Chavez's cancer may put Venezuela devaluation on hold

CARACAS Mon Dec 17, 2012 1:04am EST

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CARACAS (Reuters) - Venezuelan President Hugo Chavez's battle with cancer and the possibility of a new presidential election look likely to delay key economic policy decisions including a sharp currency devaluation needed to shore up public finances.

Chavez spent heavily this year in giving new apartments, home appliances and cash payments to poor Venezuelans to ensure his re-election, weakening the South American OPEC nation's fiscal position.

Economists have widely predicted the devaluation would come this month or in early 2013 because the spending spree expanded a yawning fiscal deficit. Devaluing eases fiscal pressure by giving the government more local bolivar currency for each dollar brought in by oil exports.

But devaluation plans, along with potential cuts to enormous subsidies that also weigh heavily on state finances, now appear to be on hold as Chavez - famous for his micro-managing style - recovers from his cancer operation in Cuba.

Policy paralysis may continue in the coming months if Chavez has to step aside and a fresh presidential election is called, because his anointed successor could seek to avoid an unpopular currency adjustment in mid-campaign.

"We believe (recent) developments make it highly likely Venezuela will have presidential elections early in 2013," said Francisco Rodriguez of Bank of America.

"Key economic policy decisions such as FX (foreign exchange)devaluation will likely be delayed until after those elections."

After winning re-election in October with 55 percent of the vote, Chavez is due to begin his third term on January 10. Officials have conceded, however, that he may not be in condition to so do.

That would trigger a new presidential vote within 30 days, with Vice President Nicolas Maduro - who Chavez this month named as his successor - running as ruling Socialist Party candidate.

Even if Chavez remains in office, policy decisions could remain stalled if his health does not improve.

CAPITAL FLIGHT

A devaluation is seen as crucial to slowing capital flight as dollars sold on the black market - in violation of currency controls created by Chavez - now fetch more than four times the official rate of 4.3 bolivars per dollar.

It would also help boost the flow of dollars to the economy, ensuring merchants have dollars to import basic products such as wheat flour that have in recent weeks disappeared sporadically from supermarket shelves.

"The exchange rate adjustment is necessary to partially reduce the fiscal and monetary imbalances, but most of all it is needed to avoid a crisis created by shortage of dollars and (imported) goods," said Caracas-based economic consultancy group Econometrica.

Economists already predict that economic growth will slow in 2013 from this year's estimated rate of 5 percent as public spending declines. The government forecasts growth next year will rise to 6 percent.

Leaving the exchange rate fixed, on the other hand, steadily reduces available resources because inflation of nearly 20 percent means the cost of building schools, hospitals or roads goes up while oil income in bolivars remains the same.

While ratings agencies have maintained a generally positive view of Venezuela's debt, most analyses have been based on a sizeable devaluation to help close the 2013 fiscal deficit.

ECONOMIC HANGOVER

A prolonged delay in the currency adjustment could pressure Venezuela's credit rating if it does not put its financial house in order, though Venezuela's global bonds have rallied on Chavez's illness on hopes of a more market-friendly government.

Officials are believed to be considering a number of responses to the "economic hangover" created by the campaign spending binge, including politically unpopular cuts to the subsidies for electricity and fuel.

Gasoline is so heavily subsidized that service stations sometimes do not bother charging drivers, a policy that costs the state billions of dollars each year.

Finance Minister Jorge Giordani recently said the state needs to stop "giving things away" in the form of subsidized services, a sentiment echoed by Maduro in his first speech since being designated successor. Little progress is expected on any of those thorny measures with Chavez in recovery.

Officials have declined to comment on devaluation rumors.

In the meantime, Venezuelans are struggling to obtain foreign exchange through a currency control system that sells dollars at the official rate of 4.3 bolivars.

Dollar sales by an alternate government-backed currency sale mechanism known as Sitme, which uses Venezuelan global bonds to provide currency to importers and travelers, have declined considerably in recent months.

A new bond issue is stalled by Chavez's health, as well as rumored plans to revamp or scrap the bond-swap system.

State oil company PDVSA had prepared a dollar-denominated bond issue for the end of the year, as a private placement to the central bank, but that was on hold due to the government paralysis over Chavez's situation.

"The issue was ready months ago, but we are waiting for approval from the finance minister," said a PDVSA source.

(Additional reporting by Marianna Parraga, Writing by Brian Ellsworth, Editing by Andrew Cawthorne and Kieran Murray)

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