Financial Regulatory Forum

Venezuela devaluation rumoured, economic announcement due

By Reuters Staff
January 8, 2010

CARACAS, Jan 8 (Reuters) – A senior Venezuelan government official told Reuters on Friday to be “alert” to an imminent economic announcement, with traders saying they were hearing a devaluation of the bolivar currency was coming.

The bolivar has been fixed at 2.15 to the dollar since 2005, but it trades on a parallel black market at way over that rate. The bolivar weakened on Friday from about 5.90 to 6.10 to the dollar in parallel trade, on the rumours of a devaluation.

“Today’s move in the parallel market has been mainly due to expectations in the financial market — non-official and not confirmed — of a possible devaluation this weekend,” one trader said in an email communication to clients.

President Hugo Chavez was due to hold a cabinet meeting from 5 p.m. (1630 EST) on Friday.

A senior member of Chavez’s economic team told Reuters that an announcement of some sort was coming. Asked if it could be a devaluation, he said: “Yes, of course, we must be on alert.”

Economists have long said Venezuela’s bolivar is over-valued at the official rate, but most had thought Chavez would be unlikely to devalue in an election year.

He faces a parliamentary election in September.

Some local economists have floated the idea of a so-called “dual currency”, under which importers of essential goods like food and medicines would have access to dollars at a preferential rate, and others at another higher level.

A devaluation, while helping exporters and boosting government coffers from oil revenues, would add pressure to Venezuela’s inflation rate, which in 2009 was already the highest in the Americas at 25.1 percent.

That impact, however, will be mitigated by the fact that many importers already use the parallel rate anyway, as access to dollars at the official level is strictly controlled.

Venezuela last devalued its currency in 2005, to 2,150 bolivars per dollar from 1,920 bolivars. In 2008, the government re-denominated the currency, lopping off three digits.

The government seeks to limit the impact of inflation on Venezuela’s 28 million people by subsidising food and gasoline, offering some free services including health clinics, and decreeing frequent increases to the minimum wage.

(Reporting by Ana Isabel Martinez; Writing by Andrew Cawthorne, Editing by Chizu Nomiyama)

((andrew.cawthorne@thomsonreuters.com; +58 212 277 2700; Reuters Messaging: andrew.cawthorne.reuters.com@reuters.net))

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