Devaluation ups stakes in Venezuela election year

http://www.reuters.com/article/idUSN096521320100109

UPDATE 1-Devaluation ups stakes in Venezuela election year
Sat Jan 9, 2010 2:05pm EST
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CARACAS, Jan 9 (Reuters) - Venezuelans rushed to the shops on Saturday, fearful of price rises after a currency devaluation that will let President Hugo Chavez boost government spending ahead of an election but feeds opposition charges of economic mismanagement.

In a bid to jump-start the recession-hit economy of South America's top oil exporter, Chavez on Friday announced a dual system for the fixed rate bolivar.

It devalues the currency to 4.3 and 2.6 against the dollar, from a rate of 2.15 per dollar in place since 2005, giving the better rate for basic goods in an attempt to limit the impact of the measure on consumer prices.

The opposition seized on fears that prices for imported goods will double as shoppers formed lines of more than a hundred people outside some stores in the capital Caracas.

"It was a Black Friday, tinted red," said sales executive Diana Sevillana in reference to the crimson color of Chavez's socialist party. She stood in a line of 30 people outside an electrical goods store in a middle class neighborhood.

The socialist Chavez believes the state should have a weighty role in managing the economy. During his 11 years in office he has nationalized most heavy industry, and business and finance are tightly regulated.

The devaluation is politically risky but means every dollar of oil revenue puts more bolivars in government coffers. That allows Chavez to lavish cash on social projects and fund salary increases ahead of parliamentary elections in September.

Opponents were quick to criticize the socialist, who a year ago promised the global financial crisis would not touch "a hair" of Venezuela's economy. He announced the devaluation on Friday night during an important baseball game.

"By establishing the exchange rate at 4.3 bolivars per dollar, the quality of life for Venezuelans is automatically devalued since we now have half the money we had before," said Caracas Mayor Antonio Ledezma, a Chavez opponent.

BLACKOUTS, WATER SHORTAGES

Opposition parties, emboldened by public dissatisfaction at frequent blackouts and water shortages and a 2.9 percent economic contraction in 2009, hope to strip Chavez of his legislative majority in September.

The devaluation is embarrassing for Chavez, who resisted calls from economists and many government allies to make the move last year when oil prices were at their lowest and elections a long way off.

"Venezuela's decision to devalue the Bolivar culminates an event that the market has been anticipating for a long time," said Walter Molano, an analyst at BCP Securities. "It helps alleviate the country's fiscal woes and puts it on a sounder macroeconomic footing."

The measure is a relief for state oil company PDVSA, which has struggled to pay service providers and meet requirements to fund social projects since crude prices dropped sharply last year. It also makes Venezuelan businesses more competitive.

Holders of Venezuela's foreign debt are also pleased, since the devaluation improves government finances and lessens the need to issue more bonds.

However, Chavez risks taking a blow to his popularity ratings, which are about 50 percent, as prices for many products inevitably will rise in the country of 28 million people, which relies on imports for much of its consumption.

Finance Minister Ali Rodriguez said the devaluation will add 3 percent to 5 percent to inflation, already the highest in the Americas at 25 percent last year.

"The popularity of the government is obviously going to be sharply and negatively affected," said economist Pedro Palma. "The inflationary impact of the measure diminishes the real income of people. People can consume less."

The new two-tiered exchange system offers the 2.6/dollar rate for goods deemed essential including food, medicine and industrial machinery. Other products, including cars and telephones, will be imported at the higher 4.3 rate.

Last month, BMO Capital Markets cut ratings on Colgate-Palmolive Co (CL.N), Avon Products Inc (AVP.N) and Kimberly-Clark Corp (KMB.N) to "market perform" saying a possible devaluation in Venezuela could hurt the U.S. consumer goods makers' profits.

Economist Pavel Gomez of the IESA economic school said the new system will increase opportunities for graft in a country that already is corruption-ridden.

"Multiple exchange schemes are incentives for corruption, more so if they are applied in the Venezuela way," he said. "Those who have good contacts can buy at 2.6 and sell at 4.3."

Chavez, whose popularity usually rises in correlation with public spending, also said on Friday that the Central Bank had transferred $7 billion of foreign reserves to a development fund used to finance investment projects.

(Additional reporting by Hugh Bronstein in Bogota, editing by Vicki Allen)