Venezuelan bonds have rallied strongly in response to a change in foreign exchange policy on Monday, when the government sold dollars to private sector buyers at a rate that is eight times higher than the official one.
The new foreign exchange system, known at Sicad 2, auctioned dollars at a rate of 51.86 bolivars to the dollar, compared with the official rate of 6.3 bolivars.
The new arrangement has been welcomed as a first step to normalising Venezuela's foreign exchange market, from which most private sector buyers have so far effectively been excluded.
A chronic lack of dollars in the economy has caused widespread shortages of basic goods, including toilet roll and milk, helping to fuel more than a month of violent street protests in which 36 people have been killed. Under socialist policies introduced by the late president Hugo Chavez since 1998, much of the economy has been nationalised and manufacturing has declined, leaving the country heavily dependent on imported goods.
But it was far from clear that the Sicad 2 system would provide lasting relief. Fitch Ratings downgraded Venezuela from B+ to B on Tuesday, taking it one notch deeper into "highly speculative" territory. Fitch blamed the downgrade on distortions in Venezuela's currency market, along with macoreconomic stability and deterioration in external accounts.
Henkel Garcias, director of Econo-metrica, a Caracas consultancy, said the new arrangement was "a step in the right direction", but added: "At the end of the day we are still under strict exchange controls, which is never optimal."
The government did not say how many dollars were sold at its first auction on Monday, although anecdotal evidence from participants suggested it could have been as little as $500,000.
That is far short of the existing dollar auction system, Sicad 1, which is supposed to sell $220m a week at a rate that has varied between about 10 and 12 bolivars to the dollar, although its weekly auctions are frequently cancelled and have often been much smaller.
Nicolas Maduro, Venezuela's president, said the Sicad 2 system, due to operate daily, did not amount to a devaluation and would anyway account for only 7 to 8 per cent of foreign exchange transactions. About 80 per cent of transactions would still take place at the official rate, largely used by public sector entities.
"The doubt is whether the government will be able to supply this exchange and whether it will be as flexible as they are promising," Mr Garcia said.
For now, investors shrugged off these fears and Monday's auction was met with a bond market rally. The benchmark 2017 bond from PDVSA, the national oil company, rallied to 84.5 cents on the dollar from 80.85 on Friday, back from an all-time low of 72.29 cents on the dollar on February 19.
The black market exchange rate, which reached a peak of more than 88 bolivars in February according to dolartoday.com, a website that monitors Venezuela's various exchange rates, has fallen back to about 58 bolivars in anticipation of the Sicad 2 system.
"It's understandable that the market should rally," said Siobhan Morden, head of Latin American credit strategy at Jefferies, the investment bank. "Having a market exchange rate is a big step for this government. But there is still a lot of risk."
As is common in Venezuela, very little information has been made public about the new system. In addition to daily volumes, it is not clear where the dollars sold by Sicad 2 will come from. Among the possibilities are public sector exports, private sector exports, bond issuance, or foreign exchange reserves.
Such uncertainty risks undermining the confidence of bondholders, who may worry that their repayments are competing for funding with the new system.
More fundamental are concerns that supplying funds out of existing flows or stocks of dollars would merely stoke inflation and lead to another devaluation down the road.
"It is really important to take a step back," Ms Morden said. "Unless you fix monetary and fiscal policy, devaluation is just one step in a negative cycle."
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