Venezuelan President Hugo Chavez’s political agenda could delay a currency devaluation expected by investors to at least early next year as the government tries to consolidate power in regional elections in December.
The economy is always secondary to politics in the South American country and gubernatorial elections set for Dec. 16 will be the government’s near-term priority, Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc., said today in a note to clients. The earliest window for a devaluation would be in the first quarter next year, she said.
“The ultimate timing is political,” Morden said today in an e-mailed response to questions. “The election agenda is still their dominant priority,” and they don’t want a devaluation pushing up inflation now.
A decline in the supply of dollars to the central bank currency market is fueling speculation that Venezuela has to devalue the bolivar to boost oil revenue and help close a fiscal deficit. Increased spending ahead of last month’s election will push Venezuela’s fiscal shortfall to about 7.8 percent of gross domestic product this year, according to Francisco Rodriguez, senior Andean economist at Bank of America Corp.
The government may opt in the “near term” to issue dollar-denominated bonds to satisfy importers’ demand for foreign currency because it won’t have a political cost, Morden said.
“Devaluation is costly in political terms for the higher inflation,” Morden said. “Around 80 percent of the consumer price basket is dependent upon imports.”
Chavez, who in June 2011 said he had cancer, could delay a devaluation well beyond the local election if he decides to hold a referendum next year on a constitutional change that would amend succession rules, Barclays Plc said in a note to clients yesterday.
Under Venezuela’s existing law, if Chavez is too ill to serve during the first four years of his term, the vice president assumes the presidency for 30 days while elections are held. Chavez may want to change that to allow the vice president to see out his term, Barclays said.
“If the government implements this modification of the constitution, it could delay - or at least minimize - the expected FX and fiscal adjustment,” Barclays analysts Alejandro Arreaza and Alejandro Grisanti said in the report.
While Chavez said in June that he was completely recovered from cancer after three operations, he limited his public appearances during the election campaign, leading Barclays and Goldman Sachs & Co. to speculate that his health may not hold up for another six years.
The government may opt to lessen the political damage of a devaluation by only adjusting the exchange rate on the central bank-administered Sitme currency market, Barclays said.
The system allows importers to purchase dollar-denominated bonds at a fixed rate of 5.3 bolivars per dollar, which they can sell for dollars in the secondary market. The government-run Foreign Exchange Board, known as Cadivi, sells dollars to Venezuelans at 4.3 bolivars for essential items such as medicine.
Changing just the Sitme rate without adjusting the official Cadivi rate would only partly address the government’s fiscal deficit, Arreaza said. The government plans to raise spending 33 percent next year, Finance Minister Jorge Giordani said Oct. 23.
Companies and investors that are unable to get dollars from the government through Cadivi or Sitme turn to an unregulated market that trades at over three times the official rate.
The currency has weakened 37 percent this year to 13.69 bolivars per dollar in the unregulated market after trading at about 8 bolivars per dollar over the past two years, according to the blog Lechuga Verde, or Green Lettuce, which cites traders.
The Bottom Line
The central bank is selling fewer dollars on the Sitme to limit its losses as the gap between the official and black market hits a record, said a government official with direct knowledge of the matter who spoke on condition of anonymity because no final decision has been made.
The person declined to provide additional details other than saying scrapping the Sitme was a possibility.
“The bottom line for bond markets is devaluation itself is fiscally positive for the government,” Ben Ramsey, an analyst at JPMorgan Chase & Co. in New York, wrote in research note yesterday. “A correction via a formal devaluation seems inevitable. In terms of timing, we would be surprised to see any formal measures taken before December 16 gubernatorial elections.”
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