CARACAS, Wednesday December 12, 2012 | Update

Lack of consensus over devaluation in Venezuela

The Government may postpone the adjustment of the forex rate by selling debt bonds

If the Government resolves not to devaluate the Venezuelan currency, there will be further distortion in the foreign exchange rate. When the adjustment is finally implemented, it will be more painful (File photo)
Wednesday December 12, 2012  11:43 AM
Members of the Venezuelan economic cabinet agree on the need to devaluate the local currency due to both excessive demand of US dollars at an artificially cheap foreign exchange rate and the advantages of obtaining more local currency for each petrodollar so that the Government can fill the gaps in public accounts. However, it appears that Finance Minister Jorge Giordani does not concur.

Although a number of studies have found the need for devaluation and adjustment of the forex rate, no decision has been made to take the first step.

If such decision is in the hands of the finance minister and no changes are made, only one choice will be left: the possibility of making the Transaction System for Foreign Currency Denominated Securities (Sitme) more flexible or setting up a new, less restricted mechanism allowing the private sector to buy and sell US dollars.

Giordani believes that a vast amount of superfluous imports can be eliminated. Additionally, now he has the powerful political incentive to put off any decision that may have an impact on inflation until political uncertainty -including doubts about a presidential election in the medium term- is dispelled.

More debt

Alejandro Grisanti, an analyst at investment bank Barclays Capital, believes that the Venezuelan Government has leeway to postpone devaluation.

Although the wide gap between income and expenditure accounts for some 15% of the gross domestic product (GDP), the Finance Ministry may issue debt bonds.

The analyst also believes that postponing devaluation by incurring in further debts means that the ministry will have to obtain USD 1.5 billion monthly.

By the end of 2012, the total debt will stand at 51.6% of the GDP, doubling the figure recorded in 2006. Moreover, by the second half of 2013, the country's debt will not be that comfortable anymore.

Overvaluation -a distortion making the US currency cheaper and spurring imports- will escalate and by the time the forex rate is finally adjusted, the move will be more painful.

Translated by Jhean Cabrera
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