Monday, August 27, 2007

Venezuela about to have Currency Problems

Chavez says's it's worth 95 cents, but it's really worth about 45 cents and falling. Chavez wants to replace the Bolivar with the Strong Bolivar, removing three zeros. Unless he dramatically fixes things, he will have created the most obvious joke ever.

Huge Chavez has set the official exchange rate for the Venezuelan Bolivar at 2144 per $1, but as any Econ 101 student knows, that just isn't going to work. The black market rate is now about 4,800 to $1.

Before entering Venezuela, any tourist needs to know to bring in outside currency. So before entering I took out about $400 worth of the Brazilian Real. This is about R$800, since the Real is worth about half as much as the dollar. Still, I got almost B$2000 per R$1. This made each ATM withdrawal after I had used my initial black market purchase so painful. It meant I was paying twice as much as previous purchases.

This WSJ article really lays out the problems that the currency has. Chavez could minimize the damage by admitting defeat, but the longer he pretends that the currency is worth B$2144 per dollar, the worse the pain is going to be.

A fun and profitable arbitrage opportunity for Venezuelan citizens:
Wealthier Venezuelans have discovered they can use credit cards to exploit the difference between official and black-market currency rates. Some have flown to the nearby island of Aruba and bought $5,000 worth of gambling chips, the maximum overseas credit purchase allowed by the Venezuelan government, according to a person who arranges the trips. They cash in the chips for dollars, then, back at home, buy enough bolívars on the black market to pay off the credit-card debt, this person says. They pocket the rest -- around $2,300 at current rates, more than enough to pay for the trip.
And Chavez tries to make it better but just creates more problems:
A Chávez plan to bolster Venezuela's currency by selling dollar-denominated government bonds has largely backfired. The government figured that asking Venezuelans to buy the bonds with bolívars would take the currency out of circulation, boosting its value. Shrewd buyers realized they could get the dollar bonds from the government at the official exchange rate, then resell them on the official Caracas exchange, where the bonds trade at prices much closer to the currency's higher black-market rate.

The government tried to give small investors first dibs on the bonds by saying that orders by private individuals for less than $3,000 would be filled first. Brokerage firms paid maids, doormen and laborers about $50 each to sign over their rights to the bonds, says Pedro Torres, a middleman who is paid by brokerages to find working-class Venezuelans willing to turn over their rights to the bonds. He says he signed up 170 for the last bond sale, earlier this year.
And of course Chavez thinks he's helping the poor, but it's only for an increasingly short duration at the cost of long term pain. Price controls are now negatively affecting poor communities:
The biggest losers may be the poor, many of whom are Mr. Chávez's supporters....Mr. Buitrago says his life is getting more difficult these days. He is among what a local pollster estimates are the 45% of Venezuelans who've had trouble finding milk and chicken this year. He can't afford black-market prices for scarce goods, so he stands in long lines at markets that sell subsidized foods. He deposits his savings in a bank, where it's being eaten away by inflation, saying buying dollars on the black market would be unpatriotic.

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