December 31, 2010 / 12:44 PM / 9 years ago

Venezuelans fret over prices after devaluation

* Second currency devaluation in 12 months

* Chavez risks political hit from poor voters

By Daniel Wallis and Deisy Buitrago

CARACAS, Dec 31 (Reuters) - Venezuelans worried on Friday that a second devaluation of their currency in 12 months would make life even harder as the socialist government of President Hugo Chavez struggled to turn the economy around.

Already suffering one of the world’s highest inflation rates and the only major Latin American economy still in recession after the global financial crisis, they fear the New Year devaluation could hit their livelihoods more.

“It is a blow against the pockets of the workers, against the poorest people,” said Robinson Calua, a 50-year-old security guard in downtown Caracas.

Officials say the devaluation announced on Thursday will increase spending and boost growth in South America’s biggest oil producer, while easing the pressure on foreign reserves and freeing up dollars for imports.

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The move scrapped the lowest rate of a complex, multitiered forex system that few Venezuelans or outsiders properly understood and even taxed the brains of Wall Street experts.

With a handful of different exchange rates for everything from medicines to factory machinery, not to mention an active currency black market, analysts said the structure encouraged corruption and inefficiency and was prone to collapse.

The elimination of the strongest rate of 2.6 bolivars to the dollar should improve the government’s balance sheet and could please bondholders, but will make goods like medicines and some food items more expensive.

In the near future, that is likely to feed an inflation rate that the central bank estimates was 26.9 percent in 2010.

Chavez, who has inherited Fidel Castro’s mantle as Latin America’s leading critic of the United States during his nearly 12 years in power, has increased his government’s role in the economy through regulations and a wave of nationalizations.

He has accelerated efforts to entrench his self-styled “21st century socialism” in recent weeks, and apparently chose to order the devaluation as soon as possible before seeking re-election at the next presidential poll in December 2012.

That way, his government takes any economic pain and inflationary pressure — and possible social consequences — in 2011 and hopes to have more funds for the election campaign.

It is a gamble, though, because the firebrand president draws his core support from Venezuela’s sprawling barrios and poor rural areas, where any price rises will be felt most.

A legislative vote in September showed the electorate split down the middle, but the charismatic Chavez remains by far the country’s single most popular politician.

The outgoing parliament gave Chavez special decree powers for the next 18 months, which he says he will soon use to increase the country’s sales tax from its current 12 percent.

FAR CRY FROM OIL BOOM DAYS

Jenny Diaz, a 39-year-old administrative assistant, was told about the devaluation while she was lining up to buy a new washing machine before any sales tax hike came into effect.

“Food is going to become more expensive, but our salaries will remain the same,” she told Reuters with a sigh.

Network engineer Bernardo Lugo, 40, said the devaluation was irresponsible and showed the government needed cash.

“They have already set up the machine to print money.” he said. “This is going increase inflation in the short term.”

The move could help Venezuela’s state oil company PDVSA, which previously had to sell nearly 30 percent of its revenue at the old rate of 2.6 bolivars to the dollar. It will now be able to book it all at 4.3 bolivars.

The devaluation had been widely forecast by Wall Street analysts, who said it was overdue but perhaps did not go far enough. Most said they expected the authorities in Caracas to take more currency measures going forward.

Daniel Kerner of the Eurasia Group think-tank said that unlike January’s major formal devaluation, the latest change did not do much to alter the overall economic picture.

“Foreign exchange shortages will likely remain problematic, and the government will continue to rely on debt issuance to finance spending and address forex shortages,” he said.

Venezuela’s currency has a unstable history. Financial turmoil in the 1990s led to rapid loss in value, with bands, fixed rates and a free float all failing to stop the decline.

It is a far cry from the oil boom days of the 1970s, when the country was nicknamed “Saudi Venezuela” and the bolivar was one of the region’s strongest currencies, letting middle-class Venezuelans enjoy lots of foreign travel and cheap shopping.

Some Venezuelans became known, one joke went, for always saying “Dame dos!” (Give me two!) when stocking up at expensive Miami malls during a period that many still remember fondly.

The devaluation should help fatten the state’s coffers and that should cheer bondholders — though Venezuelan debt trades more on global oil prices and investor appetite for risk.

From Jan. 1, dollars will be available at the official rates of 4.3 bolivars for some preferential goods and 5.3 to the dollar via the central bank’s SITME exchange system.

One option for the government could be to let the SITME rate weaken. All eyes are now on what further fiscal steps Chavez will take using his decree powers. (Editing by Andrew Cawthorne and W Simon )

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