Saturday, February 9, 2013

Venezuela: Update on Chávez Government's 32% Devaluation of Bolívar

According to Reuters, the socialistic government of ailing President Hugo Chávez devalued the bolívar yesterday (February 8) for the fifth time in a decade, this time by 32%.

Following the announcement, the often intimidated opposition leader Henrique Capriles strongly criticized Vice President Nicolas Maduro and Congressional leader Disodado Cabello of squandering the nation's lucrative petroleum revenues.

The measure was announced before a four-day weekend for Venezuela's Carnival holiday to minimize political or market repercussions. It had been widely forecast by economists as a way reconciling the black market rate for dollars at four times the old official level of 4.3 bolívars. By raising the rate to 6.3 bolívars, the government will boost state finances by providing more local currency for each dollar of oil export revenue.

COMMENT: Maduro, who is Chavez's preferred successor should his cancer force a new presidential election, said the move was needed to optimize revenues, including to fund flagship social programs that are wildly popular among Venezuela's poor.

On Wall Street, analysts praised the move as necessary--albeit overdue-- given the impact on state finances of heavy spending during Chavez's re-election campaign last year, and the soaring black market rate for the dollar. Some calculated it would generate extra revenue equivalent to more than 3% of GDP.

Unfortunately, the devaluation is simply another form of "creative financing" that will result in hyper-inflation, that almost never helps a government in the long-term.