Further Venezuela Currency Devaluation Seen Soon

The January 1 devaluation was the second in 12 months and eliminated the strongest exchange rate at 2.6 bolivars per dollar of a complex, multitiered foreign exchange system. That left two official rates: 4.3 and the central bank's SITME rate of around 5.3. The most likely option is for the government to weaken the SITME rate in what some economists are saying would be a "stealth devaluation" -- as the rate has never been officially declared.

Venezuela is likely to devalue its currency again soon after President Hugo Chavez scrapped a plan to increase the country's sales tax as analysts said the impact of a New Year devaluation had been limited.
Wall Street experts had welcomed the socialist president's plan to hike the recession-hit economy's sales tax and maybe put in place a new bank tax and other moves to generate income. Then last week, Chavez said none of that would happen because high oil prices meant the OPEC member had enough funds to cover its needs, including post-flood reconstruction costs that he estimated at $10 billion (6 billion pounds). The tax U-turn -- made with an eye on the next presidential election in December 2012 -- means the currency remains overvalued and the South American nation will have to take further steps to improve its balance sheet, experts say. "Higher oil prices and a possible decrease in Chavez's popularity blocked a deeper fiscal adjustment, in our view," Alejandro Grisanti and Alejandro Arreaza of Barclays Capital wrote in a research note, predicting another devaluation soon. The January 1 devaluation was the second in 12 months and eliminated the strongest exchange rate at 2.6 bolivars per dollar of a complex, multitiered foreign exchange system. That left two official rates: 4.3 and the central bank's SITME rate of around 5.3. The most likely option is for the government to weaken the SITME rate in what some economists are saying would be a "stealth devaluation." A central bank source told Reuters it was "very likely" the rate would be moved "slightly higher," but gave no timeframe for such a move.

The government said the New Year devaluation was aimed at improving its balance sheet, attracting funds and spurring local production in the largely import-dependent economy. Since that move scrapped the exchange rate used for essential imports, like medicines and some foods, any price rises for those goods could alienate Chavez's core support in the country's impoverished slums and rural areas. Venezuela already has one of the world's highest rates of inflation, estimated by the central bank at 26.9 percent in 2010. Now all eyes are on SITME, which last year accounted for roughly a quarter of the foreign exchange bought legally by local businesses and individuals, about $33 million per day. There is also an illegal trade in currency, where the exchange rate fell to about 9.0 from around 8.0 after the latest devaluation, according to websites that track it. Grisanti and Arreaza both said they expected the SITME rate would be adjusted to 6.50 bolivars per dollar. Others have suggested the new rate could be around 6.0 bolivars. Russ Dallen, head trader at Caracas-based BBO Financial Services, said most local analysts believed the SITME rate would be devalued during the first quarter as the central bank pushed to make that market more dynamic.
"Once again, economic improvisation rules in the Chavez administration and over the next few months we will likely hear of adjustments and new policies to correct the new distortions introduced in the system," he wrote.