Chavez Risks Backlash After Venezuela Devalues Bolivar 32%

Venezuela devalued its currency for the fifth time in nine years. Chavez ordered his government to weaken the exchange rate by 32 percent to 6.3 bolivars per dollar starting Feb. 13. A spending spree that almost tripled the fiscal deficit helped Chavez win a third six-year term.

By Charlie Devereux & Corina Pons
Feb 9, 2013 11:39 AM MT
Bloomberg

Venezuela devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies ahead of possible elections later this year.

South America’s biggest oil producer may have to call elections if Chavez, who hasn’t been seen for two months after undergoing cancer surgery in Cuba, dies or steps down. He ordered his government to weaken the exchange rate by 32 percent to 6.3 bolivars per dollar starting Feb. 13, Finance Minister Jorge Giordani told reporters yesterday in Caracas.

A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-year term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation that reached 22 percent in January.

“There is surely going to be a political cost, which may weigh against the Chavistas and hence be viewed favorably from the markets if it shifts protest votes to the opposition,” Siobhan Morden, the head of Latin America fixed income strategy at Jefferies Group Inc. in New York, said in a note to clients.

Former opposition presidential candidate Henrique Capriles Radonski said the measure “mocked Venezuelans” and he criticized the government for attempting to hide the impact of the devaluation by announcing it the day before the annual carnival holidays.

Oil Prices

“Oil is at $106 and they have to devalue!” Capriles, who lost to Chavez by 11 percentage points in elections last October, said in a message posted on his Twitter account. “They spent the money in campaign, corruption, presents abroad! Lying government!”

If Chavez is unable to finish his term, the government must call elections within 30 days of his stepping down.

Chavez has not been seen or heard from since he underwent a fourth surgery for an undisclosed type of cancer Dec. 11. Before traveling to Cuba, he anointed Vice President Nicolas Maduro as his successor, urging Venezuelans to vote for the 50-year-old former bus driver and labor union leader should he die or step down because of his health.

Maduro said yesterday that Chavez is making economic policy from Havana and that he is focused on measures meant to balance the economy. The devaluation came on the 30th anniversary of a similar event known as Black Friday in Venezuela.

Enough Dollars

“Venezuela has sufficient foreign currency to guarantee that the economy functions,” Maduro said during a televised meeting yesterday after the measures were announced. Earlier in the day he said Venezuelan have to “do more with less.”

The central bank’s so-called Cadivi system, which sells dollars to importers at the official exchange rate, will provide $35 billion this year, bank President Nelson Merentes said yesterday. That’s the same amount Cadivi sold last year, according to a Dec. 31 central bank report. The Sitme exchange, which sold at a weaker, parallel rate and will be discontinued, provided about $8 billion last year.

Maduro said Venezuela may create a complimentary currency system in the future and that the creation of dollar bank accounts could help satisfy demand for greenbacks. He didn’t provide details.

Venezuela in July eased currency rules to allow foreign and local companies to hold foreign currency accounts at local banks that can be exchanged at the official rate.

Dollar Supply

While a weaker currency may stoke inflation, it may also ease shortages of goods ranging from toilet paper to cars because the government was restraining the supply of dollars it allocated to the private sector as it waited for a more favorable rate, said Francisco Rodriguez, a Latin America economist at Bank of America Corp. in New York.

“Any tackling of the massive economic distortions, even if far more is required, is positively viewed by markets,” Kathryn Rooney Vera, a strategist at Bulltick Capital Markets, said in an interview from Miami. “We expected more, and more is indeed needed to correct fiscal imbalances and adjust economic distortions, but this is something and there may be more to come.”

The weaker exchange rate will give the central government an additional 84.5 billion bolivars ($13.4 billion) in revenue, mostly from oil sales done in dollars, according to Caracas- based research company Ecoanalitica.

The yield on Venezuela’s dollar bonds maturing in 2027 fell 10 basis points, or 0.10 percentage points, to 8.70 percent yesterday. Venezuelan bonds have returned 39 percent over the past year, according to JPMorgan Chase & Co.’s EMBIG index.

Colgate, Avon

Colgate-Palmolive Co., the world’s largest toothpaste maker, dropped 1.5 percent to $108.49 at the close in New York and Avon Products Inc. slipped 2.5 percent to $16.85. Avon is the world’s largest door-to-door cosmetics seller. Although Venezuela has only 0.4 percent of the world’s population, it has a disproportionate share of sales for many consumer products companies, Connie Maneaty, an analyst at BMO Capital Markets, wrote in a Sept. 27 note.

Venezuela’s fiscal gap widened to 11 percent of gross domestic product last year from 4 percent in 2011, according to Moody’s Investors Service. Giordani said that while the government has sufficient revenue, devaluing will encourage more efficiency in the economy.

“This isn’t a change that was done for fiscal reasons,” he said. “We have sufficient revenue but we need to adjust the accounts. We need an increase in efficiency and efficiency means spending less.”

Inflation Surge

Annual inflation accelerated to 22.2 percent in January, the fastest pace in eight months, led by a jump in food prices. Prices climbed 3.3 percent in January after rising 3.5 percent in December.

In the unregulated market, the bolivar weakened 6 percent yesterday to 19.53 bolivars per dollar, according to Lechuga Verde, a website that tracks the rate. Venezuelans use the unregulated credit market because the central bank doesn’t supply enough dollars at the official rates to meet demand.

The government will keep the currency at 4.3 per dollar for certain imports that were ordered before Jan. 15, Giordani said.

The central bank-administered currency market known as Sitme that traded at 5.3 bolivars per dollar will be eliminated, Merentes said. The market had been used by some importers.

Earlier Devaluation

Chavez last devalued in December 2010 when he weakened an exchange rate on so-called essential goods by 40 percent, unifying the two fixed foreign exchange rates it had at the time. In January 2010, he had created a multi-tier exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports. The move prompted Venezuelan consumers to rush to buy appliances including flat-screen televisions before prices were adjusted.

While Bank of America’s Rodriguez estimates that devaluing the currency will reduce the government’s budget deficit by half, he said the government will have to take further measures within the next year.

“It gets them through their most urgent problem which is to generate more bolivars to finance the current spending flow,” Rodriguez said. “This is a move that will turn out to be temporary. They will have to devalue again by the end of the year.”

To contact the reporters on this story: Charlie Devereux in Caracas at cdevereux3@bloomberg.net; Corina Pons in Caracas at crpons@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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