Venezuelan Minister of Finance announces sharp devaluation of currency

December 30, 2010

Jorge Giordani, Venezuela’s Minister of Finance announced the devaluation of the “lower” official exchange rate of Bs. 2.6 per US$ to unify it with the Bs. 4.3 rate, essentially devaluing the exchange rate for all essential items by 65%. This decision affects the whole structure of subsidies (except energy) created by the Chavez Government in the last seven years, which was based on direct imports of food and pharmaceuticals at the lower rate, which was kept at Bs. 2.15 per US$ since 2005, increased to Bs. 2.6 per US$ in January 2010 and now increased again to Bs. 4.3 per US$.

The move is, in my opinion, a political one, it is a brutal devaluation which will have a huge inflationary impact in 2011, but whose effects will dissipate in 2012 and by making it so large now, removes the need for an additional devaluation before the 2012 elections. It removes partially the distortion that the multiple exchange rates cause, but it only goes half way and does not include additional measures.

The move does nothing for exports, all exports (except PDVSA changing its foreign currency, part of it had to be exchanged at Bs. 2.6) had been receiving Bs. 4.3 per US$ since January of 2010.

In terms of inflation, this will certainly contract demand and the Government is likely to postpone price increases until shortages appear, but the overall impact in the next few months is certainly going to be quite dramatic, particularly for the poor.

The announcement does signal that Minister Giordani is in charge, despite the terrible performance of the economy under his guidance. Perhaps nothing exemplifies his ability for deceit as saying that “this measure is adopted to place the citizens at the center of economic decisions”.

What he did not say is that he is aiming at them with a fully loaded inflationary gun.

31 Responses to “Venezuelan Minister of Finance announces sharp devaluation of currency”

  1. ErneX Says:

    This is just great for student and retired people abroad.

    God damned baboons!

  2. moctavio Says:

    Well, it certainly was crazy to subsidize people abroad at that lower rate, it made no sense, both socially or economically. The measure is good, it removes distortions and subsidies, but it is not taken because of that.

  3. island canuck Says:

    He doesn’t give a shit about people abroad.

    As I mentioned in the previous thread this will help him to avoid an increase in gasoline prices.

  4. moctavio Says:

    I think the impact of this measure is much more than if they increased gas prices by 200-300%. The whole structure of subsidies for the poor was based on the Bs. 2.6 rate, now that has been increased by 65%, the impact of increasing gasoline prices would not be as large.

  5. ErneX Says:

    Good measure? for me to poop on, since when these clown have made good decisions?

    Can’t wait to see the downfall of the revolution.

  6. geha714 Says:

    “The move is, in my opinion, a political one, it is a brutal devaluation which will have a huge inflationary impact in 2011, but whose effects will dissipate in 2012 and by making it so large now, removes the need for an additional devaluation before the 2012 elections.”

    Wanna bet? Because these guys are so good at economics… Oh wait!

  7. ErneX Says:

    It’s quite interesting to see hard-core chavista reactions to this announcement:

    http://anonym.to/?http://tinyurl.com/3372s5v

    It took 12 years but it seems that more sooner than later things will change, we can only hope.

  8. A_Antonio Says:

    What it is unbelief is one of the reason Giordani gave for the devaluation: “This will allow us to simplify the situation” ;-)

  9. loroferoz Says:

    Only those who had prior access to preferential dollars, such as the students, dependents, medical patients and the retired will really suffer.

    As for imports, well… We know how it is. Say that you are a Venezuelan importer. The foreign guy, on the other side of the puddle will not wait for CADIVI to release funds, but wants to be paid before delivery. You pay up front, with surprise surprise, parallel-rate dollars or SITME-rate dollars you got hold of. CADIVI requires from foreign guy a letter of credit with all the details of the transaction, and he duly obliges. CADIVI takes it’s own sweet time (150-180 days) to release the funds. In the meantime you manage to sell the merchandise, at prices that reflect the rates you actually paid, no less. Of course, the foreign guy will be paid by CADIVI, you know this, trust him and expect to have back the money CADIVI pays him. One happy day, CADIVI deposits money to his account, he duly deposits the money into a foreign account of your choosing. This can be sold on the parallel market, invested, or paid back to foreign guy as an advance for more merchandise, whatever, it’s dollars at less than parallel or SITME rate. Of course, maybe if you are foxy enough, you don’t need to import a great deal, but have foreign guy “overcharge” you, and it’s up to you both how to divide up the triangulation spoils.

