Making Unique Observations in a Very Cluttered World

Saturday, 9 January 2010

Venezuela devalued its currency by half - to reduce imports that aren’t strictly necessary

Reading - Venezuela devalued its currency by half - to reduce imports that aren’t strictly necessary

Venezuelan President Hugo Chavez speaks during a meeting with ministers at Miraflores Palace in Caracas January 8, 2010. Chavez said he ordered two F-16 jets to intercept a U.S. military plane that twice violated Venezuelan airspace on Friday in what he called the latest provocation in the South American nation's skies. REUTERS/Miraflores Palace/Handout

CARACAS – President Hugo Chavez, harried by recession and declining popularity, announced a major currency devaluation late Friday to shore up government finances and stimulate economic growth before key elections this year.

The move cuts Mr. Chavez's two-year-old "strong bolivar" currency by half – to 4.3 per dollar from 2.15 per dollar – for most imports and transactions. The central bank will also subsidize a stronger 2.6-per-dollar rate for imports of food, medicine and other essential items, Mr. Chavez said.

The move reflects the increasingly difficult economic and political trade-offs faced by Mr. Chavez, who has been in power for more than a decade and veered the country's economy sharply to the left through steps like nationalization of key industries, rampant government spending, and currency and price controls.

While those unorthodox policies can work for a few years, they usually set the stage for deeper problems down the road – troubles which have started to surface and which led to the currency devaluation. The move is also a humiliating turn for a currency renamed the "strong bolivar" two years ago, when Mr. Chavez chopped three zeros off the old currency and declared the beginning of an era of monetary fortitude.

The staunchly anti-U.S. leader is gambling that the benefits of a weaker currency will offset faster inflation, which threatens the purchasing power of his mostly poor backers. Finance Minister Ali Rodriguez said devaluation, which makes the price of imported goods more expensive in local currency terms, may add 5 percentage points to the 27% inflation rate – already among the fastest in the world.

In Mr. Chavez's favor, the measure helps narrow a growing budget shortfall, could provide limited relief to a moribund local industry, and instantly gives his oil-rich government more local currency to spend per barrel of oil exported by the state petroleum company, PDVSA. That's a key consideration with Congressional elections looming in September.

The 55-year-old former soldier's popularity has slid amid corruption scandals, a shrinking economy, rising crime and shortages of food and electricity. Increased spending could paper over some of these problems and boost Mr. Chavez's popularity.

Devaluation brings "more room to increase public spending as way to spur economic activity," says Maikel Bello, an analyst with the Caracas-based research firm Ecoanalitica.

This year's congressional elections are especially important because, after previously boycotting some elections to protest Mr. Chavez's growing power over democratic institutions in Venezuela, traditionally fragmented opposition parties are making a push to dramatically improve their representation in Congress.

For years, Venezuela has been able to defend an overvalued currency thanks to currency controls. Venezuelan citizens and companies can get dollars at the official rate only with government permission. That has led to a thriving black market, where those who don't get government permission buy the U.S. currency. Even the Venezuelan government uses the black market to some degree, economists say.

On Friday, that black market rate stood at about 6.25 per dollar – well below the former official rate of 2.15 and still below the new rate of 4.30. Economists say one of the reasons for the move was an attempt to deflate the black market, a catalyst for inflation that has also spawned a frenzy of schemes to defraud the central bank of dollars.

Economists will be watching the black market rate on Monday to see whether the devaluation was big enough to cause Venezuelans to go through the legal route to get dollars or whether they will keep buying them at the unofficial rate.

In theory, the devaluation could fortify Mr. Chavez on a range of fronts. Announcing the devaluation on state television, Mr. Chavez predicted that a weaker currency would breathe new life into a domestic economy that has become almost totally dependent on imports for everything from beef and milk to automobiles during his 11-year presidency.

Devaluation "will give a boost to the productive economy, will stop imports that are not strictly necessary and will stimulate exports," Mr. Chavez said.

The measure may buttress the banking system, which has been rocked by the closure of several institutions amid an embezzlement scandal. Many Venezuelan banks head into the devaluation holding large stocks of dollars.

Holders of dollar-denominated bonds issued by Venezuela and PDVSA will be encouraged by the move. Devaluation narrows Venezuela's financing gap to around 3% of economic output from around 7%, according to Royal Bank of Scotland economist Boris Segura.

