February 8, 2013 / 8:55 PM / 7 years ago

UPDATE 3-Absent Chavez devalues Venezuelan currency to aid gov't finances

* Chavez still in Cuba, silent since cancer operation

* Devaluation of 32 pct follows heavy state spending in 2012

* Measure will improve access to dollars but spur inflation

By Eyanir Chinea and Brian Ellsworth

CARACAS, Feb 8 (Reuters) - Venezuela devalued its bolivar currency on Friday by 32 percent in a widely expected move that will shore up government finances after ailing President Hugo Chavez’s blowout election-year spending in 2012 but will also spur galloping inflation.

The country’s fifth devaluation in a decade follows two months of silence from the famously chatty Chavez, who remains in Cuba after surgery for cancer that has threatened to end his 14-year leadership of a self-styled socialist revolution.

The move slashes the official bolivar exchange rate to 6.3 per dollar from 4.3 under currency controls Chavez created in 2003 that require importers and travelers to apply for hard currency through a state agency.

Officials said Chavez ordered the measure from Havana.

The 58-year-old president has not been seen or heard from in public since the Dec. 9 operation, but aides visit him often and say he is signing papers and imparting instructions.

It will ease a shortage of greenbacks that has crimped imports and left many supermarkets barren of staples such as flour. But its inflationary impact could dent the government’s popularity at a time of uncertainty over whether Chavez’s cancer will stop him completing a third term in office.

Announcing the devaluation at a press conference just before the start of Venezuela’s long-weekend Carnaval holiday, Finance Minister Jorge Giordani said the move would help provide revenue for social projects and stimulate growth.

It would also help manage import levels and the cash flow available for the OPEC nation’s economic plans, he said.

“The president ... has demanded efficiency, increased efficiency by the government in the sense of minimizing spending and maximizing results,” the finance minister said.

“Of course, we have taken this as a presidential order.”

The devaluation takes the pressure off government finances by providing more bolivars for each dollar the OPEC nation receives from crude exports.

But it also raises prices for imported goods crucial to the heavily oil-dependent economy, spurring inflation.

Most Latin American currencies are freely traded, meaning any change in value is usually the result of investor perceptions or changes in interest rates rather than a policy decision ordered by state officials.

Dollars on the illegal black market had for weeks been fetching nearly four times the official exchange, which economists cited as a sign an exchange rate adjustment was imminent. Businesses frequently have to tap this market because they are unable to acquire greenbacks from the government.


“It’s positive not only because of the magnitude but because they decided not to wait until a later date despite lingering political uncertainty and all the issues around the health of president Chavez,” said Alberto Ramos of Goldman Sachs.

The analyst said future devaluations were likely given the overall imbalances in the economy.

The government is also scrapping an exchange system known as SITME, which functioned in parallel to the state currency board.

Venezuela has borrowed heavily since its last devaluation, with the government and state oil company PDVSA selling $17.5 billion in new debt during 2011 alone.

Many of those issues were used in the SITME foreign exchange system, which uses bond swaps to provide hard currency. The heavy issuance has pushed Venezuela’s bond yields to among the highest of emerging market debt.

Chavez’s popularity dipped noticeably after a 2010 devaluation that pushed up inflation to 27 percent that year, and helped the opposition win almost half the seats in Congress amid growing complaints about his government.

That devaluation affected the earnings of major consumer goods companies with operations in Venezuela, including Avon Products Inc and Colgate-Palmolive, whose earnings in bolivars were worth less after the adjustment.

It also triggered a shopping spree in the capital Caracas as consumers stocked up on imported goods such as washing machines and refrigerators whose prices are linked to the exchange rate.

The central bank earlier reported that January inflation reached 3.3 percent, the second-highest rate in three years and higher than inflation of neighboring Colombia for all of 2012.


Vice President Nicolas Maduro, speaking at a press conference just before the announcement, urged Venezuelans to be more austere and efficient - a rare call in a nation accustomed to flashy oil wealth.

“We have to learn to do a lot with a little, more with less,” said Maduro prior to the announcement in comments that hinted at austerity. “We need to overturn the culture in which historically, because of oil, we’ve done little with a lot.”

Devaluations generally make local industries more competitive in export markets abroad by lowering the cost of production in respect to other countries.

But critics say the move is unlikely to contribute to a significant expansion of domestic industry because of the government’s confrontation with the private sector, extensive price controls and frequent unpaid expropriations.

Venezuelans on the streets of Caracas were frustrated but resigned to the situation. The country has a long history of devaluing to finance state spending, creating chronic monetary instability and leaving citizens seeking hard currency.

“It increases inflation and quality of life will suffer,” said publicity worker Maria Gonzalez, 30, at a supermarket in Caracas. “It’s irrelevant whether or not Chavez comes back. He’s an ideological icon of a socialism that doesn’t exist.”

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below