Venezuela: Depreciation of bolívar remains rampant in 2020; softens from levels seen in 2018 and 2019
The Venezuelan bolívar soberano fell sharply against the U.S. dollar in 2020 amid rampant inflationary pressures and tumbling oil production. The official exchange rate ended 2020 at 1,107,199 VES per USD, marking a 95.8% depreciation over the year. Meanwhile, the parallel rate ended the year slightly lower at 998,942 VES per USD and thus clocked a milder but no less hefty 94.5% depreciation across 2020. Nevertheless, both rates depreciated at a markedly lower rate than in 2019, where the official rate dived 98.6% and the parallel rate slumped 98.7% year-on-year.
Venezuela’s economic problems are well documented: An economy built on the sumptuous profits derived from being the owner of the world’s largest proven reserves of crude oil came grinding to a halt with cratering oil prices during 2014, when prices fell from above USD 100 per barrel to less than half that value. As exports—the key source of foreign currency and positive pressure on the bolívar—dried up, the currency began to fall and the cost of imports rose. The government’s solution was to print money—annual rates of money supply growth have been above 1,000% since the end of 2017—adding further pressure to the beleaguered currency. When oil prices failed to recover to their previous lofty heights, hyperinflation took hold—inflation averaged 65,374% in 2018 and 19,906% in 2019—with U.S. sanctions on the petroleum industry adding further pressure as international investors withdrew their capital. Even the drastic action of devaluing the currency by roughly 95% in August 2018—five zeroes were lopped off the ailing bolívar fuerte (VEF) and it was renamed the bolívar soberano (VES)—and anchoring the currency to the price of Venezuelan oil did little to stem the downfall.
In 2020, both currency depreciation and inflation eased somewhat from their vastly elevated heights, in no small part due to the gradual dollarization of the economy: Local consultancy Econoanalítica estimates that around two thirds of all transactions in Venezuela now take place in U.S. dollars. Initially, President Maduro prohibited the use of dollars in local transactions, but more recently has come to accept their use as a pressure release from the bolívar’s rampant decline in value. To this end, in early January 2021, Maduro announced the expansion of the use of foreign currency bank accounts for everyday transactions, in the hope that this would go some way to easing spending pressures: If your savings are in a “hard” currency, the psychological compulsion to spend them before they rapidly lose value is mitigated to an extent.
Regarding the increased use of USD, Alberto J. Rojas, an economist at Credit Suisse, commented:
“We reiterate that the negative impact of inflation on consumption and investment decisions has been declining, as transactions in foreign currency have become somewhat the norm nationwide. […] However, we think the Maduro administration will continue to keep the bolivar as the official means of exchange, since many fiscal needs can still be funded via money printing, while dollarization would reduce the government’s spending flexibility.”
Looking at the outlook for the wider economy, LatinFocus panelists see a marked softening in the economic downturn in 2021. In part this is a sign that there is little scope for inhibiting U.S. sanctions to be tightened, with few enterprises or key individuals in the Maduro regime left to be targeted. Consequently, much attention will be focused on how the incoming Biden administration may adjust foreign policy towards Venezuela. Although the “maximum pressure” campaign waged by the outgoing Trump administration garnered bipartisan support in Washington, there is an expectation that policies will be reassessed. At the very least, a more nuanced approach should gradually develop, with humanitarian concerns given more elevated status and potential room for adjusting policies that have thus far only seen Maduro’s grip on power strengthen.
Turning to Venezuela’s key export, oil production dropped to a near 80-year low in June 2020, and only rose marginally towards the end of the year. The factors are manifold, but principally lie with chronic mismanagement of the vast reserves available and the debilitating effect of international sanctions, with exports being limited to key allies such as China and Iran. On the outlook for the industry, Carlos de Sousa, an economist at Oxford Economics, commented:
“Lack of investment and external financing, mismanagement, unpaid bills to oilfield service companies and a shortage of skilled labour led to this chronic decline, which further accelerated with the imposition of U.S. oil-sector sanctions in January 2019. […] Oil exports have been volatile in 2020 due to intermittent tightening of oil sanctions and the regime’s inconsistent success in bypassing them. We expect oil output to recover to 500k b/d by end-2021, assuming weaker sanctions enforcement.”