Venezuela Devalues Its Currency (by nearly 47%)

http://www.businessinsider.com/venezuela-bolivar-currency-devaluation-2013-2

Venezuela just undertook a massive currency devaluation, re-pegging the bolivar to a value of 6.3 per U.S. dollar from its previous official exchange rate of 4.3 bolivars per dollar.

The government also announced that it would shutter the Venezuelan currency exchange system known as SITME.

Given the currency devaluation underway in other economies around the world right now – perhaps most notably in Japan – a few are calling this Venezuela's foray into the global "currency war" between countries trying to devalue their currencies in order to increase export competitiveness.

However, Venezuela appears to be having a different sort of problem. The country is experiencing a shortage of U.S. dollars, which is making it hard for the country to pay for imports.

Bloomberg's Corina Pons & Nathan Crooks reported on Monday:

The government isn’t considering a devaluation at the moment given its strong balance of payments, the official said. The goal is to improve the supply of dollars while keeping in place existing currency controls, said the official, who spoke on condition of anonymity because no final decision has been made.

Last week the government took its first step to increase the supply of dollars in the economy by channeling more of its oil exports revenue to the central bank. South America’s biggest oil producer is facing shortages of goods ranging from diapers to cars as the lack of dollars crimps imports. In the black market, the bolivar has weakened 53 percent to 18.39 per U.S. dollar in the past year, according to Lechuga Verde, a website that tracks the rate.

Venezuelan President Hugo Chavez spent a ton of money (fiscal stimulus-wise) getting re-elected, and it's left the government with a pretty serious budget deficit.

As Bloomberg's Charlie Devereuz and Jose Orozco explain, "The move can help narrow the budget deficit by increasing the amount of bolivars the government gets from taxes on oil exports."

Another source

http://www.reuters.com/article/2013/02/08/venezuela-currency-devaluation-idUSL1N0B8BWZ20130208

UPDATE 2-Absent Chavez devalues Venezuelan currency to aid gov't finances

* Parallel SITME foreign exchange system to be scrapped

By Eyanir Chinea and Brian Ellsworth

CARACAS, Feb 8 (Reuters) - Venezuela devalued its bolivar currency on Friday by 32 percent in a widely expected move that will shore up government finances after ailing President Hugo Chavez's blowout election-year spending in 2012 but will also spur galloping inflation.

The country's fifth devaluation in a decade follows two months of silence from the famously chatty leader who remains in Cuba after surgery for cancer that has threatened to end his 14-year leadership of a self-styled socialist revolution.

The move slashes the official bolivar exchange rate to 6.3 per dollar from 4.3 under currency controls Chavez created in 2003 that require importers and travelers to apply for hard currency through a state agency.

Officials said Chavez approved the measure from Havana.

It will ease a shortage of greenbacks that has crimped imports and left many supermarkets barren of staples such as flour. But its inflationary impact could dent the government's popularity at a time of uncertainty over whether the 58-year-old Chavez's cancer will stop him completing a third term in office.

"A decision has been made to change the value of our currency to 6.3," Finance Minister Jorge Giordani said during a press conference just before the start of Venezuela's long-weekend Carnaval holiday.

The devaluation takes the pressure off government finances by providing more bolivars for each dollar the OPEC nation receives from crude exports. But it also boosts prices for imported goods crucial to the heavily oil-dependent economy, spurring inflation.

Most Latin American currencies are freely traded, meaning any change in value is usually a result of investor perception or changes in interest rates rather than a policy decision ordered by state officials.

CENBANK SYSTEM SCRAPPED

"It's positive not only because of the magnitude but because they decided not to wait until a later date despite lingering political uncertainty and all the issues around the health of president Chavez," said Alberto Ramos of Goldman Sachs.

The analyst predicted future devaluations were likely given the overall imbalances in the economy.

The government is also scrapping an exchange system known as SITME, which functioned in parallel to the state currency board.

Venezuela has borrowed heavily since its last devaluation, with the government and state oil company PDVSA selling $17.5 billion in new debt during 2011 alone.

Many of those issues were used in the SITME foreign exchange system, which uses bond swaps to provide hard currency.

Vice President Nicolas Maduro, speaking at a press conference just before the announcement, urged Venezuelans to be more austere and efficient - a rare call in a nation accustomed to flashy oil wealth.

"We have to learn to do a lot with a little, more with less," said Maduro prior to the announcement in comments that hinted at austerity. "We need to overturn the culture in which historically, because of oil, we've done little with a lot."

Devaluations generally make local industry more competitive in export markets abroad by lowering the cost of production in respect to other countries.

But critics say the move is unlikely to contribute to a significant expansion of domestic industry because of the government's confrontation with the private sector, extensive price controls and frequent unpaid expropriations.

Venezuelan governments have a long history of devaluing to finance state spending, creating chronic monetary instability and leaving citizens constantly seeking out hard currency.

There was anxiety on the streets.

"Of course, it increases inflation and quality of life will suffer," said publicity worker Maria Gonzalez, 30, at a supermarket in Caracas.

Dollars on the illegal black market have for weeks been fetching nearly four times the official exchange, which economists cite as a sign of how over-valued the currency had become. Businesses frequently have to tap this market because they are unable to acquire greenbacks from the government.

This second article has a bit trouble with the maths. Bolivars went from 4.3 to 6.3, 2/4.3 = 46%

I'd also like to point out that the Central Bank of Venezuela, just a few days ago, said that a devaluation would not be necessary, and lo and behold, look what we got today!

But OBVIOUSLY this can't be true, right? I mean, isn't Venezuela under Chávez's regime supposed to be a utopia where everything's dandy and the poor live happy lives?