Venezuela Devalues Currency to 4.3 Bolivars Per Dollar

By Jose Orozco and Corina Rodriguez Pons

Venezuela's Minister of Planning & Finance, Jorge Giordani. Photographer: Miguel Gutierrez/AFP/Getty Images

Venezuela devalued its currency for the second time since January, enabling the government to increase revenue at the risk of pushing up the world’s highest inflation rate.

The government will weaken the exchange rate on so-called essential goods such as food and medicine by 40 percent to 4.3 bolivars per dollar on Jan. 1, unifying its two fixed foreign exchange rates in bid to pull the economy out of recession, Finance Minister Jorge Giordani said today on state television. Imports of essential goods were previously bought at a rate of 2.6 bolivars per dollar.

The devaluation will help narrow the government’s budget deficit by bolstering the bolivar-based value of the state oil company’s exports, said Orlando Ochoa, an economics professor at Andres Bello Catholic University in Caracas. Inflation, which is already the highest among 78 countries tracked by Bloomberg at 27 percent, may quicken further as food prices climb, he said.

“Devaluing has fiscal benefits but also hurts the country’s economic activity,” Ochoa said. “Clearly, this adjustment in the preferential exchange rate directly affects inflation for 2011.”

The central government posted a deficit of 58.2 billion bolivars, or $13.5 billion at the new exchange rate, between January and November, according to a National treasury report.

Recession

Giordani, who has also served as planning minister under President Hugo Chavez, said the devaluation will help spur economic growth after two years of recession. Ochoa said that a pickup in inflation will “deepen the recession.”

Chavez devalued the bolivar in January for the first time since 2005 and created a multi-tiered exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports at subsidized exchange rates. Venezuela is the largest oil producer in South America.

The devaluation will boost the tax revenue that state oil company Petroleos de Venezuela SA turns over to the government because the company had been selling some of its dollar revenue at the 2.6 exchange rate, said Milton Guzman, an economist at Caracas-based consulting company Fortuny, Guzman & Asociados. Oil accounts for about 95 percent of Venezuela’s exports, according to the central bank.

Economic ‘Distortions’

About $18 billion of this year’s $30 billion of imports were also purchased at the 2.6 per dollar rate, said Juan Socias, director of Caracas-based Grupo Soluciones, a research company that studies Venezuela’s foreign exchange commission.

“With so many exchange rates in play there has been a lot of distortions” in the economy, said Guzman. “Now by selling everything at 4.3, PDVSA and the government’s fiscal contributions will improve. That will translate into a greater flow of bolivars for the government.”

Venezuela’s oil-dependent economy contracted in 2010 for a second consecutive year as foreign currency shortages grew and crude production dropped, the central bank said in a report published on its website today. Venezuela’s is the only major Latin American economy in recession.

The economy has suffered as a Chavez-led nationalization drive scared away private investment, Guzman said.

Gross domestic product shrank 1.9 percent this year, with the oil industry shrinking 2.2 percent and the non-oil sector contracting 1.8 percent, according to today’s report, which cited preliminary figures. The economy contracted 3.3 percent in 2009.

Brokerage Crackdown

Chavez ordered a crackdown on brokerages this year and the dismantling of an unregulated currency market they administered, which was used by Venezuelans to obtain dollars when they couldn’t get permission from the government to buy at the official exchange rates.

Sitme, the exchange that replaced the unregulated or so- called parallel market, has traded $5.04 billion to date, an average of $36 million per day. The parallel market traded between $80 million and $100 million a day, Alberto Ramos, a Latin America economist at Goldman Sachs Group Inc. in New York said in June.

The devaluation, which investors had anticipated, will provide only temporary help for the budget, said Jaime Valdivia, head of emerging market research at Bluecrest Capital Management in New York.

“This will be a temporary measure that will alleviate some of the fiscal pressures but I don’t think this changes the fundamental story of Venezuela, which is one of very high inflation, high deficits and increasing debt problems,” Valdivia said. “This doesn’t really change that much.”