Venezuela: Bolivar's downward spiral continues, hits new record low in October
November 5, 2015
The Venezuelan bolivar traded in the parallel market continued tumbling in recent weeks, with no end in sight to the downward trajectory that has been in place over a year. The non-official exchange rate plummeted past 900 VEF per USD on 22 October, closing the day at a new record low of 918.2 VEF per USD. The result represented a sharp 23.0% depreciation over the same day of the previous month and a massive 850% depreciation over the same day of the previous year. The parallel dollar has lost 440% of its value this year largely due to intense dollar shortages and an increase in the supply of bolivars. Following the new record low, the parallel dollar gained back some lost ground at the beginning of October and closed 4 November at 867.8 VEF per USD.
At the heart of the parallel dollar’s rapid freefall is the country’s dire financial situation combined with a convoluted three-tier exchange rate system. Oil revenues represent around 95% of Venezuela’s dollar income and low oil prices have limited the government’s ability to supply dollars to its three-tiered exchange rate system. Recession and runaway inflation combined with the fall in oil prices have pushed Venezuela into a full-blown economic crisis. Moreover, the government has a number of debts due this month and throughout next year which will likely intensify the current dollar shortage if oil prices remain low.
LatinFocus Consensus Forecast panelists see the parallel dollar continuing its downward trajectory this year and project a non-official exchange rate of 986.3 VEF per USD by the end of 2015. In 2016, the panel sees the non-official exchange rate depreciating to 2,129.9 VEF per USD.
Meanwhile, the Simadi exchange rate, the third tier of Venezuela’s exchange rate system, has remained broadly stable despite the parallel dollar’s weakening. On 4 November, the exchange rate from the Simadi system traded at 199.5 VEF per USD, which represented a slight 0.2% depreciation over the same day of the previous month. The Simadi system was introduced in February in an attempt to ease black market activity; however, little has changed since its introduction and local reports suggest that very little volume has been available in the system. The last auction held on the Sicad mechanism, the second tier of Venezuela’s exchange rate system, was held at 13.5 VEF per USD.
The FocusEconomics panel is split on whether the Venezuelan government will modify the exchange rate system before the year’s end. A slim majority of panelists expects the official rate to remain unchanged throughout 2015 and to end the year at 6.30 VEF per USD. On the other hand, a number of panelists expect a devaluation in the official rate this year as dollar shortages and public unrest force the government to act. All of our panelists see the currency devaluating further by the end of 2016. On average, the panel sees the official exchange rate ending 2015 at 26.11 VEF per USD. Next year, the panel expects the bolivar to weaken to 59.97VEF per USD.