Chavez Risks Backlash after Venezuela Devalues Bolivar 32%

Charlie Devereux & Corina Pons

Venezuela, South America’s biggest oil producer, devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies.

Venezuela will weaken the exchange rate by 32% to 6.3 bolivars per dollar starting February 13, 2013, the 30th anniversary of a similar event known as Black Friday.

The devaluation will help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports, but also threatens to accelerate annual inflation that is now 22%.

The central bank’s so-called Cadivi system, which sells dollars to importers at the official exchange rate, will provide $35 billion this year, the same as last year. The Sitme exchange, which sold at a weaker, parallel rate and will be discontinued, provided about $8 billion last year.

While a weaker currency may stoke inflation, it may also ease shortages of goods because the government was restraining the supply of dollars it allocated to the private sector as it waited for a more favorable rate.

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.

Chavez last devalued in December 2010 when he weakened an exchange rate on so-called essential goods by 40%. 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 devaluing the currency will reduce the government’s budget deficit by half, the government will likely have to take further measures within the next year.

Source: bloomberg