Venezuela: Bolivar slides further in official and parallel markets in early June
June 11, 2018
At the seventeenth Central Bank Dicom auction held on 8 June, the bolivar sold at 94,112 VEF per EUR (80,000 VEF per USD), weakening 0.8% from the 93,392 VEF per EUR (80,000 VEF per USD) rate in the previous auction held on 1 June. The Bank offered USD 1.0 million, which was far below the USD 2.2 million in the previous round. The low amounts awarded throughout the auctions held since the introduction of the new foreign exchange system on 26 January highlight the acute shortage of dollars in the economy. Moreover, and despite President Nicolás Maduro’s announcement on 26 April of allocating a considerable portion from the initial sales of the “petro” cryptocurrency to the strengthening of Dicom, the final amounts offered suggest the expected increased liquidity in the system has failed to materialize.
Meanwhile, Maduro announced on 2 June that the bolivar’s redenomination—the elimination of three zeroes—originally set for 4 June was being postponed to 4 August. The decision came after banking industry leaders requested to delay the implementation of the overhaul, as transaction systems were still being tested and were yet to be fully integrated in financial institutions. Moreover, the complex logistics involved in withdrawing old bank notes from circulation and introducing new ones has proven extremely difficult given the short time constraints. The government presented the currency measure as a strategy to combat rampant inflation and relieve cash shortages. However, analysts argue the move will prove futile as it does not tackle the causes of hyperinflation, which is fueled by excessive money creation and the seemingly never-ending depreciation of the currency that stems from a dysfunctional exchange rate regime.
Despite the official bolivar’s persistent loss of value, it remains grossly overvalued when compared to its parallel rate. The bolivar traded in the parallel market has depreciated almost uninterruptedly since 9 March, when a short-lived rally of the currency came to an end, and it crossed the 1.0 million VEF per USD mark for the first time in late May. On 8 June, the bolivar traded at 2.1 million VEF per USD, down 67.7% from the same day in May. The parallel market bolivar has plummeted since mid-2017 due to a self-reinforcing “inflation-depreciation” cycle, whereby hyperinflation increases the demand for dollars. Increased demand for dollars leads to a depreciation of the exchange rate, which in turn inflates the price of imports in local currency and spurs inflation even more.
LatinFocus Consensus Forecast panelists foresee severe pressure in both the official and the parallel markets. Given the unpredictable nature of developments in Venezuelan forex markets, several panelists have given up providing exchange rate forecasts. The remaining panelists project a non-official exchange rate of VEF 58.0 million per USD by the end of 2018. In 2019, the panel sees the non-official exchange rate trading at VEF 688.3 million per USD.
Author: Javier Colato, Economist