Tuesday, December 24, 2013

Venezuela: Cash-Strapped Nation Devalues Bolívar by 44%, Too Many Variables, Little Transparency

According to The Latin American Tribune, Venezuela devalued its currency (VEB) by 44% for tourists on Monday (December 23), one of a series of expected moves as the cash-strapped Socialist nation looks to boost its local-currency revenue.

Nonresidents will be able to legally exchange dollars for 11.3 bolivars as of Monday, compared with the previous exchange rate of VEF6.3, according to a statement on the Central Bank’s website.

The announcement comes a week after Oil Minister Rafael Ramírez, who also serves as top economic adviser to President Nicolás Maduro, said that oil investments, the tourism sector and Central-Bank gold transactions would start using a weaker exchange rate, but didn’t specify the rate.

The new rate, however, still doesn’t match the country’s currency black market where dollars are bought for more than VEF60. With annual inflation above 50%, locals have been clamoring for greenbacks to protect their savings but state regulations limit access to hard currency, leaving a scarcity of dollars in the oil-rich country.

COMMENT: “For my colleagues on Wall Street that come down to Venezuela, now supposedly when you use your US credit cards for expenses, you will get billed at this 11.3 rate, not the 6.3 rate,” according to
Russ Dallen, a partner at Caracas Capital Markets, said.

Mr. Ramírez said essential sectors like food and health care, however, would continue using the preferential rate of VEF6.3 per dollar.

Venezuela earlier this year launched a dollar-auction system called Sicad, where some importers and tourists could request hard currency at a rate weaker than the official exchange rate of VEF6.3. The government conveniently never formally disclosed the exchange rate used in Sicad, but local analysts and companies that have participated in the auctions say the rate is close to VEF12 per dollar.

Still, Wall Street analysts widely expect Venezuela to pull off a full-scale devaluation of its currency in the near-term, a move that would help the government shore up its finances by capturing more in local-currency terms when it converts dollars earned through oil sales.

Crude oil and petroleum products make up 95% of Venezuela’s exports, which is not particularly wise from an export diversification standpoint.