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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Venezuela devalues currency 32% against dollar

Venezuela devalues currency 32% against dollar

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
By Lissy de Abreu

Venezuela said it was devaluing its currency by 32 percent against the dollar on the orders of cancer-stricken President Hugo Chavez, in part to trim a bloated budget deficit.

The bolivar will go from 4.3 to the dollar to 6.3 at the official exchange rate. The move was announced Friday at a press conference by Planning and Finance Minister Jorge Giordani. He said it will take effect on Wednesday.

The goal is to "minimize expenditure and maximize results." One effect of a devaluation is to make a country's exports cheaper and thus more enticing to buyers.

But another effect is to cut the deficit, which in Venezuela last year was estimated to be nearly 10 percent of GDP.

The economy grew 5.5 percent last year and inflation was 20 percent. That was down seven points from the previous year and hit the government target, but was still the highest official inflation rate in Latin America.

Venezuela is South America's largest oil exporter and has the world's largest proven reserves. Its oil transactions are dollar-denominated, so the bolivar-value of those sales will now be higher, boosting state revenues on paper.

The change had been widely expected by analysts and business leaders since last year. This is Venezuela's fifth currency devaluation in a decade.

But a side effect of the new one will be higher inflation, economists warned.

Giordani said the government would honor dollar purchase requests made before January 15 requests at the old exchange rate.

Vice President Nicolas Maduro, who visited Chavez this week, said at the same press conference Friday that Chavez was concerned about the Venezuelan economy and called for a "major effort" to maintain its pace of growth.

Chavez established currency controls in 2003 and the government sets the rate to curb capital flight.
But the existence of a strong black market for the dollar shows the continuing desire for hard currency.

Economist Jesus Casique warned the devaluation would have a major inflationary side effect and the government should not see it as the main tool for trimming the deficit.

Rather, it should take other steps such as clearing away red tape that makes it hard for business to obtain dollars and encouraging Venezuelan non-oil exports.

"The measure should come hand in hand with others," Casique said.

Out on the street, there was little enthusiasm for the devaluation.

"This is bad news," said businessman Jorge Martinez, walking past the Venezuelan central bank with his wife.

"We have been number-crunching because in a month we are going to travel to Spain, and now we do not have enough money."

The devaluation comes amid growing uncertainty in Venezuela over the future of Chavez, who is convalescing in Cuba, where he underwent a fourth round of cancer surgery on December 11.

But since his operation, the flamboyant leftist leader has neither been seen nor heard from, a dramatic departure for a president who had been a near-constant presence in state-run media.

Even among the Latin American leaders who have gone to Cuba to offer their well-wishes to Chavez, none has claimed to have seen him.

Chavez was too sick even to attend his own inauguration to a new six-year term on January 10, which prompted the government to indefinitely postpone his swearing in while extending him and his current administration in office.
http://uk.finance.yahoo.com/news/venezuela-devalues-currency-32-against-052744012.html

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