..courtesy of Jim Willies Hat Trick Newsletter

◄ Venezuela faces a deepening crisis also. Hugo Chavez is playing fast and loose. Unlike Russia, whose central bank is dealing with the devaluation of its currency, Venezuela has sidestepped the music by permitting the black market to handle the issue. The black market is often much more corrosive to the economy and political structure on a long-term basis. The government has already stopped honoring the exchange rate established in 2005. It is now forcing travelers abroad to use a parallel unofficial market where the USDollar sells at a 61% premium. Ordinary Venezuelans need government authorization to obtain USDollars at the official rate. Russell Dallen of Caracas Capital Markets, a unit of BBO Financial Services, said “What is essentially going on is a surreptitious devaluation. They are pushing more people into the unofficial market, so that is forcing a devaluation on more people.” Strains have grown acute, since its government can no longer afford to indirectly subsidize cheap prices for the consumer imports that make more comfortable their standard of living. Maintaining the peg at 2.15 bolivars per US$ has encouraged a booming trade in imported cars, electronics, and household goods. Imports surged 98% from 2005 to 2008 to reach $47.6 billion, according to their central bank. The Chavez Govt hardly encourages foreign participation with factories to pump out products for domestic usage. Abandoning the peg would ignite a surge of inflation at a time Chavez is campaigning to run again for president. Venezuelan price inflation is the fastest among the 82 economies tracked by Bloomberg. Consumer prices rose 31.9% in 2008. Prices could easily accelerate this year as the supply of USDollars at the stubbornly enforced official exchange rate shrinks, which will force importers to spend more for foreign goods.

The bolivar traded at 5.57 per dollar in the parallel market on January 9, according to traders. The parallel market provides a rate used as a reference for widespread black market street trading. Holding to the peg on just medicine, food staples, and industrial machinery would help insulate Chavez from political fire ahead of a referendum in February or March. At that time, voters will decide whether to abandon presidential term limits and allow him to run again in 2012. When rumors of the official limits placed for travelers began circulating in December, Venezuelans flooded across the Colombian border to withdraw currency, according to Rodolfo Mora, president of a commercial group in Cucuta Colombia, a town popular with Venezuelan shoppers. Sales have been extremely brisk lately, just like before 1983, with the streets crowded at the small markets. As Chavez searches to continue his charade on the consumer front and to sustain his popular social programs, this chapter of the Venezuelan story is coming to an end. Chavez has presided over some significant decline in living standards and horrible price inflation. He has introduced deep corruption and inefficiency to their national oil business. The middle class for the nation has performed a near vanishing act. His talk to support the people serves as a cover for his own crony corruption. For instance, his buddies work in key oil business posts, without any engineering expertise or experience.

The Venezuelan Govt debt securities are very expensive. Its benchmark 9.25% bond due in 2027 has fallen a whopping 32.8% since mid-September alone. Its 16.04% yield will hinder the government from raising funds to cover federal deficits. Claudia Calich, of the emerging market debt group at Invesco in New York, believes they cannot sell any additional debt. At current oil prices, steep currency devaluation is almost unavoidable without massive spending cuts, she claims. Devaluation would increase the government’s income in bolivar terms for every US$ of crude oil sold. Oil accounts for 93% of exports and covers half the federal budget. Hence revenues have been cut in half in the last year alone. Leaders are confident that the crude oil price will enjoy a rebound. Chavez boasts that his socialist political project can survive low prices, just like in 2001 and 2002. On New Years Eve he unveiled plans for $100 billion in projects over the next four years. Chavez will be feisty and defiant to the end. That end might be sooner than analysts in the region expect. Never under-estimate the effect of popular uprisings, especially in Latin America. In the United States, people harbor a defeatist sentiment and suffer the pain of lost life savings quietly, complete with radical swings in costs, even the shame of home loss. US residents tend to believe the media networks. In Latin America, they take to the streets in a flash, and have always distrusted their government and institutions.