Venezuela devalues currency 95%

Bolivar’s rate per dollar will go to 6 million from 285,000

People walk past empty sales stands at a street market in Caracas, Venezuela, on Saturday. Venezuela launched a series of economic-overhaul measures on Monday, beginning with the release of a currency with five fewer zeros in a bid to tame soaring inflation.
People walk past empty sales stands at a street market in Caracas, Venezuela, on Saturday. Venezuela launched a series of economic-overhaul measures on Monday, beginning with the release of a currency with five fewer zeros in a bid to tame soaring inflation.

Venezuelan President Nicolas Maduro carried out one of the biggest currency devaluations in history over the weekend -- a 95 percent plunge that will test the capacity of an already beleaguered population to stomach even more pain.

One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures. Prices are currently rising at an annualized rate of 108,000 percent, according to Bloomberg's Cafe con Leche index. An exodus of Venezuelans fleeing the crisis to neighboring countries will likely increase and with it, tensions and restrictions like the ones seen over the past few days.

The official rate for the currency will go from about 285,000 per dollar to 6 million, a shock that officials tried to partly offset by raising the minimum wage 3,500 percent to the equivalent of just $30 a month. While Maduro boasted in Friday night's announcement that the International Monetary Fund wasn't involved in the policies, aspects of the moves bore a resemblance to a classic orthodox economic adjustment, albeit with some confusing twists.

Maduro's new strategy for managing the economy is a desperate response after years of disastrous policies that undercut growth, sent prices soaring and turned what had once been one of Latin America's wealthiest countries into a dysfunctional nation that's spawned a refugee crisis. Pressure is mounting on him to right the ship as calls for his overthrow grow six years after he took over for the late Hugo Chavez. Earlier this month, Maduro started a fresh crackdown on his opponents after a failed attempt to assassinate him using an aerial drone.

The opposition, a fragmented group of parties whose leaders are either in hiding or in jail, called for protests against the economic measures today. Several labor unions also called for a 24-hour national strike.

The measures demonstrate the "government's willingness to do what it takes to stay in power," Raul Gallegos, an associate director at Control Risks, said from Bogota. "Maduro looks vulnerable, clearly something could happen."

The streets of Caracas looked mostly empty on Monday morning as Venezuelans continued to digest the news and the impact it will have on their savings. Many shops including supermarkets were closed and some businesses that opened were waiting for more details to adjust prices.

The devaluation comes at the same time the government is redenominating the currency by lopping off five zeros and introducing new bills and a name change. So instead of the new minimum wage being 1.8 million strong bolivars, it will be 1,800 sovereign bolivars. Banks were closed and busy trying to adopt ATMs and online platforms to the new currency rules.

To make things more complicated, the new bolivar's value will be linked to a crypto currency -- believed to be the first time a government has ever employed the technique. The so-called petro is backed by crude oil and is valued by the government at $60, or 3,600 sovereign bolivars. The petro will fluctuate and be used to set prices for goods.

Critics have questioned the token's trustworthiness. Some ratings sites have called it a fraud. Initial coin offering ratings website ICOindex.com categorizes the petro as a scam, saying there's a lack of key technical information including how the cryptocurrency is actually backed by oil, as well as concerns the Venezuelan government won't be able to manage complex blockchain technology.

While cryptocurrencies were originally designed to be decentralized and free from third-party and governmental control, the Petro is neither.

The value added tax will increase 4 percentage points and officials will end some gasoline subsidies, saving the government $10 billion a year, Maduro said, without providing more details. The central bank will increase the frequency of foreign exchange auctions to three and eventually five days a week.

In some ways, the devaluation is a mere formality. For years now, most people and companies have been unable to access dollars at government-set rates and have been purchasing them in the black market. As a result, the prices on many goods across the country are already based on that exchange rate.

Amid the cash crunch, Maduro has halted most payments on Venezuela's foreign debt and is now $6.1 billion in the hole with bondholders, cutting off most sources of new financing. Creditors are also looking at the country's assets abroad with an eye toward seizing them. A small Canadian mining company was awarded the right to collect on an arbitration ruling by taking shares held by the parent of U.S. refining unit Citgo, a verdict Venezuela is appealing.

ConocoPhillips announced a $2 billion agreement with state oil company PDVSA on Monday for a decadelong arbitration case over the expropriation of assets. Venezuela will pay $500 million over the next 90 days then settle the rest in quarterly payments over the next four and a half years. As a result Conoco will suspend its actions against PDVSA assets in the Caribbean, according to the statement.

It's not clear how the shock measures announced by Maduro will sit with one of his key allies: the military. Top ranking generals have been handed the keys to ministries, the state-run oil company and the lucrative business of food imports. Myriad exchange rates created juicy arbitrage opportunities that enriched many close associates of the state.

Information for this article was contributed by Eric Lam of Bloomberg News.

Business on 08/21/2018

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