The Venezuelan Government devalued the currency today from Bs. 1600 to the US$ to Bs. 1920 to the US$. The move was not unexpected as the 2004 budget was calculated at exactly the new rate an average for the full year. Thus, it was only a question of when exactly the Government would implement it.
The decision will have its strongest impact on basic foodstuffs which were receiving foreign currency at the official rate as well as regulated products which, if not adjusted, will become scarce. The move will obviously add to inflation in 2004 as the parallel market exchange rate moved today from Bs. 3100 to Bs. 3200 as part of the devaluation had already been priced in last week when the foreign exchange control office CADIVI stopped the flow of foreign currency arguing that it was changing its already brand new information system.
As suggested here last Friday, this is likely to be a first step before the Government issues two bonds in US$ one to be swapped for local debt in the hands of the banks and the second one to be sold to local investors in Bolívars.
From a practical point of view, the measure will immediately have a positive impact on exporters and companies that maintain foreign currency positions. These positions are maintained in the books at the official exchange rate and will generate a one time gain for their holders. The opposite will be true for companies that have liabilities in US$, since they will have to generate Bolívars to cover their debt.
A quirky effect will occur in any Bolivar denominated mutual fund that has US$ instruments in its portfolio, it will generate a 20% gain in one day in those instruments. Some mutual funds I know have as much as 50% of their holdings in foreign currency instruments.
Additionally, the holders of CANTV ADR’s will lose as CADIVI had yet to approve the dividend paid by the company in December, so that in the end they will receive US$ 1.278 rather than expected US$ 1.535 per ADR.
The devaluation will have its strongest impact in the lower strata of the population, since food will likely record the highest increase of all items in the CPI and it represents the highest percentage of the budget of poor people. Of course, the Minister of Finance claims it will not have an impact on inflation because it had already been taken into account. What a cynic! Once again, the hidden tax which a devaluation represents is paid by those that can afford it the least.
Curiously, President Chávez did not announce the decision in his Sunday program, despite the fact that the official gazette with the decree had already been printed on Friday. Venezuela maybe the only country in the world where a devaluation is not announced by any Government official. Nobody wants to look bad?
The Devil's Excrement 
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