Venezuela: Non-official exchange rate hits an all-time low in October
October 8, 2014
The bolivar that is traded in the parallel market continued on a downward spiral in recent weeks due to a severe shortage of U.S. dollars and Venezuelans’ appetite for the greenback as they attempt to protect themselves from soaring inflation. On 2 October, the non-official exchange rate traded at 96.6 VEF per USD. The print was 12.5% weaker than on the same day of the previous month and marked the lowest value on record. On an annual basis, the bolivar traded in the black market lost 130.4% of its value. LatinFocus Consensus Forecast panelists project a non-official exchange rate of 108.0 VEF per USD by the end of this year. In 2015, the panel sees the non-official exchange rate depreciating even further to 130.0 VEF per USD.
The recent cash crunch also reflected the government’s increasing financial needs; the country will have to make USD 9.2 billion in debt payments before the end of the year. While the official foreign-exchange reserves currently amount to USD 21.3 billion, analysts have warned that the country’s liquid reserves may only stand at USD 2.5 billion (73% of the country's international reserves are in gold). This has raised concerns among market participants that Venezuela could have serious problems meeting its international obligations. Nevertheless, the country still has large amounts of cash reserves in the National Development Fund (Fonden) and state-owned oil company Petroleos de Venezuela (PDVSA) with which it can continue servicing its external debt. LatinFocus Consensus Forecast panelists expect the country’s international reserves to be USD 21.7 billion this year and to increase slightly to USD 21.9 billion in 2015.
Meanwhile, the three official exchange rates remained broadly stable in the last few weeks. On 2 October, the bolivar traded at a weighted average of 50.0 VEF per USD under the Sicad II mechanism and at 12.00 VEF per USD in the Sicad I system. The official exchange rate was unaltered at 6.30 VEF per USD. LatinFocus Consensus Forecast panelists expect the Sicad II exchange rate to continue to be relatively stable for the rest of this year and to trade at 47.1 VEF per USD in 2014. Next year, the panel sees the bolivar in the Sicad II system weakening to 58.2 VEF per USD. LatinFocus Consensus Forecast panelists still expect a sharp devaluation of the official exchange rate in the months to come. Panelists see the official exchange rate ending this year at 10.54 VEF per USD, which is slightly weaker compared to the 9.9 VEF per USD that was estimated last month. Next year, the panel sees the bolivar weakening even further than the depreciation expected in 2014 and see it trading at 14.89 VEF per USD.
On 25 September, the government announced that PDVSA will be allowed to sell U.S. dollars at any of the existing exchange rates when it contributes to the Fonden. The fund is the government’s main off-budget spending mechanism and is financed via oil revenues. While the government is expected to receive additional income in local currency with this move, this also represents a stealth devaluation of the bolivar. That said, Francisco Rodriguez, Chief Andean Economist at BofA Merrill Lynch Global Research, points out:
“Whether this measure counts as an actual devaluation depends not on the rate at which the central bank buys dollars from PDVSA, but at the rate at which the central bank sells these dollars to the public. If the central bank simply gives more bolivars to PDVSA in exchange for the same dollars, while reselling these at the 6.3 rate to the public through Cencoex, then it is just printing additional bolivars to give to PDVSA. If, in contrast, the central bank sells these dollars to the public at the higher rate, then the government does receive a genuine fiscal effect, which could be as high as 5.9% of GDP.”
The Venezuelan economy remains in the doldrums and the shortage of U.S. dollars is likely to continue in the months ahead, thus propping up the value of the greenback in the parallel market. That said, the country’s capacity to generate revenues via oil exports and additional funds allocated outside of the budget has increased the government’s room to maneuver. Nevertheless, the long-delayed economic reforms continue to be the country’s top priority.