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Chávez vows to punish 'bourgeoisie speculation' after devaluing currency

Venezuelan President Hugo Chávez this weekend devalued the country's currency, the bolivar, by half, in a move that economists say underscores the dire economic straits of the oil-rich nation.

By Staff writer / January 11, 2010

Venezuelan soldiers check prices Monday at a Caracas supermarket accused of raising prices. President Hugo Chavez threatened on Sunday to seize businesses that raise prices as a result of last week's devaluation of Venezuela's currency.

Fernando Llano/AP

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Mexico City

The move by Venezuelan President Hugo Chávez to steeply devalue the nation’s currency has generated anxiety among citizens, who rushed to stores over the weekend to purchase goods they expect will rise in price.

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But for economists and analysts, it also underlies the dire economic straits of the oil-rich nation, which already suffers the highest inflation rate in the region and will face a tough recovery ahead.

“The timing of the decision surprised many in Venezuela, mainly because this year is a crucial year politically,” says Pedro Palma, founder of the economic consulting firm MetroEconomica and president of Venezuela’s National Academy of Economic Sciences. “We were sure that the devaluation would come. But we thought the government could postpone it until after elections [in September]. The oxygen of the government is shorter than we expected.”

Late Friday, President Chávez announced that the currency will be devalued to 4.3 per dollar from 2.15 currently for the majority of imports. A subsidized rate of 2.6 bolivars per dollar will also be used for essential imports, such as food and medicine.

The move is a boon to the state-run oil company PDVSA, which will now receive double the amount of bolivars per barrel of oil. That in turn will help the government boost spending for popular programs in poor areas that have been threatened by declining oil revenues. The new rates will help exporters, Chávez says, and he also expects it to encourage domestic production of items such as food.

“This is to boost the productive economy, to reduce imports that aren’t strictly necessary and to stimulate exports,” Chávez said on state television in announcing the measures. “We need to stop being a country that only exports oil.”

Clear benefits

The immediate benefits are clear.

For PDVSA, says Alejandro Grisanti, an analyst at Barclays Capital in New York, “it improves cash flow.”

In a research note today, he wrote: “Although the accounting and other important details are not yet clear, we believe that the announcement is enormously positive for Venezuelan assets prices, since it provides a further signal from President Chávez of his willingness to pay, while improving considerably the capacity to pay. For us, it is a new demonstration of his flexibility and the capacity to adjust whenever is required.”

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