Venezuela: Government launches new exchange rate, allows legal trading of the bolivar

The Venezuelan government launched an overhaul of the exchange rate system and introduced a new exchange rate mechanism on 12 February. The Marginal Currency System, or Simadi, is the third mechanism in the new three-tier exchange rate regime and allows for legal trading of the bolivar. The move represented an easing of the tightly-controlled exchange rates and a departure from the former three-tier system, which strictly rationed access to foreign currency. Under Simadi, businesses and individuals are allowed to purchase and sell foreign currency at the price set by the market.

The new second tier, Sicad, is a combination of the former second and third tiers, Sicad I and Sicad II, with a rate of approximately 12.0 VEF per USD used for non-essential goods. The first tier, the official exchange rate, is unchanged and sells dollars at 6.30 VEF per USD for preferential goods. President, Nicolás Maduro, stated that Simadi is a “test trial” and will only account for 3–5% of dollar’s sales for the time being. Sicad will account for approximately 25% of the country’s dollar sales, while the official exchange rate will make up 70%.

On its first day, the exchange rate from the Simadi system traded at 170.1 VEF per USD, which represented a de facto devaluation of 2,601% over the official exchange rate of 6.30 VEF per USD. The rate was still stronger than the non-official exchange rate, which traded in the parallel market at 178.3 VEF per USD on the same day, but was much closer than market analysts had expected. The non-official rate has weakened slightly since the new system was announced and it was 3.3% weaker on 12 February than on the same day of the previous month.

With the creation of Simadi, Venezuelan authorities hope to ease dollar shortages and counteract widespread black market activity. Given that oil supplies almost all of Venezuela’s dollar income, the sharp drop in prices has put pressure on government finances and resulted in huge goods shortages. A depreciation in the bolivar may help shore up the country’s finances, but it could increase inflationary pressures which are already high. Severe economic contractions, runaway inflation and the fall in oil prices have pushed Venezuela into its worst economic crisis since President Hugo Chávez took power.

Against this backdrop, LatinFocus Consensus Forecast panelists expect a devaluation in the official rate this year. The panel sees the official exchange rate ending 2015 at 18.05 VEF per USD. Next year, the panel expects the bolivar to weaken to 36.69 VEF per USD. In the black market, LatinFocus Consensus Forecast panelists project a non-official exchange rate of 273.0 VEF per USD by the end of this year. In 2016, the panel sees the non-official exchange rate depreciating even further to 367.5 VEF per USD.