Chavez Devaluation Too `Timid' as Bolivar Remains Overvalued, Goldman Says

Venezuelan President Hugo Chavez. Photographer: Yuri Cortez/AFP/Getty Images

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Dec. 30 (Bloomberg) -- Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp., discusses the outlook for emerging market economies and stock markets in 2011. Woolfolk, speaking with Pimm Fox on Bloomberg Television’s “Surveillance Midday,” also discusses Federal Reserve policy, the U.S. dollar and the Chinese yuan. (Source: Bloomberg)

Venezuelan President Hugo Chavez’s currency devaluation yesterday was too “timid” to shore up government revenue and narrow the budget deficit because the bolivar remains overvalued, Goldman Sachs Group Inc. said.

The government weakened the exchange rate on so-called essential goods such as food and medicine by 40 percent to 4.3 bolivars per dollar, unifying its two fixed foreign exchange rates in a bid to pull the economy out of recession, Finance Minister Jorge Giordani said yesterday. Imports of essential goods were previously bought at 2.6 bolivars per dollar.

While the devaluation will increase the bolivar-based value of the state oil company’s exports, the move is too marginal to bolster tax revenue enough to trim the deficit, said Alberto Ramos, a Latin America economist at Goldman Sachs in New York. The central government posted a deficit of 58.2 billion bolivars, or $13.5 billion at the 4.3-per-dollar rate, in the first 11 months of the year, according to the National Treasury.

The devaluation “is not deep enough” and will not “correct for the real overvaluation of the currency,” Ramos said in a telephone interview. “Unifying the two cash rates is a good development, but I think it’s a relatively timid move,” he said.

Giordani, speaking on state television yesterday, said that the measure will help pull the country out of recession. The economy contracted in 2010 for a second consecutive year as foreign currency shortages mounted and oil production fell, the central bank said in a report published on its website yesterday. Venezuela is the only major Latin American nation in recession.

Unregulated Market

The decision comes seven months after Chavez suspended trading in May in the unregulated market following a plunge in the bolivar to 8.2 bolivars to the dollar. Chavez dismantled the unregulated, or so-called parallel currency market administered by brokerages, which was used by Venezuelans to obtain dollars when they couldn’t get permission from the government to buy at the official exchange rates.

Sitme, the state-run exchange system that replaced the parallel market, has traded on average about $36 million per day at an average rate of 5.3 bolivars per dollar, the upper end of a price band between 4.3 and 5.3 bolivars per dollar.

‘Negative Impact’

Siobhan Morden, the head of Latin America strategy at RBS Securities Inc., said the devaluation, Chavez’s second since January, may have a “net negative impact” on the country’s fiscal accounts because the government had been booking its dollar debts at the 2.6 exchange rate. State-run Petroleos de Venezuela SA, known as PDVSA, was selling only about 30 percent of its dollars at the 2.6 rate, according to Barclays Capital.

Oil accounts for about 95 percent of exports from Venezuela, which is the largest crude producer in South America, according to the central bank.

“There might be some marginal benefits for PDVSA but it doesn’t really help the sovereign much,” Morden, who’s based in Stamford, Connecticut, said in a telephone interview. “Just unifying the rate to 4.3 seems to fall short” of what’s needed, she said.

Gross domestic product shrank 1.9 percent this year, with the oil industry shrinking 2.2 percent and the non-oil sector contracting 1.8 percent, according to the central bank report released yesterday. The economy contracted 3.3 percent in 2009.

World’s Highest Inflation

Inflation, which is already the highest among 78 nations tracked by Bloomberg at 27 percent, may quicken further as the weaker bolivar pushes up food prices, said Orlando Ochoa, an economics professor at Andres Bello Catholic University in Caracas. He said that inflation pickup will “deepen the recession” by eroding Venezuelans’ purchasing power.

Chavez said Dec. 13 that he’s also planning to increase the country’s value-added tax rate from 12 percent to bolster revenue and fund housing and infrastructure projects after torrential rains left 130,000 homeless. Chavez was granted decree powers for 18 months by the National Assembly after he said he needed fast track legislation following the natural disaster. He didn’t say how big an increase he would enact.

The devaluation, which will take effect Jan. 1, will only provide a temporary boost to the budget, said Jaime Valdivia, head of emerging market research at Bluecrest Capital Management in New York.

“I don’t think this changes the fundamental story of Venezuela, which is one of very high inflation, high deficits and increasing debt problems,” Valdivia said.

Nationalizations

The government’s benchmark dollar bonds due in 2027 rose today, pushing the yields down to 13 percent from 13.3 percent yesterday, according to Trace prices. Venezuelan dollar bonds have returned 15 percent this year, beating the 11.7 percent average gain on emerging-market dollar debt, according to JPMorgan’s EMBI+ index.

Chavez devalued the bolivar in January for the first time since 2005 and created a multi-tiered exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports at subsidized exchange rates.

The economy has sputtered as Chavez’s nationalization of companies in business ranging from cattle ranching to telecommunications deterred investment in the country, said Milton Guzman, an economist at Caracas-based consulting company Fortuny, Guzman & Asociados.

For now, Venezuela will not raise prices at state-run Mercal stores for the 65 percent of the food that it imports at 2.6 bolivars per dollar, El Universal reported today, citing government officials it didn’t identify.

Venezuela will collect an additional 13 billion bolivars ($3 billion) from state oil company Petroleos de Venezuela SA and the central bank will receive more money as part of the devaluation, El Universal reported, citing Ecoanalitica analyst Asdrubal Oliveros.

To contact the reporters on this story: Jose Orozco in Caracas at jorozco8@bloomberg.net; Charlie Devereux in London at cdevereux3@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at