issued or underwritten by investment banks such as Lehman Brothers Holdings Inc. and Merrill Lynch & Co. to set aside funds to cover potential losses.

Foreign exchange controls put in place in 2003 have limited the banking sector’s access to foreign credit lines, thus shielding them from a direct impact from the credit crunch.

A slowdown in growth next year from a drop in oil prices may affect the banking sector, and rampant inflation may lead to higher loan default rates, said Asdrubal Oliveros, a director at Ecoanalitica in Caracas.

Economic indicators in Venezuela, including manufacturing output and retail sales, have slowed this year, signaling a slowdown in consumption. Venezuelan crude oil prices have dropped 68.7 percent since hitting a record in July. Annual inflation hit 36 percent in September, the steepest of 78 economies tracked by Bloomberg.

“Although Venezuela looks ‘isolated,’ it can be affected,” said Krstonosic at Banvalor. “There’s a global bubble that busted, but there’s also a Venezuelan bubble.”

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