Government Devalues to Bs. 6.3 per US$, Too Little, A Little Late

February 9, 2013


An so it came. The much predicted, expected, delayed and surprising devaluation arrived today. Reportedly, this was ready before Chavez’ illness, postponed until after his return, who nobody thought would take so long. And then, as all sources were saying nothing would be done, boom, Friday before Carnival, the Government devalues the currency 46.5% to Bs. 6.3 per US$ (more correctly 32%)

And there is more…

Because at the same press conference, the Government announced the elimination of the Central Bank’s SITME foreign exchange system. The same one hailed by the Central Bank’s President at its creation as being so “good”, it could last 100 years. It never made it to its third anniversary.

And when Merentes said that it made no sense to have the country issue new debt to supply SITME, one did not know whether to laugh or cry. Because the Government issued over US$ 10 billion in debt in the last two years only for that: To maintain an absurd and artificial foreign exchange system with cheap dollars at Bs. 5.3.

And today’s decision has to be related to today’s CPI announcement for January. Despite all the controls, threats and new institutions created to insure prices don’t go up, the January CPI came in at 3.3% (22% for the last 12 months), with the all important Food and Beverages coming in at 5.3%. In December, Food and Beverages was 5.7%, keep it at 5% per month and we are talking an annualized value of 80% per year for the group that poo people spend 80% of their income on.

And even worse, the scarcity index went from 16% to 20%-plus, as Venezuelans hoard and buy whatever they can get in basic staples. (Luxury goods are available, mostly through SITME, so maybe wine, foie and caviar hoarding will begin now)

But all the 46.5% devaluation does, is to provide a little bit of fiscal relief for a little while. The problem is that it still leaves a fiscal gap that is too large, which is likely to require another devaluation later in the year. Because this devaluation only covers about 60% of the expected deficit. At least another Bolivar in devaluation is needed now, which will only make a devaluation later much larger.

I see Bs. 8 by the end of the year.

Because in the end, the problem is not that the Government devalued by 46.5%, the problem is that the gap between the official rate and the black market illegal rate, went from 318%, to 272%, making arbitrage still very attractive and making prices of goods imported at the official rate of exchange too attractive to pass up. And the black rate sets many prices today.

Because in the end a devaluation is not a policy, it is the result of bad policy, and if it is not accompanied by a bunch of other measures, all it does it postpone the adjustments.

And when the President of the Central Bank announced that SITME was eliminated and there will be no alternative to it, what he was doing is insuring that the black market rate never goes down. Because SITME accounted for US$ 10 billion in imports last year and ALL of that will move to the black market, implying more inflation and a higher rate for that price which can not be mentioned in these pages.

Thus, ten years and four days after establishing exchange controls, the Chavez Government devalued once more. It has been a long road. First, it devalued in February of 2012, when the “band” was moved from Bs. 773 to Bs 980 (old Bs.). Then came the real controls and the price was fixed at Bs. 1,600 (old Bs.), then 1,900, the Bs. 2,150, which created the “strong” (jaja) Bolivar. Then Bs. 2.65, then Bs. 4.3 and now Bs. 6.3 per US$.

Some record no? Seven devaluations in fourteen years.

And Merentes and Giordani still suggest things are peachy, the economy is strong and we have to be more “efficient” (with US$ 15 billion in fake imports)

Oh yes! I forgot, part of the problem will be fixed with the creation of a new control body, above CADIVI, which will be an office to “Optimize the use of Foreign Currency”.

Merentes also announced that accounts in dollars in Venezuela will now be able to receive dollars from anywhere. I am still wondering about this one. These accounts were created to receive dollars from Sitme, now Sitme is eliminated, so that they will allow money to come from everywhere ,for those demented enough to have dollars in Venezuela’s revolutionary banking system.

Things that make you got uhhh???

But both Giordani and Merentes actually even managed to smile during their surprise announcement. In the end, it is the poor, the “people” who suffer most from devaluation and inflation and neither of them is in that group. And they really don’t seem to care

And you had to laugh when Giordani said that economics is hard. It’s hard when you know so little and do so many idiotic things.

