http://online.wsj.com/article/BT-CO-20100110-702846.html?mod=WSJ_World_MIDDLEHeadlinesAmericasARACAS (Dow Jones)--Venezuela's devaluation of its currency and the imposition of a dual-rate foreign exchange system will certainly give a short-term boost to the fiscal situation of President Hugo Chavez's government.
But doubts remain that the devaluation will meaningfully help those outside the government. Importers and exporters, foreign oil companies and others in Venezuela that have been battling the broken currency system for years are waiting to see how the new system will work in practice.
After all, they've been down this road before.
Since winning the presidency more than a decade ago, this is effectively the fourth devaluation under Chavez, suggesting the previous ones have failed to engender longer-term economic stability.
Normally, a weaker currency makes exports more cost-competitive abroad, and so would typically generate more sales to overseas clients. That helps a country's external accounts and economy.
But this dynamic doesn't much apply to Venezuela. The country never had a strong manufacturing sector, and has seen what there was of it shrivel sharply during Chavez's tenure, which has been marked by statist policies, including widespread nationalizations.
Venezuela's sales of oil, which are denominated in dollars, now account for more than 90% of exports. So total exports can hardly be expected to rise as a result of the devaluation.
Still, the government had to do something, given its high spending commitments and a rampant currency black market in which the dollar frequently fetched three times the official rate. That disparity generated inflation that ran at 27% last year, among the highest rates in the world.
The old system, in place for the past five years, was made up of an official rate that required hard-to-obtain government approval and a black market that was thriving but pseudo-legal.
With the stroke of a pen Friday night, President Hugo Chavez chopped in half the official value of Venezuela's bolivar currency, to VEF4.3 for $1. It had been held at VEF2.15 for $1 since 2005. A declared socialist, Chavez also decreed a special rate of VEF2.60 for $1 to apply to import purchases of "necessary" items the country is lacking, such as basic foods and medicine.
It's the VEF4.3 rate that will get the most scrutiny.
"How much currency will the government really make available to the markets at 4.3 (bolivars)?" asked Russ Dallen, a banking analyst at BBO Financial Services. "If the government doesn't supply a significant amount of dollars at 4.3, then companies that need access to foreign currency will still be forced to rely on the higher parallel market."
Whether the government provides all the dollars individuals and companies request at the VEF4.3 rate is, in large part, out of its hands. If oil prices continue to rise, the government should have no problem meeting demand.
But if crude prices trend back toward levels seen last year, firms may be just as frustrated trying to get the VEF4.3 rate as they were trying to get the VEF2.15 rate.
Venezuela's oil price averaged $57 a barrel last year from $86 in 2008.
The government, of course, is assured of immediately getting the VEF4.3 rate, which means that starting Monday the tens of millions of dollars oil-rich Venezuela earns on a daily basis from its petroleum sales - mostly to the U.S. - will be worth double when converted into bolivars.
The extra money will allow Chavez to restore spending on social programs that saw cutbacks last year as oil prices plummeted. He said Saturday that more spending was indeed a key reason for the devaluation.
Critics say Chavez' strategy is clear: the extra cash will allow him to essentially buy votes from the poor ahead of September congressional elections, where the president's socialist party hopes to retain a majority.
Chavez saw his popularity ratings dip under the crucial 50% level a few times last year, a rarity during his 11 years at the helm of this South American nation. A grinding recession and rising power and water shortages that many blame on him are also hurting.
Some say his support could suffer if the currency measures spark more inflation, which devaluations often do. The government is betting that the potential benefits will outweigh the risks.
Apart from government coffers, state oil firm Petroleos de Venezuela will clearly see its cash flow enhanced from the new VEF4.3 rate, which will result in more bolivars from its sales of oil abroad. That should help the company's books as it struggles to meet a sharply rising payroll and payment demands from suppliers.
For others, the VEF4.3 rate would be an improvement from the black market rate, as long as they secure approval from the government to buy dollars.
To keep the black market rate down, "we need the government to sell more dollars at the official rate, whatever it is," said Carlos Larrazabal, president of the industrial business chamber Conindustria.
The balance sheets of foreign companies doing business in Venezuela are still likely to take a hit. Companies like Spanish telecom giant Telefonica SA (TEF) reported their income here using the fixed, VEF2.15 rate, even as the government denied their requests to sell them dollars to repatriate their profits. Telefonica officials were not immediately available for comment.
Colgate-Palmolive mentioned Venezuela in an SEC filing as an example of exchange controls limiting the companies ability to repatriate earnings. The currency controls result "in significant balances in countries such as Venezuela that are at risk for devaluation," the company said in a filing last year.
"The government didn't approve any repatriation requests last year," Larrazabal said. The currency controls have trapped billions of dollars in profits, forcing foreign companies to keep them in local currency in Venezuela.
On the flip side, a firm like Brink's Co. (BCO), the security company, decided last month to start repatriating its profits at the black market rate and took a $23 million hit instead of waiting for government approval to take out their money from Venezuela. Now, assuming it can get the VEF4.3 rate, it may be able to report a windfall of $10 million or so.
Officials at Brink's were not immediately available for comment.
DIRECTV also took a $168 million charge through September to repatriate profits using the black market rate.
Many Venezuelan importers received approval to buy dollars last year, but are still awaiting payment. Conindustria says the government owes around $5 billion to importers at the previous VEF2.15 rate. "Will these debts be paid at the old rate? We don't know yet," said Larrazabal.
The new VEF2.6 rate, designed for a chosen few, could be a boon for importers of food, hospital equipment, medicines and some yet undetermined types of heavy machinery, as they will be the only ones getting the highly subsidized rate.
Hugo Board Mod please speak on this?Peter SNiff seems to think the US is heading in this direction.. Just imagine if we had to do that to our currency, the almighty greenback..
