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Venezuelan President Nicolas Maduro faces growing protests as inflation last year reached a 17-year high and was the highest in the world during 2013. (Photo: Minci)
The multiple between the official and black market rates of the dollar is at its widest, at double the margin of early 2013. (Photos: BCV and NPS) 
Wednesday, January 8, 2014
Special Reports

Venezuela: Devaluation “Imminent”

A devaluation in Venezuela is inevitable and imminent, experts say.

BY LATINVEX STAFF

A devaluation in Venezuela is imminent, says Pedro A. Palma, director at Ecoanalítica and founding partner at MetroEconomica. “Declining oil production combined with high demand for almost-free gasoline and high export subsidies for politically allied countries have limited the inflow of foreign exchange,” he told the Inter-American Dialogue’s daily Latin America Advisor. “This scenario combined with a high demand for dollars due to a significantly overvalued official exchange rate and a black market rate tenfold higher makes devaluation inevitable and imminent.”

IHS Global Insight, meanwhile, expects across-the-board devaluation within the next quarter.

Venezuela last devalued its currency, the Bolivar, in February last year by 32 percent.

INFLATION HITS 17-YEAR HIGH

A new devaluation will worsen inflation even further, warns IHS Global Insight analyst Carlos Cardenas. “A likely devaluation in 2014 will put greater pressure on prices,” he wrote in a commentary yesterday.

Palma also sees inflation rising above the 2013 level of 56.2 percent, which was the highest rate in 17 years, according to a Latinvex analysis of data from the International Monetary Fund. It also means that Venezuela had the world’s highest rate, surpassing Iran, which had an estimated 42 percent inflation in 2013.

“The announced reinforcement of price controls will not abate inflation,” Palma warns. “After a possible initial inflationary moderation, a rebound would follow. Unavoidable adjustment will restrict production, limiting job opportunities and reducing real wages.”

Unlike Argentina, Venezuela has not tampered with official inflation rates so far. However, that may change, Cardenas warns.  “The government will probably tamper with the Central Bank's methodology to measure inflation (to show gradual improvements),” he says.

INCREASED SHORTAGES

A very high public-sector deficit and massive deficit spending financed by the central bank have caused the money supply to grow sharply, stimulating consumption, Palma says. Meanwhile, production has been severely affected by a highly overvalued currency, difficulty in accessing foreign exchange and a hostile policy toward private enterprises.

“This has created shortages and scarcity and a growing dependency on imports,” he says. “Despite the high international oil prices, the restrictions on the foreign exchange market have made imports even more difficult.”

On Monday, President Nicolas Maduro hiked the minimum wage in Venezuela by 10 percent to help offset the rising inflation.

“The increase is ... considered to be symbolic and unlikely to mitigate the country's high costs of living,” Cardenas says.

INCREASED PROTESTS

The government’s continued struggles to resolve its inflationary problem will increase the probability of it gradually losing popular support in 2014 and seeing rising protests, he warns. Increased public discontent will probably translate into greater protests and industrial action risks in 2014,” he says.

IHS expects pressure groups, such as unions working for the state conglomerate Corporación Venezolana de Guayana (CVG), to step up demonstrations and strikes to demand higher salaries, benefits, and the signature of a new collective bargaining agreement. Unions at state-run oil firm Petroleum of Venezuela (Petróleos de Venezuela, SA: PDVSA) demanded an 80 percent salary increase in December 2013, which the company rejected.

“Public workers' protests are likely to increase along the risk of strikes in the private sector,” Cardenas predicts.

Meanwhile, the multiple between the official and black market rates of the dollar is at its widest, at double the margin of early 2013, IHS Global Insight points out.

In November, the government created a new national center for foreign trade (Centro Nacional de Comercio Exterior ) that will allocate dollar quotas to importers.  “In addition, the [new center] will add a new bureaucratic layer, making the foreign currency market even more complicated for foreign investors in Venezuela,” Cardenas says.

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