About the only “good” news to come from this, is that the country’s bonds will go up next week, not only because a devaluation improves the country’s ability to pay, but because the elimination of SITME also means there will be no more idiotic issuance of bonds to supply that market.

But the bad news, is that these announcements reflect that Giordani is still in control of economic policy. Which means more ideology, less pragmatism and more distortions.

And Maduro said he backs all these measures, which must have Diosdado smiling…

He must be the only one…

50 Responses to “Government Devalues to Bs. 6.3 per US$, Too Little, A Little Late”

  1. geronl Says:

    What does this mean for Venezuelans at the grocery store? Do prices automatically increase that much?

    • moctavio Says:

      Not automatically, but basic staples, the ones in the CPI, all have to be increased by the same percentage as they are all purchased at Bs. 6.3 now. Shortages should go down if they allow price increases. Politically it seems as if shortages have more impact than inflation.

  2. deananash Says:

    The worst part isn’t the poor suffering, it’s the innocent poor suffering. That one word makes a world of difference.

    The guilty poor need to feel the results of their blind devotion to Chavez. It’s the only way they’ll ever learn. Best thing for Venezuela now is for Chavez to live a very long, incapacitated life, but still issuing the Cuban decrees.

  3. Kepler Says:


    It’s funny: I used the same title on a post this yesterday (CET time) but in German :-)
    I agree with you on almost everything here but for this:
    I am not so sure about how this will affect the poorest in the next couple of months. It will certainly affect them but they will probably feel it less because of government spending a little bit more on certain areas.
    Think about it: same PDVSA dollars, more bolívares for the imported cameras and cars and films and trips, which on a short term the government can spend in subsidies for Mercal and stuff like that.

    People will become even more dependent on that and demonize the private sector as it cannot provide products for those prices. This will be short lived and only in certain areas of the food production but it might be enough to help the government until June.
    I don’t mean it will get better for these people. I think it won’t get as bad as many think…for a couple of months.

    You know…I would like Venezuelans to see that page where Navarro and Giordani were praising the North Korean system.

  4. donacobius Says:

    Thanks Miguel. Nice post. But one query: why say the government has devalued the currency by 46.5% when in fact it’s a little under 32%? In plain logic, if you’re devaluing something you’re reducing it’s value. The reduction in the value (in dollar terms) of the bolivar is not 46.5% – that’s the amount by which the dollar rises against the bolivar. The other problem with this way of describing it is that it leads to nonsensical statements like ‘a devaluation of 120%’, when it’s obvious that no currency can lose more than 100% of its value. I know everyone does this, but I’m just curious as to why.

    • moctavio Says:

      I dont know what that is, it has always puzzled me that people measure the percentage change in the currency and not in its purchasing power, but I have no clue why it is. Long ago I tried to do it the right way only to confuse people. In fact, in Venezuela´s history we have had such statements of over 100% devaluations made by Government officials. (Last week someone in the opposition talked about the 600% devaluation since Chavez took power)

  5. Glenn Says:

    This is worrisome. Does it mean the Iranian ex-official will get less dollars for his 300 million bolivar fuerte check?

  6. moctavio Says:

    No, because the Bs. are for building houses, he got paid in $. The Bs. came from selling a fraction at the black rate.

  7. captainccs Says:

    No, not too little too late.

    On the contrary, too much too often. We don’t need devaluation. What we need are honest politicians and a sound economy, of that we have too little always.

    We have had this crap for 30 years, since Viernes Negro — 18 de febrero de 1983! It didn’t start in 1998. Remember cochino de monte, remember chiripero. Same carp, different camouflage.

    • Kepler Says:

      Captain, it is too little too late. As Miguel very much to the point said, the devaluation in itself is a consequence of shitty management. It is like an amputation: an amputation is not fun but…

      Had government not tried to carry out stupid populist programmes while destroying the national industry and competition, we wouldn’t have had devaluations, at least not on the scale we have been having for decades.
      But once things are rotten, you have to do something.

  8. Stan Says:

    Check out the news on “Doctors and family communicate Chavez will not recover”.

