Venezuela lawmakers approve central bank reform law

By Ana Isabel Martinez CARACAS, Oct 29 (Reuters) - Venezuela's National Assembly on Thursday approved a law to reform the central bank that analysts say will undermine the bank's autonomy and allow President Hugo Chavez access to more state funds. The modification allows the bank to fix special interest rates for loans directed at strategic sectors like those applied to manufacturing, construction and export sectors to help boost growth. The government says the reforms will help bolster the economy, but analysts say the legal changes will allow Chavez to use the bank's resources to cover the state's fiscal gaps, which is currently prohibited under the constitution. Chavez, a leftist, is seeking to maintain his popularity and protect his majority in the National Assembly in legislative elections in 2010. But Venezuela's oil-dependent economy is struggling to recover from the global financial crisis. The law also allows the bank to transfer more international reserves to a special government investment fund and also permits the institution to buy up debt issued by public bodies such as state oil company PDVSA. "These changes may worsen the quality of the central bank international reserves and could exacerbate the current inflation dynamics," investment bank Credit Suisse said in a research note. PDVSA has issued $6.2 billion in bonds this year to confront increasing debts with its suppliers and improve its liquidity after a slide in crude revenues. In 2007 it sold $7.5 billion in debt. Some analysts believe the reforms will allow the central bank to directly finance PDVSA's financial deficits as it struggles with lower oil revenues.

Government officials say the law is aimed at improving the bank's portfolio. "It is not true this is to finance deficits that PDVSA may have," Venezuelan Central Bank President Nelson Merentes said. "It is an opportunity to be in the primary and secondary markets, for the bank to buy debt bonds." For some analysts, the sale of PDVSA paper at a discount by the central bank will validate the parallel exchange rate that emerged when strict currency exchange controls were instituted in 2003. The tight controls have created pent-up demand for dollars on the parallel exchange market. While the official exchange rate is 2.15 bolivares to the dollar, the greenback traded on the parrallel market at about 5.3 bolivares on Thursday. Former bank director Domingo Maza said the reforms would annul the institution's autonomy and add to Venezuela's inflationary pressures. Venezuela, which suffered an economic contraction in the second quarter, is the country with the highest inflation in the region. Consumer prices are expected to rise 26 percent this year. (Writing by Patrick Markey; Editing by Andrew Hay) (([e-mail]; Reuters Messaging: [e-mail]; 646 223 6057;)) Keywords: VENEZUELA ECONOMY/REFORM (For help: Click "Contact Us" in your desk top, click here or call 1-800-738-8377 for Reuters Products and 1-888-463-3383 for Thomson products; For client training: [e-mail] ; [phone]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.