The Venezuelan government is likely to devalue the official exchange rate of the bolivar after the October elections to contain the depletion of foreign exchange reserves caused by the strong growth in imports, David Rees, emerging markets economist at Capital Economics, said in a note on Tuesday.
A further devaluation of the exchange rate of the bolivar, which is seen as overvalued, would lead to a sharp fall in imports, leading to a deceleration in the decline of foreign exchange reserves, Rees pointed out. It will also see the local currency value of dollar-denominated oil revenues increasing, he added.
The government devalued the official exchange rate peg against the dollar in January 2010 and 2011. A string of expropriations has hollowed out the economy leading to a strong growth in imports, Rees said. Consequently, liquid foreign exchange reserves declined rapidly and fell short of the often-cited benchmark of three months' worth of imports. Another devaluation of the bolivar this year will result in the exchange rate dropping nearly 20 percent to 5.5/$, the economist said.
Capital Economics expects the next devaluation to come most likely after the presidential elections due October, though it does not rule out it happening over the coming months, because reducing imports ahead of the election is not desirable as it would lead to a decline in economic activity. Since political popularity tends to go hand-in-hand with good economic performance, it is essential that imports continue to flow into the country, Rees observed.
While delaying the devaluation of exchange rate until the elections, the Venezuelan government is likely to maintain strong foreign exchange reserves through bilateral loans from friendly governments, debt issuances and perhaps via sale of gold reserves to finance imports, Capital Economics said.
Considering the finiteness of such sources and the likelihood of the real exchange rate appreciating significantly in 2012 on high inflation rates, the government is likely to engage in more devaluation as a first step to maintain capital flow, Rees noted.
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