"This is good news," said Mr. Segura.

However, the devaluation does little to assuage the deeper problems plaguing the Venezuelan economy, economists say.

Foremost, devaluation by itself is not enough to revive a domestic manufacturing base that's atrophied amid a hostile operating environment. Few investors are willing to brave Venezuela's maze of price caps, currency controls and the ever-present fear of nationalization.

Higher inflation from the move will also keep chipping away at the value of the bolivar, even at its new peg.

What's more, by keeping a subsidized dollar rate for importing food, medicine and essential items, Mr. Chavez removes any incentive for Venezuelans to produce what they need most. It will almost certainly remain cheaper to import beef from Brazil, for example, than to produce it.

The fact that Venezuela has ceased to produce meaningful amounts of food, medicine and other basic goods under Mr. Chavez puts his government in a Catch-22 bind. Mr. Chavez can't use devaluation to stimulate production of the most essential products because doing so would instantly make the imported versions too expensive for his mainly poor constituents.

Official devaluations are nothing new for Venezuelans, with many getting their first taste of currency controls in 1961. The peg imposed then was kept for 22 years but a decline in oil revenue forced the government to devalue in 1983, marking the beginning a downward spiral that included several adjustments to the foreign currency rate. A devaluation in 1994 amid a deep economic crisis spurred a wave of popular unrest that Chavez eventually tapped to win the presidency five years later.

Mr. Chavez is returning Venezuela to an official dual-exchange rate last tried during the economic turmoil of the 1980s. Dual exchange rates around the world are associated with corruption by bureaucrats who decide which businesses get the preferential rate, and by importers who have an incentive to falsify import invoices.

It also adds to general confusion. Venezuelans will wake up Monday to a country with three exchange rates, if you include the black market rate.

The devaluation is a humiliating turn for a currency renamed the "strong bolivar" two years ago, when Mr. Chavez chopped three zeros off the old currency and declared the beginning a of an era of monetary fortitude.

But the currency became grossly overvalued amid galloping inflation and government spending. Pressure to devalue rose as the bolivar plunged to around of third of its value on the black market.

In a bid to stem central bank dollar losses amid the black market crash, the government restricted sales of dollars. But that only made things worse, by spurring the black market to new heights and punishing companies, such as importers, that need those dollars to do business.

"Companies had frozen their activities because they couldn't buy dollars at the official rate," said Pedro Palma, an economics professor at IESA business school in Caracas.

Mr. Chavez maintained unfettered access to dollars for importers of staples who supplied the government's subsidized food markets. But even that backfired. Late last year, the government jailed the nation's biggest such importer, billionaire Ricardo Fernandez. In part, he is accused of using access to dollars to enrich himself.

Mr. Fernandez has denied wrongdoing.

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RIP Gumby - Gumby Animator Art Clokey Dies at 89 in California -

Reading - RIP Gumby - Gumby Animator Art Clokey Dies at 89 in California -

Art Clokey poses with a Gumby doll in 1995. (AP photo)

Clokey first molded Gumby for a surreal student project at the University of Southern California called "Gumbasia." That led to his making shorts for the "Howdy Doody Show" and several series through the years.

LOS OSOS, Calif. - Gumby animator Art Clokey, whose bendable creation became a pop culture phenomenon through countless satires, toys and revivals, has died at age 89.

Caretaker Chrisanne Wollett Clokey says Clokey died Friday in Los Osos on California's Central Coast.

Clokey first molded Gumby for a surreal student project at the University of Southern California called "Gumbasia." That led to his making shorts for the "Howdy Doody Show" and several series through the years.

He said he based Gumby's swooping head on the hairdo of his father, who died when Clokey was nine.

Clokey also created the moralizing and often satirized claymation duo "Davey and Goliath."

Eddie Murphy brought a surge in Gumby's popularity in the 1980s with his send-up of the character on "Saturday Night Live" as a cigar-smoking primadonna.

