Venezuela's Double-Edged Devaluation

Unfinished skyscrapers mark the skyline of Caracas Photograph by Meridith Kohut/Bloomberg

The news that ailing Venezuelan leader Hugo Chávez is on a tracheal tube caps off a week of financial tumult for South America’s fourth-biggest economy, which devalued its currency by a third on Feb. 8, its fifth such intervention in a decade. Is the interim regime–Chávez has been out of sight since before Christmas—clearing the decks for a new economic regime? Whose regime? And when?

For all the uncertainty, those who have had enough stomach lining to invest in the country continue to be unfazed.

To be sure, reports of the former paratrooper’s demise have frequently been exaggerated. In the early 1990s, Chávez was jailed, not executed, for plotting insurrection. He rose to power via elections in 1998 and four years later, amid plunging crude oil prices, was overthrown for all of 47 hours before wresting the presidency back while brandishing a copy of the constitution. That staying power—marked by nationalizations, jacked-up spending on social programs, and nose-thumbing at Washington—encouraged a leftward lurch across much of the rest of the continent. Throughout, despite all his bluster, Chávez honored Venezuela’s debt obligations.

Now, by any objective measure, Venezuela’s economy is touch-and-go. It lives and dies by oil prices, which in the first nine years under Chávez went from the low double digits to as high as $140 a barrel. At 22 percent, inflation burns, with food shortages common. Finance Minister Jorge Giordani this week lamented that Venezuela needs from $30 billion to $40 billion of foreign currency annually just to slake its import needs. “We all suffer from an insatiable appetite for the dollar, from a type of dollarized nymphomania,” he said in the country’s state-run paper.

“The devaluation was a much-needed measure to address Venezuela’s economic imbalances,” says Jabier Arbeloa of Pan American Finance in Miami, citing a high reliance on public spending, a wide fiscal deficit, and an over-dependence on exporting oil to bring home hard currency. According to the Consecomercio trade chamber in Caracas, upward of 70 percent of products purchased in Venezuela were either imported or assembled from imported raw materials.

Within Venezuela, says Arbeloa, the devaluation of the bolivar may have political consequences because it will stoke inflation. However, he says, “It improves the government’s ability to service its foreign obligations and to maintain Venezuela’s track record of not defaulting on its sovereign debt. So from a bondholder’s standpoint, that devaluation is likely to be seen as a positive development.”

In Venezuela’s booming black market, its currency was lately quoted at more than three times the new, official, all-time low against the dollar. So critical has under-the-table trading become to Caracas that a well-trafficked website tracks the state of the trafficking.

The devaluation, which was apparently ordered by the bedridden Chávez, could be the populist’s closing jab at foreign corporations. On Wednesday, pharma-multinational Merck & Co. revealed that the move will hit its net profit by $200 million this year. On Monday, Colgate-Palmolive said the devaluation will pare its 2013 sales by $120 million; and Avon and Goodyear Tire & Rubber have cited the new dollar-bolivar rate as a material blow to their income statements.

Foreign investors have increasingly been wagering that Chavismo policies won’t survive the populist’s passing, and that anything that succeeds him will be a vast (capitalistic) improvement to the financial mismanagement of the last 14 years.

Wager is the operative verb here. “Hugo Chávez’s actual fate is in the hands of a greater power,” wrote Walter Molano of BCP Securities earlier in the week. “But all eyes are now focused on what will happen after his departure. So far, the market is very optimistic,” in spite of the fact that “no one has any idea what Venezuela will look like after him.”

( Corrects the spelling of "Jabier Arbeloa" in the fifth and sixth paragraphs )
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