  9. syd Says:

    Thank you for the clarity, Miguel.

  10. moctavio Says:

    I think Venezuela should eliminate the Bolivar and dollarize or issue a gold backed currency, or whatever. Venezuela only exports oil and politicians will continue devaluing for their convenience. Dollarize of back the currency with gold and the poor will benefit most and lots of money will come to the country to be invested. Look at the world today, Japan, the US and Europe want to devalue, Brazil, Korea, Colombia, Chile, Peru, China are fighting off revaluing their currency.

    Meanwhile, nothing has changed in Venezuela.

    • m_astera Says:

      Issue a gold backed currency? That sounds like a good idea to me. Maybe. Assuming the gold is there in the vaults to back it. Does anyone have any clues about where the gold is, and if it was assayed as being gold and not gold-plated tungsten?

      The idea behind a gold backed currency is that one can go to the bank and exchange paper money for gold any time they wish.

  11. Alex Says:

    Sitme was just another source of corruption and clientelism.
    While Cadivi is assigned by the government, privileging friends and allies, Sitme’s assignation was determined by bankers who no doubts abused it to their own benefit – and maybe their friends’.
    It is likely that -beyond the economic absurdity of Sitme- the government’s intention to consolidate control of the whole economy -and thus of all the guisos- was the determinant factor in the decision to close it down.

  12. Alex Dalmady Says:

    Meanwhile, Ledezma, Capriles, et al are reacting to the news like fourth republic populists. Its all about the headlines and the outrage. If Capriles had won and he were the one devaluing (and he would be, of course) it would be Maduro and Cabello screaming bloody murder.

    • Alex (the other) Says:

      And how about Jose Guerra´s comments yesterday in Globovision? All economists shouted that devaluation was required to fix the fiscal deficit and other imbalances. Yesterday Guerra -and others- went all out against devaluation and its atrocious effect on people´s pockets.
      So, what is it then? You can´t discuss the necessity of devaluation and once executed attack it for political purposes.

    • notiven Says:

      Alex, I have been out of sych with the big enonomic numbers and the way the National Budget is made, but taking the numbers from Giordani”s Budget presentation before the National Assembly a couple of months ago he said the total was Bs. 396.406 million, out of which Bs 83.179 millions are from oil, calculated at $55.oo per barrel and using an exchange rate of Bs 4.30 / US$

      And going back to the budget ?

      If Government needs more Bolivars in the budget they had two choices: 1) Move the exchange rate – which is what they did taking it to 6.30 / $ or 2) They could have raised the $ 55.00 / Barrel referenced in the Budget but with no devaluation.

      For budget purposes, in the end would it had been the same ? what do you think ?


  13. Mike Says:

    I believe Venezuelan bond prices will fall next week because the devaluation and its effects are already priced in the high present price – investors knew it was coming sooner or later.

    With the news of Chavez likely not returning, or never again being able to exercise the presidency, the country is now perceived to be a rudderless ship and will likely become increasingly politically volatile. Investors don’t like instability and will take profits next week.

    Just a friendly competition of predicting the stock / bond market, which due to it’s random walk behavior is of course not really possible….

    • Mike, you are on for two reasons: while a devaluation was in the cards, it was expected in January and it looked like it was not going to be done until therewere elections, thus the fact that it was done will be loved by the market. But the moreimportant factor is that with the elimination of Sitme, there will be no new supply of bonds coming to markets. Supply has been fund managers biggest nightmare the last two years as they would disrupt prices. But more importantly, nobody expectedSitme to be eliminated all together. Thus, my bet is that byWenesday, given the holidays, prices are up 3 to 4%. Add 5 % when absolute absence is declared and time to sell most of it.

  14. I watch the pdvsa 22, 35 and the venny 22, they have the highest current yield, which is what I am interestd in in.

  15. Livefree Says:

    Aporrea forums are a pretty entertaining read right now…appears there are more than a few folks that aren’t to happy being misled right up to the last moment….never thought i’d see posts there saying Socialism of the XXI won’t survive the inept bureaucracy..had to double check which website i was on

    • Charlie Says:

      I like reading aporrea because it gives me an insight on how the other side feels about various issues. The opposition politicians should read it on a regular basis and bring up to the AN the valid issues chavistas may have. Addressing the problems the peoplr have should be their job anyways.