Stay away from Dubai too! - Raped in Dubai has passport confiscated and charged with having sex outside marriage -

Reading - Stay away from Dubai too! - Raped in Dubai has passport confiscated and charged with having sex outside marriage -

A British woman who alleged that she was raped in Dubai on New Year’s Eve has had her passport confiscated and may face a jail sentence after she was charged with having sex outside marriage with her fiance.
The 23-year-old woman, a Muslim from London, of Pakistani origin, said that she was attacked by a man who is understood to be a worker in the hotel where she had been drinking with her fiance to celebrate their engagement during a three-day holiday in Dubai.
When she reported to the police that she had been raped, she and her partner, 44, were themselves jailed for sex outside marriage, which is illegal under the emirate’s laws. Unmarried couples are not allowed to share hotel rooms or live together, although many establishments turn a blind eye. The couple were also charged with being drunk outside licensed premises.
The alleged assault on the woman took place at the upmarket Address Hotel in the Dubai Marina district.
After drinking heavily to celebrate the marriage proposal that evening, the woman passed out in the toilets, where she says that she was followed by a member of staff and attacked. It is unclear if the alleged rape is being investigated by police. The woman’s alleged attacker has denied rape and has claimed that sex was consensual. He has also been charged with illegal sex outside marriage.
A spokesperson for the Address declined to comment yesterday. Dubai police also declined to comment.
The woman’s fiance was unaware of the incident and took her home, but when she recalled the attack the next morning they went to the police.
It is reported that the police focused on the woman’s drinking and her sexual preferences. It is claimed that standard procedures in alleged rape cases were not followed, although legal sources in Dubai dispute this. A blood test proved that the woman had been drinking. The couple were arrested, charged and jailed overnight. They have been released on bail and their passports have been taken away.
The woman has been advised to drop the rape allegation, admit that she was drunk and marry her fiance immediately if she wants to go home. She told The Sun: “I always dreamed of a big family wedding in Britain, but now I just want to get married so I can get out of here.”

Stay away from Mexico! - assailants skinned Hernandez's face and stitched it onto a soccer ball -

Reading - Stay away from Mexico! - assailants skinned Hernandez's face and stitched it onto a soccer ball -


The body of 36-year-old Hugo Hernandez was left on the streets of Los Mochis in seven pieces as a chilling threat to members of the Juarez drug cartel. A note read: "Happy New Year, because this will be your last."

To drive home the point, the assailants skinned Hernandez's face and stitched it onto a soccer ball.

The gruesome find, confirmed Friday by Sinaloa state prosecutors, represents a new level of brutality in Mexico's drug war, in which torture and beheadings are almost daily occurrences.

Hernandez was taken to Sinaloa after being kidnapped Jan. 2 in neighboring Sonora state, in an area known for marijuana growing, said Martin Robles, a spokesman for Sinaloa prosecutors. The motive for his abduction was unclear.

His torso was found in a plastic container in one location; elsewhere another box contained his arms, legs and skull, Robles said. Hernandez's face, sewn onto a football, was left in a plastic bag near City Hall.

More than 15,000 people have been killed since President Felipe Calderon launched a crackdown on cartels three years ago. While the border cities of Ciudad Juarez and Tijuana have seen much of the violence, Sinaloa state is Mexico's drug-smuggling heartland and is the birthplace of the leadership of four of the six major cartels.

Often, victims are tortured and mutilated, in an attempt to intimidate rivals, officials and others who might represent a threat to the cartels.

Often, it works.

In the northern city of Saltillo, a major regional newspaper announced it would stop covering drug violence altogether after the body of a reporter was found Friday outside a motel with a threatening message. Valentin Valdes had recently written about the arrests of suspected drug traffickers.

"As of today we will publish zero information related to drug trafficking to avoid situations like the one we went through today," an editor of the newspaper Zocalo told The Associated Press. Tellingly, he asked that his name not be published.

Many Mexican news media have stopped covering anything that might be associated with drugs, or limit themselves to reporting on government news releases. At least 17 journalists have been killed in Mexico since 1992 in direct reprisal for stories, according to the New York-based Committee to Protect Journalists.

Valdes had written about the Dec. 29 arrests at the Marbella Motel of five alleged members of the Gulf drug cartel. He also covered the arrests Wednesday of five others who barged into the same hotel and stole the surveillance tapes.

The 28-year-old reporter was shot to death, and his body was dumped outside the Marbella Motel.

Coahuila state Attorney General Jesus Torres would not give details of the threat left with his body.