And yet you would not believe that there was such a massive devaluation if you read only the headlines of Google news. Words like "unification" pop up to hide the fact that about half of the imports of Venezuela will now cost 65% more in USD than they did today.
The government has unusually well planned such a dramatic measure. First, it is in the least newsy day of the year, December 30, when even the Nazional Assembly in overdrive is taking a couple of days off while Chavez goes to Brazil for Dilma swearing in. Second, the newsy impact was the suppression of one of the exchange rates to "unify" the exchange rates around a single value. The D word never being pronounced!
Last January we went from 2.15 to two exchange rates, one at 2.6 and one at 4.3 to the USD. That is, the second one, 4.3, reflected crudely a 100% devaluation for common goods while the regime reserved for itself the 2.6 rate to which a few people, those involved in food or medicine production, could access to. And yet the January devaluation did not bring any relief to the Venezuelan economy, exports kept going down, inflation remained at an official 27% and we end the year with a second consecutive year of economic drop, a bona fide recession, the LONE country in South America with negative growth!!!! And high inflation to boot. The Dutch disease is transmogrified into the Venezuelan gangrene!
I am not going to go back on the reasons for such a disastrous economic result: it is all political, Chavez wanting to control everything at any price, literally. What I am going to tell you is the effect on next year, and why Chavez is willing to pay that new price.
My business was one of the lucky ones that could access to mostly 2.6 exchange because we sell most of our products to people that sell in turn at controlled food prices. In other words, my costs will increase as of January 1 by at least 50% when everything is taken into account (without including poor services such as continuous electric outages during working hours). That is, I am OBLIGED to increase my prices by 50% because as it turns out my storeroom is almost empty (I cannot use the stock at the "old price" since I do not have it, while I will need to replenish it at 4.3, requiring an expensive bank loan to afford the new import costs). The question is which clients will be willing to accept my new prices, the more so if the regime does not accept an increase in the price of foodstuff like chicken and pork products.
In other words I am in serious danger of bankruptcy next year as in 2010 our earnings were minimal, below inflation so we are losing capital, work capital that is! Like most small and medium business in Venezuela, in particular those linked to medicine and agriculture, we are very low in our reserves and this 60% devaluation will be a major blow.
The food chain production of Venezuela is heavily dependent on imports (from corn to agricultural implements). Most were at 2.6. It is simply impossible that the cost of food in Venezuela will not rise by at least 50% when 2011 is done. In fact, I am willing to bet right now that the cost of food will rise by at least 30% in the first semester, no matter how many subsidies the regime throw at Mercal and PDVAL and whatever other scheme it comes up with, allowing for an oil price remaining around 90 USD for that semester!
This is the recipe for an aggravated recession as the regime is not only considering increasing by two points our sales tax, but also ready to impose a banking tax of maybe 0.5% per written check! Plus, of course, the effect on the nationalization of Agroisleña that is becoming to be felt, and miscellaneous disastrous take overs like the farms in Sur del Lago. We are in real danger to have food riots by mid year!!!!!! Because after the disaster of Pudreval when hundreds of thousand of tons of food were lost to sheer incompetence and unspeakable corruption for which we are still waiting for a real accounting we must observe that the people who screwed Venezuela in 2009 and 2010 are still the ones in charge in 2011 to manage the aggravated crisis.
So why is Chavez taking such an extreme measure when he could have settled for a more logical shortening of the gap between the two exchanges rate to, say, 3.2 and 4.8? For two reasons.
First, Venezuela is getting too close of bankruptcy for comfort. So Chavez cannot escape devaluation. Were he to take a more moderate and rational approach he still will not take the necessary economic and political measures to avoid further decline and so we would be facing again by the end of 2011 a new devaluation, just as the electoral year starts. Thus he does the brutal devaluation now hoping that with an increased oil price, maybe crossing durably the 100 USD line by the end of 2011, he can wiggle his way out to 2013 and then let it all go once he is sitting securely back in Miraflores. I do not think it will work, personally, but that is probably the calculation for these people who need desperately to hold on for at least two more years until they hope to erase the political opposition of Venezuela once and for all.
Second, what I could call the paradox of plenty in recession. That is, recession will not be for all. With this brutal devaluation Chavez has some political moves open, all distasteful but all almost necessary for him. For example, he can bankrupt a further chunk of the private sector. That is, less funding for the political opposition available. By 2012 maybe a much weakened Polar will be all that is left and thus in 2013 he can finally eliminate the private sector except for little shopkeepers and the like. Another example of making good use of this disaster is to finally create an apartheid system where only the faithful to Chavez will have access to ration cards for cheap food at Mercal, PDVAL and the like. The excuse will be the fake "emergency" which required an enabling law that will allow Chavez to rule on such measures. What will be important there is to mark the populace with the idea that their only salvation is through Chavez, as they watch the anti Chavez group go bankrupt, into exile, denied ration cards, whatever. Or even better, chavistas offered the spectacle of the degradation of the middle class forced into food lines like they do.
That is why I also call today's devaluation an economic coup because Chavez is going to use the new circumstances to screw as many people as he can. Even the banks are a sure target now because, you know, the people need cash. Doubt me? Watch on cable TV those weird official ads running in channels that are seeing in non Venezuelan countries. One of these ads would have you believe that the mass of Venezuelans never had access to banks before Chavez, that it was Chavez who finally forced the banks to allow the middle class to open at least a saving account. Who is that propaganda destined to? Venezuelans that have no access to cable TV? Or opinion makers outside of Venezuela?