Banks scramble to offer higher rates

The Central Bank’s decision to raise the interest it pays on daily traded certificates of deposit (CODs) by an unprecedented 10 percentage points last week has resulted not only in banks paying higher interest rates on deposits but also in higher charges for credit card accounts.

Banks Provincial and Unión, which throughout all of 1997 sought to attract depositors by offering daily and monthly drawings for cash and assorted prizes, were the first to announce higher rates on deposits.

Provincial led the change by increasing the rate on preferential accounts by 6 points, to 16 percent, on Friday of last week.

Not to be outdone, Unión on Monday announced that it would increase the interest it pays on all deposits by 7 percent, bringing its scale for various types of deposits to between 12 and 21.5 percent.

But Provincial and Unión also announced that credit card accounts will have to pay 44 percent at both banks from now on.

The sharp rise in the cost of plastic money led the Bank Superintendency to warn all banks that it intends to conduct an investigation of consumer credit portfolios so as to evaluate the risk level of defaults under the new terms set by the banks.

Sources at the Superintendency said banks might be asked to demand higher guarantees on credit card accounts, depending on the results of the evaluation.

At the start of the week bankers said the changes introduced by Provincial and Unión – which control 30 percent of all the funds in savings accounts – would almost certainly cause other banks to follow suit.

Two smaller, but very competitive banks, InterBank and Banco Venezolano de Crédito lost no time in adjusting their deposit rates upward.

InterBank decided to offer 7 percent more on all deposits, which means that top of the line accounts in that bank will earn 23 percent from now on.

Venezolano de Crédito – which at 16 percent was already paying the highest rate on regular passbook accounts – jacked up its minimum rate to 20 percent, and raised the prime rate on deposits 10 points to 24 percent, the highest for any bank in the market.

Gov’t monitors surge in interest rates

interestThe government said it’s closely monitoring the recent upswing in the country’s interest rates, which could hurt the country’s budding economic recovery.

Commercial banks, following the lead of the Central Bank (BCV), have raised interest rates by up to 18 percentage points on corporate and consumer credit loans. Banks now charge between 32 percent and 36 percent on loans to select corporate customers, up from 18 percent just a week ago.

“We are monitoring the (higher) rates, because we are trying to gauge just how they might hurt domestic consumption levels and the inflow of capital,” said Trade and Industry Minister Héctor Maldonado Lira at a news conference.

Venezuelan interest rates have soared since the BCV began selling certificates of deposits earlier this month.

Yields on the one-month certificates have soared more than 9 percentage points to 27.4 percent that was offered Wednesday. The BCV raised interest rates to mop up excess cash in the economy to strengthen the currency, the bolivar. The rise in interest rates precipitated a fall in the country’s stock exchange, as investors fretted that the rise would hurt corporate earnings by raising borrowing costs.

Maldonado Lira was Venezuela’s ambassador to Bolivia before being appointed Trade and Industry Ministry last week.

He replaces Freddy Rojas Parra who became finance minister when Luis Raúl Matos Azócar resigned last month, days before he faced a vote of censure.

IMF pact soon

Finance Minister Freddy Rojas Parra said on Thursday that chances are “good” for a renewed accord with the International Monetary Fund in the weeks ahead.

A Venezuelan mission sent to IMF headquarters in Washington, D.C., Jan. 7 finished its latest round of negotiations earlier this week.

“The mission has returned and we are preparing to send the final copies of the proposal in the week ahead,” Rojas told reporters following a tribute to the ideas of Venezuelan thinker and economist Carlos Rangel at the Caracas Hilton.

A $1.5 billion standby loan agreement with the IMF expired in July 1997 after Venezuela collected only the first disbursement of $500 million. The country is seeking a shadow program that would provide technical support but no money.

Venezuela’s foreign reserves, estimated at nearly $18 billion, make loans from the IMF unnecessary.

Rojas stressed that the IMF and Venezuelan government have kept in close contact despite the absence of any agreement. The IMF stamp of approval and quarterly visits by IMF technicians are vital in the country’s efforts to attract foreign investors.

“The IMF knows of all the steps we are taking internally and is in agreement with the recent moves by the Central Bank of Venezuela (BCV),” Rojas said.

Last week the BCV raised interest rates on certificates of deposit in an effort to mop up excess liquidity. The move could eventually slow consumer spending and lower inflationary pressures.

One prominent criticism by an IMF mission to Venezuela last February was of the country’s difficulty in controlling inflation. Venezuela had the highest inflation in Latin America for a second straight year in 1997 at 37 percent. The government expects 25 percent inflation in 1998.

Rojas has repeatedly said since assuming his post that controlling inflation is the key component to the Caldera administration’s macroeconomic policy.

“It was a necessary and indispensable measure to give equilibrium to the situation we are living with in terms of exchange policy,” he said. “The exchange market has been moderated. There is normal demand.”

Earlier this month, there was a rush to buy dollars because of speculation that the bolivar would be devalued.

An earlier sticking point with the IMF was the government’s outstanding debt of $14 billion it owes to public workers. The government eventually plans to issue bonds to cover the shortfall according to the Finance Ministry.

The IMF also maintains that labor liabilities should account for no more than 2 percent of gross domestic product (GDP) while the debt owed Venezuela’s 1.35 million bureaucrats account for some 5 percent of the GDP.

The government earlier this month addressed another IMF concern when it sliced 5 percent of its 1998 budget (Bs.1.03 billion) in an attempt to control public spending.