CARACAS, Saturday December 24, 2011 | Update
Finance | Foreign exchange rate

The strong bolivar heads for a new devaluation

Swiss multinational financial company Credit Suisse believes that an adjustment will be inevitable in 2013

Overvaluation of the Venezuelan bolivar triggers imports with foreign purchases totaling USD 33 billion in nine months (File photo)
Saturday December 24, 2011  12:00 AM

Analysts and investment banks agree that Venezuela's official exchange rate (VEB 4.30 per US dollar) have its days numbered. However, there are doubts whether the devaluation will occur before or after October 7, 2012 when Venezuelans will decide whether or not to re-elect Hugo Chávez as president.

In its last report on Venezuela, Swiss multinational financial company Credit Suisse said that "devaluation will be inevitable in 2013, no matter the outcome of presidential election." The up-regulation will thicken the official exchange rate up to VEB 6.15 per US dollar.

While economic analysts mostly agree with Credit Suisse on thinking that for political reasons, governments do not adjust the official exchange rate in an election year, government's decision to devalue the Venezuelan bolivar in 2010, nine months before the election of the deputies to the National Assembly, is still fresh in the minds of many people.

Sources close to government agencies have said that Hugo Chávez's Administration has not ruled out the possibility of making a foreign exchange adjustment in January 2012.

That's cheap, give me two

Why is Venezuela approaching a new devaluation? José Manuel Puente, a professor at the Institute of Higher Education in Business Administration (IESA), says that the main reason is the overvaluation of the Venezuelan bolivar.

Technically, the combination of static exchange rate with a high inflation rate leads to currency overvaluation. In this economic imbalance, imported products are cheaper than those produced domestically. As a result, imports grow rapidly.

While consumers get quality products at lower prices, domestic production is affected because prices are lower. Non-oil companies are hit by a stiff competition which limits their scope for development, job creation and the possibility to diversify exports.

In the course of time, this imbalance becomes unsustainable, because the high demand for foreign exchange can not be met and the government has no choice but to devalue the currency.

"No matter the methodology followed, there is only one conclusion: the Venezuelan bolivar is overvalued with respect to the US dollar, and 41% of Venezuelan trade is with the United States. If we take into account this parameter, the exchange rate should be twice the current foreign exchange," José Manuel Puente reasoned.

Since the exchange rate is artificially cheap, Puente forecasts that imports will amount to USD 44 billion, a 16% hike compared to 2010.

There are not so many...

Although the oil price challenges the law of gravity and remains over USD 100, the amount of foreign currency available to meet rising imports is limited.

Pdvsa's output has not risen lately and there are several agreements under which Venezuelan oil is sold at discount prices or is already committed to pay off loans to China.

In addition, Pdvsa does not transfer to the Central Bank of Venezuela all the US dollars it receives, and the international reserves, which account for the foreign exchange available to cover imports, has not grown in 2011.

Consider also that the government has begun to make itself responsible for overheads such as the increase of government payroll, pensioners and scholarships for young pregnant women. In this context, devaluation of the local currency is a way to get more bolivars for each oil barrel.

This tax-oriented reason will be much more powerful if the slowdown in Asian economies and an almost inevitable recession in Europe negatively impact oil prices.

At the end of the third quarter of this current year, oil provides USD 95 out of incoming USD 100, whereas non-oil exports only account for USD 3.39 billion.

Translated by Gerardo Cárdenas

The end of a cycle

Hundreds of thousands of demonstrators took to the streets of Brazil on March 13 to demand the ouster of embattled President Dilma Rousseff, carrying banners expressing anger at bribery scandals and economic woes. A banner read "We don't want a new Venezuela in Brazil."

fotter Estampas
fotter Estampas