Venezuela Begins Stealth Devaluation After Oil Price Plunge

By Matthew Walter

Jan. 12 (Bloomberg) -- Venezuelan President Hugo Chavez says he won’t adjust the oil-exporting country’s pegged exchange rate amid a plunge in prices for crude. Instead, seeking to maintain his popularity, he may devalue the currency by sleight of hand.

The government is already cutting its sales of dollars at the rate it established in 2005, forcing travelers abroad to turn to a parallel, unofficial market where U.S. currency sells at a 61 percent premium. Venezuelans need government authorization to get dollars at the official rate.

“What’s essentially going on is a surreptitious devaluation,” said Russell Dallen, head trader at Caracas Capital Markets, a unit of BBO Financial Services Inc., a Caracas-based brokerage and asset management company. “They’re pushing more people into the unofficial market, so that’s forcing a devaluation on more people.”

Chavez’s insistence on a pegged rate, which worked well enough as long as Venezuela was awash in petrodollars, turned into a liability since oil prices collapsed. The government can no longer afford to subsidize cheap dollars for the consumer imports Venezuelans have grown accustomed to. On the other hand, abandoning the peg would ignite a surge of inflation at a time Chavez is campaigning for a chance to run again for president.

Venezuela’s inflation, the fastest among the 82 economies tracked by Bloomberg, may accelerate this year as the supply of dollars at the official exchange rate shrinks, forcing importers to spend more for foreign goods. Consumer prices rose 31.9 percent in 2008.

No Adjustment

A devaluation “isn’t planned” this year, Finance Minister Ali Rodriguez said in an interview Jan. 8, adding later on state television that an exchange rate adjustment “isn’t necessary.”

Asked whether dollar sales at the pegged rate will be cut this year, Rodriguez said: “It’s likely that they’ll go down a bit.”

That would be the first drop since the Foreign Exchange Administration Commission, the agency that approves currency trades, was created in 2003. Last year, it authorized $48 billion in dollar sales, up 11 percent from 2007.

On Dec. 31 the government cut in half the maximum dollars Venezuelans can buy for international travel, and Rodriguez said dollars for luxury imports will probably be reduced as well.

Keeping the peg at 2.15 bolivars per dollar has stoked a booming trade in imported cars, electronics and consumer goods. Imports surged 98 percent from 2005 to 2008 to $47.6 billion, according to the central bank.

Parallel Market

To offer access to additional foreign exchange, Venezuelan bond traders started exchanging dollar-denominated securities for local bolivar bonds at a floating, parallel exchange rate after the government imposed foreign exchange controls in 2003.

The bolivar traded at 5.57 per dollar in the parallel market on Jan. 9, traders said. The rate is also used as a reference for widespread black-market street trading.

Rodriguez said he can’t rule out a multitiered exchange rate similar to the one implemented in the 1980s when collapsing oil revenue sent the economy into a tailspin. On Feb. 28, 1983, known as “Black Friday,” then-President Luis Herrera Campins devalued the bolivar for the first time in 22 years after oil prices crashed.

The Venezuelan basket, an index of the country’s oil exports, has tumbled 70 percent between July 18 and Jan. 9 to $37.62 a barrel.

Political Fire

Maintaining the peg on just medicine, food staples, and industrial machinery would help insulate Chavez from political fire ahead of a referendum in February or March, when voters will decide whether to scrap presidential term limits and allow him to run again in 2012.

That limited range for dollar sales, though, would be an “implicit devaluation,” said Asdrubal Oliveros, a director at Caracas-based economic consultant Ecoanalitica.

When rumors of the cutback for travelers began circulating in December, Venezuelans flooded across the Colombian border to withdraw currency, said Rodolfo Mora, president of the retailers’ chamber in Cucuta, Colombia, a town popular with Venezuelan shoppers.

“Sales this year were like before 1983,” Mora said. “Back then, there wasn’t room on the streets for all the people.”

As Chavez looks for ways to save money and sustain his popular social programs, Venezuela’s five-year frenzy of consumption may be coming to an end.

Expensive Debt

Even after a recent rally, the benchmark 9 1/4 percent bond due in 2027 is down 32.8 percent since Sept. 10. Its 16.041 percent yield will keep the government from selling additional debt, said Claudia Calich, who manages $1 billion in emerging market debt at Invesco in New York.

At current oil prices, devaluation is almost unavoidable without “massive” spending cuts, she said in an interview.

Devaluation would boost the government’s earnings in bolivars for every dollar of oil sold. Oil accounts for 93 percent of exports and pays for half the budget.

Chavez and Rodriguez have said oil may be poised to rebound. In any event, Chavez says his socialist political project can survive low prices, as it did in 2001 and 2002. On New Years Eve he unveiled plans for $100 billion in projects over the next four years.

“His mouth is writing checks that the oil price doesn’t allow him to cash at the moment,” said Dallen, the trader at Caracas Capital Markets.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net;