Dollar Shortage Bites Venezuela as Devaluation Seen: Currencies

Photographer: John Moore/Getty Images

People line up before sunrise to buy basic food products at a supermarket in San Cristobal, Venezuela, on March 8, 2014. Close

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Photographer: John Moore/Getty Images

People line up before sunrise to buy basic food products at a supermarket in San Cristobal, Venezuela, on March 8, 2014.

Venezuelan Daniela Toledo knew exactly what to ask for as a gift when her boss went on vacation to the Caribbean.

Instead of a carton of duty free cigarettes or a bottle of whisky, Toledo wanted a stick of her favorite deodorant, which she’d been unable to find at home. A complex system of official and unofficial exchange rates, a legacy of the late former President Hugo Chavez’s 14-year rule, has left Venezuela with a shortage of dollars and stores empty of basics from toilet paper to medicine.

“I went to five shops in Caracas and couldn’t find it,” the 27-year-old factory worker said in an Aug. 14 interview in Venezuela’s capital. “The only deodorant I can find here doesn’t work for me. So my boss went abroad and he brought me back the deodorant I’ve always used.”

A decade and a half of increasing government control over the economy and official policy that overvalues the bolivar has brought private Venezuelan industry to its knees and left the nation dependent on imports. Annual inflation reached 60.9 percent in May, the fastest in the world, while gross domestic product probably shrank 2.1 percent in the second quarter, according to the median of economist forecasts compiled by Bloomberg.

Black Market

Companies pay for foreign goods using money distributed by the government at rates ranging from as low as 6.3 bolivars per dollar to 50 per dollar. On top of those official rates is the black-market rate of 84 bolivars that most Venezuelans pay to obtain U.S. currency.

The government is running out of time to implement planned reforms, likely to include devaluation, before parliamentary elections in 2015 lead to policy paralysis, according to Barclays Plc.

“We give them a window of opportunity until mid-September,” Alejandro Arreaza, an economist at Barclays in New York, said by phone on Aug. 12. “After that, Venezuela will enter a new electoral cycle. That will reduce the possibility of making any adjustments.”

Mayira Hernandez, a spokeswoman for the finance ministry in Caracas, didn’t respond to phone calls and an e-mail seeking comment.

Under the current system, developed from the currency controls Chavez introduced in 2003, importers of food and medicine can buy dollars at a rate of 6.3 bolivars. Manufacturers can sometimes get a rate of 11 bolivars in weekly government auctions, while individuals and importers of non-essential products are offered restricted amounts for about 50 bolivars in a daily sale.

Maduro’s Succession

The bolivar has lost about 71 percent of its value on the black market since President Nicolas Maduro, a former bus driver and union leader, came to power in April 2013 with a pledge to deepen Chavez’s socialist rule. The currency isn’t traded in global markets because of the government controls.

The increasing difficulty of finding dollars is forcing Venezuelans to official distribution depots, where they line up for subsidized goods with numbered tickets that give them the right to buy subsidized frozen chicken, rice or cooking oil.

The lines are guarded by soldiers with machine guns because often there aren’t enough goods to go around. At least 43 people have been killed this year in clashes caused partly by shortages.

Economy ‘Suffering’

Venezuela has “severe basic goods shortages, and it’s all fomenting” trouble, Peter Lannigan, an emerging-markets strategist at CRT Capital Group LLC in Stamford, Connecticut, said by phone on Aug. 19. “The value of the exchange rate is too high right now and they’re suffering economically.”

Toledo used the black-market rate to calculate how much she owed her boss for her Colgate Palmolive Co. anti-perspirant, handing him 240 bolivars to reimburse the $3 he paid on the Caribbean island of Aruba. At the official rate, she would have paid about 19 bolivars, had the deodorant been available at home.

Merging the exchange rates would mean making a short-term sacrifice for a longer-term benefit because goods currently imported at subsidized rates would become more expensive, according to Barclays.

“If they don’t do it, next year you’ll have inflation of at least triple digits and it could be quadruple digits,” Francisco Rodriguez, a Venezuelan-born economist at Bank of America Corp. in New York, said by phone on Aug. 8. “The government’s aware that it’s counterproductive to continue on this path. However, they may not be aware that it’s so serious and that they have so little time.”

Venezuela, which has the world’s largest crude oil reserves, has delayed regular reporting of economic statistics and is yet to publish inflation data for June or July.

Devaluing Currency

Maduro has postponed at least two deadlines to fix the currency since last month, while Economy Vice-President Rafael Ramirez, the leader of a relatively business-friendly government faction, was reported by the El Mundo newspaper on Aug. 18 as saying that a two-rate system will be adopted “as soon as possible.”

Bank of America expects the government to set a new rate of 20 bolivars per dollar for essential imports while maintaining a secondary rate of about 50 for non-essential goods. Barclays said Venezuela will devalue its currency to about 25 to 30 per dollar, while Banctrust & Co. predicts a level of about 30, and says prices will rise regardless of whether the government devalues the bolivar.

“Changing to a balanced exchange rate would have a very significant impact on prices, and that’s what the government’s afraid of,” Hernan Yellati, the head of research at Banctrust, said by phone from New York on Aug. 19. “Fear of inflation in Venezuela is a real fear.”

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Paul Armstrong

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