Raul Gallegos : Venezuela:
false hope, investors may exit
Venezuela’s devaluation bodes badly for investors. The move announced Friday to weaken the currency 32 percent to 6.3 bolivars per dollar strengthens the government. It eases an overvalued exchange rate and gives the state more solvency. But it also proves Hugo Chavez’s ministers can run Venezuela without Chavez. Investors may want to eye an exit.
The Venezuelan economy has seen worse days. Its GDP grew 5.5 percent last year, a faster clip than Latin America’s largest economy, Brazil, which rose merely 1 percent. And while Venezuela’s 20 percent inflation rate was the second highest in the region after Argentina’s, it was still its lowest level in nearly four years.
But a devaluation was overdue. Chavez’s heavy spending ahead of October’s election ensured his victory by ten percentage points, but it pushed Venezuela’s deficit to 11 percent of GDP according to Moody’s Investors Service. Meanwhile, strict capital controls have starved businesses of dollars, leading to product shortages and heavy dollar demand. By year end, a greenback in Venezuela’s black market fetched four times the official rate of 4.3 bolivars per dollar.
The Chavez administration has used devaluations before to strengthen its hand. Adjusting the exchange rate allows the government to obtain more bolivars for every dollar in oil sold. Ecoanalitica, an analysis firm, reckons the devaluation will mean an additional $13.4 billion for state coffers. This gives Chavistas more spending power to cement their popularity among the poor.
Chavez is still in Havana fighting for his life and his return looks increasingly unlikely. But the Chavistas running Venezuela have felt comfortable enough to make major economic decisions in his absence. And Chavez’s heir, Vice President Nicolas Maduro, will no doubt follow the same tired economic script if he were elected to serve in the leader’s absence.
Investors hopeful for regime change have welcomed a weaker bolivar. The price for Venezuela’s 2022 bonds rose to well above par on Friday and pushed yields down to 9 percent, their lowest return ever. Venezuela’s debt has returned nearly 40 percent since Chavez fell ill. But investors expecting a fiscal turnaround in Venezuela may be as unrealistic as Chavez’s supporters awaiting his return. They may want to quit while they’re still ahead.
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Editor's Note:This commentary was originally published byt State of Americas on Feb. 11, 2013. Petroleumworld reprint this article in the interest of our readers.
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Petroleumworld News 02/13/2013
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