Chavez mismanages his windfall

Bloomberg:

Hugo Chavez's economy is starting to unravel in the currency market.

While Venezuela earns record proceeds from oil exports, consumers face shortages of meat, flour and cooking oil. Annual inflation has risen to 16 percent, the highest in Latin America, as President Chavez tripled government spending in four years. Exxon Mobil Corp. and ConocoPhillips are pulling out after Chavez demanded they cede control of joint venture projects.

The currency, the bolivar, has tumbled 30 percent this year to 4,850 per dollar on the black market, the only place it trades freely because of government controls on foreign exchange. That's less than half the official rate of 2,150 set in 2005. Chavez may have to devalue the bolivar to reduce the gap and increase oil proceeds that make up half the state's revenue.

``This has been the worst managed oil boom in Venezuela's history,'' said Ricardo Hausmann, a former government planning minister who now teaches economics at Harvard University in Cambridge, Massachusetts. ``A devaluation is a foregone conclusion. The only question is when.''

Chavez will devalue the bolivar 14 percent in the first quarter of 2008 after he introduces a new currency on Jan. 1 that will lop three zeros off all denominations, according to JPMorgan Chase & Co., the third-largest U.S. bank, and Merrill Lynch & Co., the biggest brokerage firm.

The new currency, to be called the strong bolivar, will have an exchange rate of 2.15 per dollar, the equivalent of today's rate, Finance Minister Rodrigo Cabezas said last week. Analysts forecast the official rate will decline 13 percent by the end of 2008, according to the median of nine estimates in a Bloomberg survey.

``We're not going to devalue no matter how much they pressure us,'' Cabezas told reporters in Caracas on Aug. 31. ``The so-called parallel market doesn't dictate our fiscal, exchange or monetary policies.''

Chavez, an ally of Cuban President Fidel Castro who calls capitalism ``evil,'' weakened the currency 11 percent in 2005. He imposed restrictions on foreign exchange in 2003 to halt capital flight that has driven down the bolivar more than 70 percent since he took office in 1999.

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There are certain laws that despots cannot control or overrule and Chavez is finding what Mugabe has found. Inflation cannot let you slip the bounds of earth or gravity. He is quickly driving Venezuela into the ditch of socialism and communism. someday he will make them as poor as Cubans or Zimbabweans if he last that long.