On 8 January 2010, Venezuelan President, Hugo Chavez, ordered a devaluation of the Bolivar Fuerte (VEF).
Previously the currency had been officially pegged at 2.15 VEF to the US dollar. As a consequence of this artificially strong peg, a free-floating parallel rate also existed which is available to some assignees for a more favourable exchange rate. The changes instigated by Chavez mean that three different exchange rates now exist:
The official rate has been halved in value, making it now USD 1 = VEF 4.3 for the majority of goods and transactions.
A second official rate of USD 1 = VEF 2.6 has been created especially for what are deemed 'priority' imports, such as basic foodstuffs and medicine.
The parallel rate still exists, enjoying a tolerated, semi-legal status alongside the other two. On 20 January it stood at
USD 1 = VEF 5.5.
The implications of these changes are dramatic. Venezuela relies on imports for 90% of its consumption, meaning that a spike in inflation is inevitable as companies seek to cover their costs by raising their prices to match the devaluation of the VEF.
This is complicated by Chavez's insistence that he will not tolerate 'profiteering' in the wake of the currency change, leading the Venezuelan government to forcefully close more than 70 shops that they deemed to be unduly raising their prices. These include the French-owned Exito chain of supermarkets, which have been unilaterally nationalised by the Venezuelan government. Currently the Venezuelan army accompany government inspectors on the streets, checking shop prices to ensure that they remain unchanged.
The closure of these shops has limited the availability of goods, but this has been exacerbated further by a spate of panic-buying from the Venezuelan population. Some are looking to stock up on supplies before the expected price rises arrive. Others are looking to invest by buying expensive imported goods, such as widescreen televisions and other electronics, on the basis that they should increase significantly in value once the transition to the new exchange rates has been completed. Increased demand and limited supply work as forces to drive prices up further still, though the government continues to insist that this will not be tolerated.
The probable result of all this is that Venezuela will experience a rapid rise in inflation in the short-term, although a small proportion of the increases should fall back after a couple of months when the immediate effects of the changeover - such as the panic-buying - ease off. The situation may yet develop differently if Chavez makes further changes, and ECA are monitoring all developments closely.
For those applying a Cost of Living index for assignees in Venezuela, many will be wondering whether they ought to update their September 2009 index by one of the new exchange rates. An index on the old official rate of USD 1 = VEF 2.15 would be halved by updating it to USD 1 = VEF 4.30 without considering any of the inflation that has occurred in the meantime. We would therefore advise that you continue using the September 2009 index at the September 2009 exchange rate. This is also the case for those using the parallel rate, whose indices won’t be as affected.
The March 2010 survey will be our next update of Cost of Living indices. The current situation is far too volatile to prorate or otherwise estimate inflation, and the March survey should avoid most of the initial chaos which might otherwise influence the reliability of the data.
As ECA recognises the importance in providing new data as quickly as possible in a special situation such as this, we intend to provide preliminary estimates of Venezuelan inflation around the end of March - ahead of our usual publication time in mid-May - via an alert like this one. Approximated Venezuelan Cost of Living indices will then be available for clients from their ECA contact, while final figures will be available in May as normal.