Venezuela: Government reshuffling expected to delay unification of foreign exchange rate systems
August 2, 2016
After crossing the 1,200 VEF per USD threshold and hitting an all-time low on 10 March—the same day that the two-tier exchange rate system was introduced—the bolivar traded in the parallel market and appreciated somewhat thereafter. Starting in mid-June, however, the bolivar has experienced some volatility and has been trading close to all-time lows since mid-July. On 5 August, the bolivar traded in the parallel market at 1,003 VEF per USD. The result represented a 3.1% appreciation over the same day of the previous month and a sharp 44.0% depreciation over the same day last year. The parallel dollar has lost 20.4% of its value since the start of the year.
Panelists participating in the LatinFocus Consensus Forecast see the parallel dollar continuing its downward trajectory this year and project a non-official exchange rate of 1,857 VEF per USD by the end of 2016. In 2017, the panel sees the non-official exchange rate depreciating to 2,882 VEF per USD.
Meanwhile, the Dipro exchange rate—the first tier of the exchange rate system—remained unchanged at 10.00 VEF per USD on 5 August. According to the government, Dipro is used exclusively to purchase essential goods such as medicine and food products and can face devaluations if authorities deem it necessary.
The free-floating Dicom—the second-tier of the system—has remained broadly stable since early July after having depreciated continuously since its introduction in March. On 5 August, the Dicom traded at 644.5 VEF per USD. The result represented a 2.0% depreciation over the same day of the previous month. The Dicom has depreciated 67.8% since it was introduced.
Analysts remain highly skeptical regarding the effectiveness of the new exchange rate system. It is very unlikely that Dicom will alleviate shortages of goods and services because the government still maintains price controls and there are numerous legal hurdles for imports. In addition, there are doubts about whether the government will commit to a floating exchange rate. The government has never allowed any of the three previous exchange rate systems that have been implemented since 2013 to be free-floating and set by market forces.
Prospects of a potential devaluation of the Dicom exchange rate in 2016 are now up in the air after President Nicolás Maduro sacked the Minister of Industry and Commerce and the vice president for the economy, Miguel Pérez Abad, over alleged internal differences with hardliners from the ruling party. Pérez Abad, seen as the most pragmatic and moderate member of Maduro’s Cabinet, was in favor of liberalizing the country’s convoluted exchange rate system and the devolution of nationalized companies. As minister, he oversaw the overhaul of the current exchange rate system in March. Pérez Abad is expected to be replaced by a more dogmatic minister who champions expropriations and currency controls. On this point, economist Ben Ramsey from JPMorgan argues that:
“For now, we would assume paralysis of the Pérez Abad agenda, namely, any further devaluation of the Simadi/Dicom FX rate (stable over the last month at around USD/VEF 645), incremental liberalization of that market, and Pérez Abad’s stated goal of unifying the FX regime effectively by phasing out Cencoex/Dipro (USD/VEF 10)”