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The impact of a more than 50 percent devaluation anticipated by analysts would have very unpopular consequences for the socioeconomic classes D and E, principal supporters of President Hugo Chavez, analysts say. (Photo: Minci)
Tuesday, November 20, 2012

Venezuela Devaluation: Winners & Losers

Who will gain and lose most by Venezuela’s expected devaluation next year?


Inter-American Dialogue 

Venezuela is likely to devalue its currency by nearly 50 percent next year, according to think tank Ecoanalitica. The move would generate more than $19 billion for Venezuela's government, which would receive more bolívars in exchange for each petrodollar, El Universal reported. What effect would such a devaluation have on Venezuela's economy overall? Which sectors of the economy would be most affected, and what would a devaluation mean for consumers? 

Alberto M. Ramos, managing director and head of Latin America economics at Goldman Sachs in New York:
The need for a large devaluation reflects the large macro imbalances that have been brewing in the Venezuelan economy for many years. One of the key imbalances is entrenched high inflation (despite extensive price controls), a reflection of fiscal profligacy and excessive monetary accommodation (very negative real interest rates). On the other hand, the investment/business environment has deteriorated significantly, impairing capital formation; low investment leads to higher inflation and surging imports as the economy's domestic supply response has been weakened. Hence, we see a large devaluation sometime during the first half of 2013 having just a palliative effect inasmuch as it isn't part of a broader toolkit of more disciplined macro polices that would lower inflation and increase confidence in the local currency. That is, the devaluation does not address the fundamental macro issues that caused it, and as such, we can confidently predict that after this one there will be others. The bolívar will continue to weaken as long as domestic inflation remains very high and private capital seeks to leave the country. In that sense, the devaluation offers only temporary fiscal relief. It will likely cause inflation to accelerate soon after, probably eroding any momentary external competitiveness gains. The devaluation would benefit sectors of the economy (exporters and those who compete with imports) but, since we expect inflation to remain high and likely accelerate in 2013, the benefit will likely be ephemeral. However, PDVSA will certainly be a winner as the devaluation improves its local currency cash-flow, although it makes its imports of capital and intermediate goods more expensive. Given the deteriorated business environment, we do not expect the devaluation to lead to significant investment in the tradable sectors and higher non-oil exports. The only thing that would benefit the economy and consumers would be a significant overhaul of the policy mix toward more conventional policies and less government intervention. 


Mark Weisbrot, co-director of the Center for Economic and Policy Research: With a sizeable trade surplus, Venezuela is unlikely to see any balance of payments crisis in the foreseeable future, and its currency does not need to be devalued. The idea that Venezuela needs to devalue in order to provide more government revenue in bolívars is based on a macroeconomic confusion. The amount of money that the government can spend in domestic currency is not related to the exchange rate. Of course, the government may still choose to devalue; if they did, the resulting inflation would likely be modest. The biggest devaluation during the Chávez years, in January 2010 produced no increase in the core rate of inflation, and only a temporary increase in the headline rate. By September of 2012, inflation had fallen to an annualized rate of 13.7 over the preceding three months, the lowest it has been in more than four years. It is important to remember that most of the analyses and forecasts of the Venezuelan economy have been wrong for most of the past decade, including, for example, the forecasts of 60 percent inflation after the January 2010 devaluation. These analysts have been predicting disaster for more than a decade, but Venezuela has had just two recessions. One was caused by the opposition oil strike of 2002-2003 and the other began during the world recession of 2009. Investors who ignored these biased and flawed analyses, for example those who have bought and held Venezuela's dollar-denominated government bonds, have done very well.


Juan Pablo Fuentes, economist at Moody's Analytics: The Venezuelan economy faces a year of adjustments in 2013. Devaluating the bolívar is just one of several steps the government will need to take to close its fiscal gap, estimated to exceed 15 percent of GDP in 2012. Another will be to cut spending aggressively and increase taxes. A sharp increase in domestic gasoline prices might also be in the cards. The effects will be severe; a 50 percent currency devaluation alone is enough to cause growth to slow sharply in 2013. With Venezuela highly dependent on imports, such a devaluation would sharply reduce household purchasing power. The combined effect of all the steps needed to make the fiscal deficit manageable will likely be a new recession. Devaluation, government spending cuts and higher taxes will all hit private consumption in meaningful ways in 2013. Private consumption, which accounts for 70 percent of GDP, will plummet. The nontradable sector of the economy will be hurt the most as demand plunges. Retail, banking, construction and transport will suffer as import volumes drop sharply and overall domestic demand slumps. Manufacturing will benefit in the short term as imports become more expensive, bolstering the sector's relative competitiveness. This gain will be short-lived, however, as soaring inflation will erase any price advantage against imports. As in recent years, the anticipated devaluation of the bolívar will partially erase Venezuela's macroeconomic imbalances-but only temporarily. The government will repeat these cycles of overvaluation and devaluation as long as it fails to reform its fundamental approach to managing the economy.

Gustavo Roosen, member of the Advisor board and chairman of the IESA Management School: The devaluation of the Venezuelan currency expected for early 2013 has been forecasted by economic analysts and businessmen alike. The objective would be to reduce the fiscal deficit and alleviate strong pressures on the regulated exchange system that have existed in Venezuela for the last 10 years. In effect, the 2012 fiscal deficit is estimated to be close to 17 percent of GDP. However, Planning Minister Jorge Giordani presented the proposed 2013 budget to the Venezuelan National Assembly and indicated that there is no consideration of a devaluation to finance the budget. The impact of a more than 50 percent devaluation anticipated by analysts would have very unpopular consequences for the socioeconomic classes D and E, principal supporters of President Hugo Chávez, given its impact on the prices of basic food and medical products, which now are mainly imported. The inflationary effect of such a devaluation would be in excess of 40 percent for 2013. My opinion is that the government will consider the implementation of value-added tax increases before resorting to a devaluation of the currency of such a magnitude. One important factor that the devaluation does not solve is the lack of available petrodollars for the exchange system resulting from a decrease in oil production volume, the capacity of collecting from new oil buyers and the amount of oil sales related to the repayment of very large loans from China.

David Rees, emerging markets economist at Capital Economics Ltd.: A substantial devaluation of the exchange rate should, in theory, increase economic competitiveness. This tends to lead to stronger export growth while domestic demand is redirected into locally produced goods rather than imports. The net result is often stronger GDP growth. But in Venezuela's case, we doubt that devaluation will give a significant boost to the economy. Oil accounts for 95 percent of exports and is already priced in dollars. Meanwhile, the manufacturing sector, which is the usual beneficiary of a cheaper currency, is simply too small to have much of an impact on overall GDP. Devaluation will also increase the price of imports, on which Venezuela has become increasingly reliant in recent years. Admittedly, about half of import transactions, predominately for 'nonessential' goods, appear to already take place using the unofficial black market exchange rate (currently thought to be 70 percent weaker than the official exchange rate). As a result, there has already been some pass-through of a weaker currency to import prices. But the price of 'essential' items-which have generally been imported via the government's official exchange rate-would rise if the bolívar is devalued. This will help to keep inflation running at annual rates of 15-20 percent. So why devalue? The main benefit is to the government, which gains about half of its income from oil exports. Since these are priced in dollars, devaluing raises the local currency value of export revenues. We estimate that a 50 percent drop in the bolívar would raise government revenues by as much as 25 percent. But while devaluation will ease the pressure on public finances, it is unlikely to solve the structural issues in the wider economy.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter



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