Venezuelans Slammed with Devaluation

In an announcement timed to take the bulk of the population by surprise -- just as the majority of the country was heading off to enjoy a national holiday -- the Chavez government sprung a plan to devalue the currency (the bolivar), which analysts believed was being artificially supported.

The exchange rate has gone from 4.3 bolivars to a dollar to a 6.3-1 ratio. That is a significant enough shift but still falls way short of what most suggest would be an accurate ratio. The black market exchange rate is nearly four times the new rate. Within hours of this announcement, the population packed stores trying to buy imports at the old exchange rate. The moment the new rates came to be, that surge ended with a thud. The population is now far poorer than it was at the start of the weekend, and the government is as shaky as it has been in years. Hugo Chavez made the decision from his hospital bed in Cuba, and there are signs that even his vice president was taken by surprise by the whole thing. The public outcry is dramatic and seems people are erroneously blaming interim leader Nicolas Maduro instead of Chavez.

The bolivar still remains overvalued, and demand for dollars is as great as ever. For years, the Chavez regime has deliberately kept the bolivar higher than is remotely justified as this essentially subsidized the economy. He counted on the dollar revenues from oil to cover this bet, but the tactic has been less than effective for the past few years.

The cost of bringing oil to market in a given nation is the key to how much that nation gets from its key resource. It is hard to get accurate data on Venezuela, but the estimate is that it is costing around $100 a barrel, nearly triple the cost faced by those in Saudi Arabia. This leaves almost no margin at all. The upshot is that the country is not earning the dollars it used to – that compromises its economy as a whole. The country is in deep trouble no matter what direction it chooses to go. Maduro will likely be the one that faces the immediate consequences of Chavez’s increasingly erratic decision-making.

-Armada Corporate Intelligence

No comments:

Post a Comment