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Source: Reuters
President Hugo Chavez devalued Venezuela's bolivar currency,
attempting to resuscitate local production but running the risk of
worsening inflation in the South American oil-exporter's flagging
economy.
Facing a recession and galloping prices in the 11th year of his
presidency, Chavez had long been pressured by business for an
adjustment of the over-valued exchange rate, but was not expected
to make the move so close to an election.
Venezuela votes for a new National Assembly in September.
The move will likely boost the state's bolivar revenues from oil
and help local exporters, but add pressure on prices, which soared
25% in 2009, the highest in the Americas.
The bolivar had been fixed at 2.15 to the US dollar since 2005
as part of Chavez's strict controls of Venezuela's economy in line
with his "21st century socialism" policies.
But Chavez, in a live address on state TV, said the bolivar would
now have two levels - a preferential rate of 2.6 per dollar for
essential imports like food, health and machinery and a 4.3
petro-dollar rate for other things.
"This has several objectives, to revive the productive economy,
strengthen the Venezuelan economy, slow imports that are not
strictly necessary and at the same time ... stimulate production
for exports," he said.
"Veneuela has to be a country which exports more than just
oil."
Widely considered to have been overvalued for several years, the
bolivar also trades on a tolerated parallel black market and will
continue to do so.
Ahead of Friday's announcement, the bolivar weakened during the day
from about 5.90 to 6.10 to the dollar in parallel trade, on the
rumours of a devaluation.
Election coming
Chavez, whose self-styled revolution since coming to power in 1999
has sharply polarized Venezuela's 28 million people, hopes to stave
off an opposition effort to overturn his majority in the September
vote.
The devaluation could stoke social tensions and weigh on his
ratings, now at about 50%.
Asked how the devaluation would impact inflation, Venezuelan
Finance Minister Ali Rodriguez told state TV it could add three to
five percent to the annual rate.
It was not clear if he meant percentage points.
Local economists said the main risk from the devaluation was
further price pressures.
"Among the disadvantages is the inflationary effect," said Pavel
Gomez, of local business institute IESA.
But the government hopes the inflationary impact of the devaluation
will be offset by subsidies to food and gasoline prices, provision
of some free services including health clinics, and frequent
increases to the minimum wage.
At the 4.3% rate the bolivar is 50% weaker, while the 2.6 rate
represents a devaluation of 17.3%.
Venezuela last devalued its currency in 2005, to 2,150 bolivars per
dollar from 1,920 bolivars.
In 2008, it re-denominated the currency, lopping off three
digits.
Venezuela's economy is estimated to have shrunk 2.9% in 2009, and
officials are hoping for moderate growth at the very best this
year.
"When you depend on oil and you keep increasing spending on social
programs and you hold the exchange rate at that level, you are
clearly going to have monetary and fiscal deterioration," a New
York-based source at a major global bank said just before the
devaluation as rumors grew.
"Maybe he didn't want to do this sooner because he doesn't want to
show weakness."
The devaluation will affect neighbouring Colombia's economy,
already hit hard by diplomatic strife with Venezuela as Chavez has
clamped down on bilateral trade in protest over a military
cooperation deal signed by Washington and Bogota in October.
"All our exports to Venezuela will increase in price overnight,"
said Camilo Perez, chief economist at Banco de Bogota in
Colombia.
"This will be true of all countries that export to Venezuela, but Venezuela is Colombia's second biggest trade partner, so the impact will be significant here."