  16. m_astera Says:

    I passed a spray-painted wall two days ago that read “Maduro = Usurper”.

  17. LT Says:

    What is needed to setup cambio permuta again:
    1. no competition from sitme
    2. that accounts in dollars in Venezuela that will be able to receive dollars from anywhere
    3. enough spread for profitability
    4. people who know how to set it up out of jail and with an offer they cannot refuse

  18. moctavio Says:

    And do you really think the Government wants that? I dont, I think ideology won again, more controls, not less. The problem with a floating rate is that it goes against the Governments plans of cohtrolling everything. With Giordani, I dont think we will see “another” market of any sort.

    • LT Says:

      There is a power struggle going on between M and G. M. was always against dismantling the swap market. The provision about accounts being able to receive dollars from anywhere makes no sense except in the context of swaps, as you yourself recognize. They will call it something else to save face. They will set this up and tax it as if it were an oil well run by a private venture, since, for them, the desperate middle class is an oil well, ready to be exploited.

  19. Kepler Says:

    I just wonder what kind of upbringing Giordani had. I don’t mean what he studied, you said it…but how he came to be so thick? I mean: it would be good to have an economist as finance minister but Juana de las panelas de San Joaquín didn’t study economy and she can see through.

  20. notiven Says:

    Javier says:

    The way the National Budget is made, and taking the numbers from Giordani”s Budget presentation before the National Assembly a couple of months ago, the total was Bs. 396.406 million, where Bs 83.179 are from oil calculated at $55.oo per barrel and using an exchange rate of Bs 4.30 / US$

    And going back to the budget

    If Government needs more Bolivars in the budget they had two choices: 1) Move the exchange rate – which is what they did taking it to 6.30 / $ or 2) They could have raised the $ 55.00 / Barrel referenced in the Budget but with no devaluation.

    For budget purposes, in the end would it had been the same ? what do you think ?


  21. Joe American Says:

    It is amazing how the former Venezuelan leader Hugo Chavez’s ideology and ruthless need to control and manipulate the masses to stay in power had such a disastrous effect on its economy.

    Devaluing the currency is only relieves the immediate symptoms, the real problems have gone completely unaddressed, ideology makes any real solution taboo.

    Now I was thinking what would I do if I was Giordani.

    Almost all statistics are manipulated with a political purpose.
    Government policies are causing most of the problems you are trying to fix.
    Corruption at all levels of government.
    Graft a large constant financial drain, the higher up the food chain the worse it gets.

    You could say lets give the Austrian economics a chance, give people financial freedom and they will on there own accord figure out a path to a better life. It’s pretty well known socialist economics dont work. But you would be out of a job or worse.

    My personal opinion Giordani is living in fear and has not for a very long time been able to do what objectively need to be done. So some of the things he does is for political survival.

  22. Clint Says:


    In the above entry you mention the following…..

    “Because in the end, the problem is not that the Government devalued by 46.5%, the problem is that the gap between the official rate and the black market illegal rate, went from 318%, to 272%, making arbitrage still very attractive and making prices of goods imported at the official rate of exchange too attractive to pass up. And the black rate sets many prices today.”

    Could you expand on the subject of the Arbitrage opportunity and how money is being made in real world examples? I am new to currencies and am trying to learn as much as possible.


    • moctavio Says:

      The arbitrage is due to price controls in this case. If you can get offical dollars at the low price, when you sell your good (unless it is regulated in price) the buyer does not know whether you bought ot at Bs. 6.3 or Bs. 20. Similarly, you can buy airplane tickets at Bs. 6.3, making it very cheap to travel abroad, you can send a limited amount of dollars to send to family abroad at Bs. 6.3, you can send it, get t back and sell it in the pararllel market at three times the prices. There are hundreds of such arbitrage opportunities.

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