With reports coming out of Venezuela that its president, Hugo Chavez, has died, not only is there some geopolitical instability in the government of Venezuela, but as Chavez has had his thumb on much of the Venezuelan economy, one big question that may be debated could be in the financial sector. With Chavez instituting various devaluation policies of the Venezuelan currency, the bolivar, over the last decade, what might happen with the currency going forward, and how might some multinational firms be impacted as they deal with Venezuela and use the currency in transactions?
Bloomberg’s Latin America correspondent, Alix Steel, spoke nearly a month ago about the latest devaluation, where Chavez ordered that the bolivar be devalued another 32 percent – which marked the fifth devaluation order in nine years, which has resulted in the bolivar losing 90 percent of its overall value. Steel noted that this move was designed to improve oil exports for the country to help cut down on the government’s budget deficit, and she said part of these various devaluation moves are designed for the treasury to collect an “inflation tax” in the country.
With a devalued bolivar, Venezuela could actually make more money with its exports, Steel says, because it would take more bolivars to buy a barrel of oil from the country than it did before the devaluation. How low does the bolivar go? As of a month ago, it was taking eight bolivars for an American dollar, and the black market for the currency had an exchange rate of 20 bolivars to $1.
With the death of the man who directed all these devaluation policies, could the currency rebound? What could be the impact of this death on the economy in Venezuela and especially on the oil trade with the country? Let us know your thoughts in the comments section below.
DISCLOSURE: I currently own no positions in any oil-related stocks, nor do I own any foreign currency.