Saturday, January 9, 2010

Venezuela, the "Strong Bolivar," and TVs

Yesterday, President Hugo Chavez of Venezuela announced devaluation of Venezuela's currency (now at 2.15 per dollar), and a dual-tier exchange rate of the Venezuelan "Strong Bolivar" against the dollar, depending on what industry you are in. (The Bolivar became the new "Strong Bolivar" when Chavez cut three zeros from it two years ago.) Government exchange rates will become 2.6 per dollar for essential items like food and medicine, and 4.3 generally. The black market exchange rate is 6.25 per dollar. [1] So technically this isn't really a devaluation but the partial removal of a currency peg.

The cheaper government exchange rate behaves as a subsidy to those parties that have access to it. Most Venezuelans don't. Subsidized exchange rates allows much cheaper access to goods from America (or any good that can be bought with dollars). Industries with access to the preferred exchange rate can furthermore make a tidy profit though buying dollars from the government at a low exchange rate and selling them on the black market at nearly a 300% markup. Venezuelans who want to protect their wealth against inflation (which is a historical probability there) by holding dollars would greatly benefit if they have access to the subsidized exchange rate over those who don't.

Meanwhile, ordinary Venezuelans are running to buy TV sets before the cost of foreign products in Strong Bolivars essentially doubles [2]. The appliance import industry has been subsidized by the government up to now, and with this policy, they still are, but not as much. Dollar subsidies, in the best light, almost behave as a wealth redistribution scheme from the excesses of the highly focal oil market to the broader economy. Still, it is unfair, benefitting some Venezuelans (those with access to it) more than others.

From the CIA World Factbook: Their GDP is $356B, revenues is $94B, and public debt is 14% of GDP, or $50B. High inflation rates in Venezuela (30% in the factbook) essentially forgive a lot of public debt. So the reason for today's move appears to be a decline in revenue in dollars from reduced oil exports.

1. Chavez Devalues Venezuela's Currency.
2. Nervous Venezuelans buy TVs after devaluation.

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