    Lubrio, who is a chavista, but not uncritical and not blind, has it in Spanish:

    http://lubrio.blogspot.com/2010/01/entendiendo-como-los-empresarios.html

  10. ErneX Says:

    Lubrio is a brainwashed hard-core chavista that for each thousand praise to the revolution he does a tiny critic, calling him uncritical is like saying it’s freezing in hell.

    I used to be a friend of the guy back when he wasn’t brainwashed and actually enjoyed playing violent imperialistic videogames in lan parties.

  11. captainccs Says:

    The Bolivians didn’t take long to start a protest. Who knows, maybe Evo will follow CAP out the palace door…

    Bolivians in streets to protest fuel hikes

    http://news.yahoo.com/s/nm/20101230/wl_nm/us_bolivia

  12. captainccs Says:

    Jorge Giordani is continuing the job that Luis Herrera Campins started and which all following presidents have continued which is to devalue the currency. The rate of devaluation is well north of 31% annually, from 4.50 in 1983 to 8,650.00 today.

    The currency has been devalued by copeyanos, adecos, chriperos and rojo rojitos. Todos la misma vaina.

  13. loroferoz Says:

    Ernex: Lubrio might or might not be brainwashed. I don’t know the mind of the guy. I strongly disagree with most of his opinions, and believe him a hardcore chavista. Note that he credits a person named Luis Lopez Silva, aka Croncho as responsible for the analysis.

    However, that does not detract one iota from the plausibility of the process he posted.

    I cannot picture, for practical reasons, an exporter willing to wait for CADIVI bureaucracy a whole 5 to 6 months!!!, when the money paid is needed right about now to pay expenditures and to invest in future production or acquisitions.

    Or under that regime (letter of credit, CADIVI taking 5 to 6 months) that importers and exporters would not hatch such an scheme. They have to under the conditions if they want to be called such.

    Then, just selling their CADIVI dollars at parallel rates produces gain, particularly as parallel rates rise and do not fall; even if you actually bought at the worst possible rate for you at the time there is still a gain to be made in selling at the rate current 6 months later. Figure if you exchange bonds from PDVSA. Jackpot!

    Even the most honest would be tempted to shift the focus of their operation to this Golden Triangle of imported stuff, CADIVI dollars and parallel dollars. The less than honest would only pretend to import and sell, or ask to actually be “overcharged”.

  14. Kolya Says:

    Judging from the angry reactions in Aporrea, I wonder whether Chavez will soon offer Giordani as a chivo expiatorio.

  15. GWEH Says:

    OT: this is accurate behind the scenes

    http://www.investors.com/NewsAndAnalysis/ArticlePrint.aspx?id=558327&p=1

    IBD Editorials

    The Hug That Failed

    Posted 12/30/2010 07:05 PM ET

    Diplomacy: If there’s any doubt that U.S. kissing up to Venezuela’s Hugo Chavez has been a disaster, note the mutual expulsion of envoys Wednesday. Some diplomacy. This is the product of appeasement, not strength.

    It was quite a bright dawn two years ago when President Obama and his Secretary of State, Hillary Clinton, went out of their way to make nice with Venezuela’s Hugo Chavez at a summit in Trinidad. They shook hands, touched him like an old friend, accepted his insulting anti-American book as a gift, and declared they were “there to listen” as the diatribes flowed.

    Instead of improving relations, we can now see where that leads — to a fast deterioration in ties.

    Because Chavez acts like a clown, it’s easy for the Obama administration not to take him seriously. The administration also fears being singled out in the hemisphere for Chavez’s rage, as the Bush administration was.

    So President Obama and some of his political appointees at State seem to think the way to handle him is to appease him — even as evidence mounts that he’s a predator.

    Chavez refused career diplomat Larry Palmer as U.S. ambassador to Caracas because he made “aggressive” and “unacceptable” attacks on his rule. In fact, Palmer merely explained to the Foreign Relations Committee at his Senate confirmation hearing last June that morale is low in Venezuela’s military and the government is sheltering drug-dealing guerrillas from Colombia. All true.

