Thursday, January 14, 2010

Venezuela Devaluates: What Does It Mean?

Late last Friday, Venenzuelan President Hugo Chavez, announced the implementation of a new exchange rate that includes two official prices for the dollar.  One of these, referred to as the "Oil Dollar", was devalued by 50%!

The other exchange rate, for the Bolivar (VEB), will be reset, from 2.15 to 2.6, and will be used for transactions in food, health, machinery and equipment, science and technology, as well as anything related to the public sector.

The devaluation of the VEB will adversely affect several large companies doing substantial business in Venezuela, such as Avon Products, Colgate Palmolive, General Cable, Goodyear and Kimberly Clark.

Venezuelans rushed to shops, fearful of further price hikes following the announcement of the develuation.
The move weakened President Chavez politically and opponents are gearing up for a fight in the upcoming Presidential election in 2010.

Finance Minister, Ali Rodriguez, said the devaluation will add 3% to 5% to the country's inflation rate, which is already the highest in the Americas:  currently at 25%!

However, the devaluation will add substantially to oil revenues and puts more Bolivars into public coffers, which will benefit holders of Venezuelan debt.

This move by Venezuela may mark the beginning of a trend as countries try to improve their various trade balances. 

Thanks for reading!

Marko's Take

No comments:

Post a Comment

Take me on!