Venezuela’s Chavez devalues currency

CARACAS, (Reuters) – President Hugo Chavez devalued  Venezuela’s bolivar currency yesterday, attempting to  resuscitate local production but running the risk of worsening  inflation in the South American oil-exporter’s flagging  economy.

Facing a recession and galloping prices in the 11th year of  his presidency, Chavez had long been pressured by business for  an adjustment of the over-valued exchange rate, but was not  expected to make the move so close to an election.

Venezuela votes for a new National Assembly in September.

The move will likely boost the state’s bolivar revenues  from oil and help local exporters, but add pressure on prices,  which soared 25 percent in 2009, the highest in the Americas.

The bolivar had been fixed at 2.15 to the dollar since 2005  as part of Chavez’s strict controls of Venezuela’s economy in  line with his “21st century socialism” policies. But Chavez, in a live address on state TV, said the bolivar  would now have two levels — a preferential rate of 2.6 per  dollar for essential imports like food, health and machinery  and a 4.3 “petro-dollar” rate for other things.

“This has several objectives, to revive the productive  economy, strengthen the Venezuelan economy, slow imports that  are not strictly necessary and at the same time … stimulate  production for exports,” he said.

“Veneuela has to be a country which exports more than just  oil.”

Widely considered to have been overvalued for several  years, the bolivar also trades on a tolerated parallel black  market and will continue to do so.

Ahead of yesterday’s announcement, the bolivar weakened during  the day from about 5.90 to 6.10 to the dollar in parallel  trade, on the rumors of a devaluation.

Chavez, whose self-styled revolution since coming to power  in 1999 has sharply polarized Venezuela’s 28 million people,  hopes to stave off an opposition effort to overturn his  majority in the September vote.

The devaluation could stoke social tensions and weigh on  his ratings, now at about 50 percent.

Asked how the devaluation would impact inflation,  Venezuelan Finance Minister Ali Rodriguez told state TV it  could add “three to five” percent to the annual rate. It was  not clear if he meant percentage points.

Local economists said the main risk from the devaluation  was further price pressures. “Among the disadvantages is the  inflationary effect,” said Pavel Gomez, of local business  institute IESA.

But the government hopes the inflationary impact of the  devaluation will be offset by subsidies to food and gasoline  prices, provision of some free services including health  clinics, and frequent increases to the minimum wage.

At the 4.3 percent rate the bolivar is 50 percent weaker,  while the 2.6 rate represents a devaluation of 17.3 percent.

Venezuela last devalued its currency in 2005, to 2,150  bolivars per dollar from 1,920 bolivars. In 2008, it  re-denominated the currency, lopping off three digits.

Venezuela’s economy is estimated to have shrunk 2.9 percent  in 2009, and officials are hoping for moderate growth at the  very best this year.

“When you depend on oil and you keep increasing spending on  social programs and you hold the exchange rate at that level,  you are clearly going to have monetary and fiscal  deterioration,” a New York-based source at a major global bank  said just before the devaluation as rumors grew.

“Maybe he didn’t want to do this sooner because he doesn’t  want to show weakness.”

The devaluation will affect neighbouring Colombia’s  economy, already hit hard by diplomatic strife with Venezuela  as Chavez has clamped down on bilateral trade in protest over a  military cooperation deal signed by Washington and Bogota in  October.

“All our exports to Venezuela will increase in price  overnight,” said Camilo Perez, chief economist at Banco de  Bogota in Colombia. “This will be true of all countries that  export to Venezuela, but Venezuela is Colombia’s second biggest  trade partner, so the impact will be significant here.”