    It was enough for Chavez to throw a tantrum and reject the president’s choice of envoy, as well as place himself in a position to bully the U.S. into nominating an ambassador of his choosing.

    Fact is, these things happened because U.S. hasn’t dealt Chavez a hard enough hand.

    The U.S. — rightly — kicked Chavez’s own envoy out in retaliation for this thuggery. But even that packed less punch than it should have because Assistant Secretary of State for Western Hemisphere Affairs Arturo Valenzuela, a former board member of La Raza, merely revoked Ambassador Bernardo Alvarez’s visa instead of the much tougher act of declaring him persona non grata.

    They also dragged Palmer’s nomination out for six months, which gave Chavez the time he needed to step up his attacks.

    Worse still, Chavez could see a divided State Department, where the spokesman defended Palmer, and Valenzuela actually blamed Senator Richard Lugar’s staff for asking Palmer tough questions.

    It’s all part of a message, sent again and again, that Chavez’s tantrums don’t matter, his acts don’t matter and all that matters is not confronting him. It will only get worse from here.

  16. GWEH Says:

    Luigino Bracci drank the koolaid a long time ago

  17. GWEH Says:

    Miguel, you got those snowflakes running on the site?

  18. moctavio Says:

    Yes, it’s Xmas!!!

  19. captainccs Says:

    The snow flakes are caused by global warming. Merry Global Warming, I mean Xmas!

  20. Kepler Says:

    GWEH,

    Whatever the US does, it won’t be better. What do you think would have happened if Obama and Clinton had said anything else? I mean: WHAT?
    Don’t you see? No matter what the US does or says, Hugo is going to do the same.

    OK, let’s see what YOU propose. Obama (or Bush or whoever) says from the start Chávez is a gruesome dictator or anything else. Do you think Chavez would not have dared to do something?

    The only thing the US or any other country other than Venezuela could do to really screw Chavez is to come up with some incredible car that does not need petrol to function.

  21. jeffry house Says:

    A more aggressive US policy against Chavez would simply allow him to posture more believably as a victim of the empire. The US error with Cuba was to allow Castro to mobilise nationalist sentiment on behalf of his revolution.

    It’s a hard truth, but it really is up to Venezuelans to get rid of him.

  22. PB Says:

    Off topic but . . . . Happy New Year from your followers in the UK. I hope you have a better year in 2011.

  23. GWEH Says:

    Kepler I cant publicly seriously talk about this! Regarding Bernardo, they should have PNG’d his fat ass

  24. GWEH Says:

    I dont think anyone can say what chavez’ outcome will be for he’s one crazy mofo with a penchant for danger. he loves to gamble big

  25. GWEH Says:

    Kepler, I think the USG can draw a tougher line with Venezuela. I think the USG is underestimating the dangers yet the problems are everywhere to be seen. Contrary to popular belief, the United States is currently not reliant (hostage) to Venezuelan petroleum and could source Venezuela’s portion with Saudi Arabia. However, this could lead to rapid deterioation of situation and USG has to be prepared for all contingencies. Currently USG is conducting two large wars and conducting offensive military operations around the globe. The special ops are all busy and you would need a sizable chunk for venezuelan contingencies.

  26. GWEH Says:

    I would make sealed indictment against chavez and gang for drug trafficking top priority. Something good… not the Castro or Haiti bs.


  27. The value of a currency is determined relative to the value of the other currencies i.e. how much of the other currency can be bought by one unit of your home currency. In general, this is the exchange rate of this currency pair and it fluctuates over time with currencies gaining or losing value against each other.

  28. Avila Says:

    Hey Miguel,

    You made the newspapers in Thailand. Sorry I did not think to take a picture, but you were quoted as a local analyst in a newswire story. No mention of your blog, however.

    Feliz ano Nuevo to you and your family.


  29. Thailand ?

    Wow! That is globalization for you!

    Thanks!


  30. [...] In the meantime, Venezuelans are bearing the latest currency devaluation. [...]


  31. [...] VENEZUELA Venezuelan Minister of Finance announces sharp devaluation of currency [...]


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