Venezuelans fret over prices after devaluation

* Second currency devaluation in 12 months

* Chavez risks political hit from poor voters

By Daniel Wallis and Deisy Buitrago

CARACAS, Dec 31 (BestGrowthStock) – Venezuelans worried on Friday
that a second devaluation of their currency in 12 months would
make life even harder as the socialist government of President
Hugo Chavez struggled to turn the economy around.

Already suffering one of the world’s highest inflation
rates and the only major Latin American economy still in
recession after the global financial crisis, they fear the New
Year devaluation could hit their livelihoods more.

“It is a blow against the pockets of the workers, against
the poorest people,” said Robinson Calua, a 50-year-old
security guard in downtown Caracas.

Officials say the devaluation announced on Thursday will
increase spending and boost growth in South America’s biggest
oil producer, while easing the pressure on foreign reserves and
freeing up dollars for imports.

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The move scrapped the lowest rate of a complex, multitiered
forex system that few Venezuelans or outsiders properly
understood and even taxed the brains of Wall Street experts.

With a handful of different exchange rates for everything
from medicines to factory machinery, not to mention an active
currency black market, analysts said the structure encouraged
corruption and inefficiency and was prone to collapse.

The elimination of the strongest rate of 2.6 bolivars to
the dollar should improve the government’s balance sheet and
could please bondholders, but will make goods like medicines
and some food items more expensive.

In the near future, that is likely to feed an inflation
rate that the central bank estimates was 26.9 percent in 2010.

Chavez, who has inherited Fidel Castro’s mantle as Latin
America’s leading critic of the United States during his nearly
12 years in power, has increased his government’s role in the
economy through regulations and a wave of nationalizations.

He has accelerated efforts to entrench his self-styled
“21st century socialism” in recent weeks, and apparently chose
to order the devaluation as soon as possible before seeking
re-election at the next presidential poll in December 2012.

That way, his government takes any economic pain and
inflationary pressure — and possible social consequences — in
2011 and hopes to have more funds for the election campaign.

It is a gamble, though, because the firebrand president
draws his core support from Venezuela’s sprawling barrios and
poor rural areas, where any price rises will be felt most.

A legislative vote in September showed the electorate split
down the middle, but the charismatic Chavez remains by far the
country’s single most popular politician.

The outgoing parliament gave Chavez special decree powers
for the next 18 months, which he says he will soon use to
increase the country’s sales tax from its current 12 percent.

FAR CRY FROM OIL BOOM DAYS

Jenny Diaz, a 39-year-old administrative assistant, was
told about the devaluation while she was lining up to buy a new
washing machine before any sales tax hike came into effect.

“Food is going to become more expensive, but our salaries
will remain the same,” she told Reuters with a sigh.

Network engineer Bernardo Lugo, 40, said the devaluation
was irresponsible and showed the government needed cash.

“They have already set up the machine to print money.” he
said. “This is going increase inflation in the short term.”

The move could help Venezuela’s state oil company PDVSA,
which previously had to sell nearly 30 percent of its revenue
at the old rate of 2.6 bolivars to the dollar. It will now be
able to book it all at 4.3 bolivars.

The devaluation had been widely forecast by Wall Street
analysts, who said it was overdue but perhaps did not go far
enough. Most said they expected the authorities in Caracas to
take more currency measures going forward.

Daniel Kerner of the Eurasia Group think-tank said that
unlike January’s major formal devaluation, the latest change
did not do much to alter the overall economic picture.

“Foreign exchange shortages will likely remain problematic,
and the government will continue to rely on debt issuance to
finance spending and address forex shortages,” he said.

Venezuela’s currency has a unstable history. Financial
turmoil in the 1990s led to rapid loss in value, with bands,
fixed rates and a free float all failing to stop the decline.

It is a far cry from the oil boom days of the 1970s, when
the country was nicknamed “Saudi Venezuela” and the bolivar was
one of the region’s strongest currencies, letting middle-class
Venezuelans enjoy lots of foreign travel and cheap shopping.

Some Venezuelans became known, one joke went, for always
saying “Dame dos!” (Give me two!) when stocking up at expensive
Miami malls during a period that many still remember fondly.

The devaluation should help fatten the state’s coffers and
that should cheer bondholders — though Venezuelan debt trades
more on global oil prices and investor appetite for risk.

From Jan. 1, dollars will be available at the official
rates of 4.3 bolivars for some preferential goods and 5.3 to
the dollar via the central bank’s SITME exchange system.

One option for the government could be to let the SITME
rate weaken. All eyes are now on what further fiscal steps
Chavez will take using his decree powers.
(Editing by Andrew Cawthorne and W Simon )

Venezuelans fret over prices after devaluation