Venezuela: New Dicom rate fails to close the gap with the parallel dollar
March 7, 2018
Venezuela’s new exchange rate system, introduced in late January, helped stem the slide of the bolivar in the parallel market, but already seems doomed to fail due to the persistent lack of dollars in the Venezuelan economy.
In the parallel market, the bolivar strengthened notably in the weeks following the introduction of the new exchange rate system. On 7 March, the bolivar traded at 205,900 VEF per USD, which represented a 11 .6% gain in value compared to the same day in February. However, compared to a year ago, the parallel market bolivar was still down almost 5,000%. The parallel bolivar has plummeted continuously 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.
At the fourth Central Bank auction, held under the new single-tier Dicom exchange rate system on 5 March, the bolivar traded at 40,045 VEF per USD, which was down 36.2% from the 29,375 VEF per USD in the previous auction held on 23 February. The Bank offered less than USD 500,000, sharply down from the USD 1.3 million in the previous round. The low amount highlights the persistent shortage of dollars and casts doubts on the sustainability of the new system. However, a fifth auction was held on 9 March, but the result is still outstanding as of 12 March.
LatinFocus Consensus Forecast panelists foresee severe pressure on the bolivar in both the official and the parallel markets. Given the unpredictable nature of developments in Venezuelan forex markets, most panelists have given up providing exchange rate forecasts. The remaining panel projects a non-official exchange rate of 2,668,972 VEF per USD at the end of 2018. The official rate is seen ending 2018 at 149,223 VEF per USD.
To circumvent economic sanctions imposed on the country by the United States, the Venezuelan government proceeded with plans to launch its own cryptocurrency. On 20 February, it opened the pre-sale of the so-called petro. In contrast to other cryptocurrencies, the petro will be issued by the Central Bank and pegged to the price of Venezuelan oil. Buyers can only purchase the petro with other currencies than the bolivar, such as the euro or USD. Analysts are skeptical of the cryptocurrency, as there is no trust in the issuing authorities. Moreover, the country’s National Assembly, which opposes President Maduro, declared on 6 March the cryptocurrency illegal under domestic law. The assembly deemed the cryptocurrency to be fraudulent and a threat to potential investors.
Author: Jan Lammersen, Economist