WRAPUP 2-Venezuela’s Chavez devalues bolivar currency again

* Lowest forex rate eliminated in 2nd devaluation of 2010

* Price pressures expected, opposition critical

* President Chavez risks political pain before 2012 vote
(Adds central bank chief comments, details, background)

By Andrew Cawthorne and Daniel Wallis

CARACAS, Dec 30 (BestGrowthStock) – Venezuelan President Hugo
Chavez’s government devalued its bolivar currency for the
second time in 12 months on Thursday, abolishing the lowest
exchange rate as the OPEC member fights to revive its economy.

Intended to spur local production in the largely
import-dependent nation, the announcement followed a central
bank estimate that the economy contracted 1.9 percent during
2010 — Venezuela’s second straight year of recession.

The central bank said it would eliminate the exchange rate
of 2.6 bolivars per dollar, which had been available for
essential imports such as medicines and some foods, accounting
for roughly a third of all forex transactions.

The socialist government hopes the move will attract
foreign funds, improve its balance sheet and make the local
private sector more competitive.

“The decision will have positive consequences for
investment in 2011,” said central bank chief Nelson Merentes.

Economists had forecast a devaluation given the perilous
state of the country’s finances despite global oil prices that
have averaged over $80 per barrel during the year. Crude and
oil products account for about 90 percent of Venezuela’s export
revenue.

They expected that Chavez, who trumpets his “21st century
socialism” as a model for the world, would want to take the
political pain of a devaluation as early as possible before
seeking re-election in the December 2012 presidential polls.

Latin America’s only major economy still in recession,
Venezuelan GDP shrank 3.3 percent last year. But the government
says the economy is recovering and will grow by 2.0 percent in
2011.

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“Politically, it is the right thing to do. They are
devaluing now so as to avoid it in 2012 and take the
inflationary hit in 2011,” said local analyst Miguel Octavio,
of BBO financial services. “It’s brutal for the ordinary
Venezuelan because it will affect food and medicine prices.”

Venezuela already has one of the world’s highest inflation
rates, estimated by the central bank at 26.9 percent in 2010.
The price rises threaten to alienate Chavez’s core support in
the country’s slums and poor rural areas.

As of Jan. 1, in a still-complicated currency control
system, dollars will be available at state-controlled rates of
4.3 bolivars per dollar for some preferential goods and 5.3
bolivars via the central bank’s SITME exchange system.

MORE MEASURES?

State-run PDVSA, one of the world’s biggest oil companies,
will continue to book its revenue at 4.3 bolivars per dollar,
meaning the impact of the move is limited. However, it will no
longer be required to sell some of its dollar revenue to state
institutions at the previous 2.6-per-dollar rate.

The bolivar was previously devalued in January of this
year, meaning many foreign companies in Venezuela took a cash
hit to their 2010 results.

That move had sent Venezuelans rushing to shops to make
purchases before prices rose, but there was no immediate
evidence of similar panic buying on Thursday.

In office since 1999, Chavez has blamed the country’s
economic problems on the global financial crisis as well as on
reduced oil exports from OPEC quota cuts.

He contends, however, that strong social indicators show
socialism is benefiting Venezuela’s 29 million people and
hauling many out of poverty.

Critics say Chavez is leading the economy to ruin citing
nationalizations, the byzantine system of currency controls,
subsidized oil supplies to allies like Cuba and China, and
other policies aimed at entrenching his socialist agenda.

“While the rest of the nations of Latin America show
vigorous growth and low inflation, Venezuela will close this
year with negative growth and inflation nearing 30 percent,”
said opposition politician Gustavo Rojas.

“All the countries advance, except for Venezuela, whose
income per capita this year will be the same as in 1986. We
have tossed 24 years into the waste basket,” he said.

PRICE WORRIES

A handful of Venezuelans interviewed at random by Reuters
seemed surprised and displeased by news of the devaluation,
which was unveiled the day before New Year’s Eve.

“This is going to affect the poor. Everything’s going to go
up now,” said Esperanza Sarmiento, a 55-year-old housewife.

While the devaluation will add to local price pressures, it
should help government coffers, which could please bondholders
— though the paper tends to trade more on global oil prices
and risk appetite.

Venezuela’s benchmark 2027 global bond (VENGLB27=RR: ) is
particularly broadly traded due to its high yield and
volatility on perceived risk.

Risk indicators like Morgan Stanley’s EMBI+ (11EMJ: ) and CDI
spreads (VEGV5YUSAC=MP: ) consistently rate the country’s debt as
the highest default risk in the world.

“This initial announcement is still mildly credit positive
as it eliminates the most (distortional) layer of the multiple
FX rate regimes,” said Siobhan Morden of RBS Securities.

Analysts believe further currency measures could be in the
offing, including letting the SITME rate weaken.

Chavez’s currency controls have spawned an illegal black
market where the bolivar trades at about 8.0 to the dollar.

Goldman Sachs senior economist Alberto Ramos applauded the
elimination of the lowest exchange rate, saying the multiple
tiers encouraged inefficiency and corruption.

“This comes at the bottom of the range of what the market
was expecting. We were expecting a more aggressive move,” he
said. “I think it’s not enough to correct for the real
appreciation of the currency.”

WRAPUP 2-Venezuela’s Chavez devalues bolivar currency again