Analysis: Black market surge presages Venezuela devaluation

CARACAS Wed Nov 21, 2012 7:13pm IST

CARACAS (Reuters) - Lettuces. Green ones. Benjamins.

Called by a host of nicknames to evade Venezuela's strict currency controls, U.S. dollars are in such hot demand that the black market price has soared to nearly four times the local bolivar money's official fixed rate.

Added to existing fiscal pressures for President Hugo Chavez's socialist government, the new illegal exchange rate for dollars is making a devaluation look inevitable, probably around year end or in early 2013, economists and businessmen say.

"Things look pretty bad," said one young importer.

Unable to access dollars at the official rate, he also struggles to find them on the black market for a small business bringing mobile phones, computers and iPads into Venezuela and - like plenty of others - is looking at a barren Christmas period.

"I don't know how importers will cope because there are no dollars available. Those who have them are hanging on to them to protect themselves from the devaluation," the Venezuelan added, asking not to be named to protect his business.

A fifth devaluation of the bolivar since Chavez introduced currency controls four years into his rule in 2003 would help him tidy the government's books but also risk stoking supporters' ire by pushing up food and other prices.

Past devaluations have sent people rushing into shops to bulk-buy before businesses pass on the cost, though the impact on inflation - in the high 20s the last few years - has not been as dramatic as some feared, partly due to price controls.

With the last devaluation only at the end of 2010, fiscal pressure for a new one increased during a state spending binge this year ahead of Chavez's successful bid for re-election. The black market rate has leapt 45 percent since before the vote.

ASK THE QUEEN OF ENGLAND?

In a nation where politics often trump economics, most assume Chavez will delay the next currency adjustment until after mid-December state governorship elections.

Some speculate he could also wait until after another local vote for mayors in April, to avoid any voter cost.

Balancing that, though, he has political capital in the bag after re-election with 55 percent of the vote in October.

As with previous pre-devaluation environments in Venezuela and elsewhere, officials deny it or are simply enigmatic.

"Not even the Queen of England talks about this subject," Finance Minister Jorge Giordani said recently.

Chavez has various mechanisms at his disposal.

He could simply adjust upwards the two official rates: 4.3 bolivars to the dollar for preferential items like medicines and essential foods, and 5.3 at the Central Bank's Sitme exchange.

Economists estimate the main 4.3 peg could go to anything between 6.5 and 7.5 bolivars, with the Sitme mechanism nearing 8 or above. The lower rate accounts for about 40 percent of imports, and Sitme a third, the government says.

Chavez could also carry out what some call a "stealth" devaluation by simply moving some of the categories allowed dollars at 4.3 into the higher bracket.

"It is difficult to gauge what is ultimately a political decision, though authorities cannot ignore what are becoming acute macro imbalances," said New York analyst Siobhan Morgan.

She noted the declining supply of dollars via the Sitme system - where daily trading of up to $80 million earlier in the year is about a quarter of that now - and the pre-election surge in monetary stimulus as Chavez spent big on social projects.

The opposition says it has state documents showing OPEC member Venezuela heading for a worryingly high fiscal deficit of near 19 percent of GDP this year despite the high price of oil and healthy economic growth of probably 5 percent or more.

FISCAL BREATHING SPACE

A devaluation would ease fiscal pressure by providing more bolivars for its oil revenue dollars and lowering the value of local debt. State oil company PDVSA would benefit in particular because it is heavily indebted to providers and is also under pressure to finance Chavez's flagship welfare programs.

On the negative side for the government, importers in a nation exaggeratedly dependent on outside goods would face bigger bills. That would feed into inflation that is already the highest in the Americas and has long been the scourge of Venezuelan governments from well before Chavez.

The spending splurge before the presidential vote is clearly over, with a 34 percent fall in real terms in the month after the October 7 poll, Bank of America said, joining the chorus of predictions of a devaluation from Wall Street.

"This is one of several indicators that a fiscal adjustment has begun. We see a downward adjustment in spending accompanied by a strong devaluation, and possibly by a tax reform, leading to a strengthening of Venezuela's fiscal position and lessening its need for external issuance in 2013," it said in a report.

Venezuela and state oil firm PDVSA issued around $17.5 billion in dollar-denominated debt last year, but there has only been one issue this year: a private placement to the central bank and some other state-run financial institutions.

Chinese loans have been the government's financial lifeline.

A PDVSA source said the company was seeking the Finance Ministry's approval for another dollar-denominated issue before the end of 2012. It would be another placement with the Central Bank to supply the Sitme currency mechanism.

On the street, the hunt for dollars in middle and upper-class sectors is frantic. "Supply has dropped to virtually nothing," said a Venezuelan who runs a web site giving a daily black market price for "green lettuces".

"Never, ever before had we seen a drought like this."

(Additional reporting by Marianna Parraga in Caracas, Krista Hughes in Mexico, Editing by Brian Ellsworth and Kenneth Barry)

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