Venezuela: Parallel dollar continues freefall, approaches 700 VEF per USD
August 7, 2015
The bolivar traded in the parallel market tumbled in recent weeks, continuing the downward trajectory that has been in place for the past year. After passing 500 VEF per USD on 3 July and just one week later plummeting past 600 VEF per USD, the parallel dollar is now quickly approaching 700 VEF per USD. On 4 August, the non-official exchange rate traded at a new record-low of 686.7 VEF per USD, which represented a 37.0% depreciation over the same day of the previous month and a massive 830.2% depreciation over the same day of the previous year. Moreover, the parallel dollar is now worth less than a hundredth of the official exchange rate of 6.3 VEF per USD.
The rapid freefall of the parallel dollar is a result of the country’s dire financial situation. Low oil prices have eroded the government’s ability to supply dollars to its complex three-tiered exchange rate system as oil revenues represent around 95% of Venezuela’s dollar income. Further, recession and runaway inflation combined with the fall in oil prices have pushed Venezuela into a full-blown economic crisis. The government has had to resort to desperate measures to obtain foreign currency, including draining USD 1.5 billion from an International Monetary Fund (IMF) account in June and borrowing USD 5 billion from China.
LatinFocus Consensus Forecast panelists are still taking the latest exchange rate movements into account and project a non-official exchange rate of 608.0 VEF per USD by the end of this year. In 2016, the panel sees the non-official exchange rate depreciating to 782.5 VEF per USD.
Meanwhile, the Simadi exchange rate, the third tier of Venezuela’s exchange rate system, has remained broadly stable despite the parallel dollar’s weakening. On 4 August, the exchange rate from the Simadi system traded at 199.2 VEF per USD, which represented a meagre 0.4% depreciation over the same day of the previous month. The Simadi system was introduced in February in an attempt to ease black market activity; however, little has changed since its introduction and local reports suggest that very little volume has been available in the system. In addition, no new auctions have been held under the Sicad mechanism, the second tier of Venezuela’s exchange rate system, since June. The last auction was held following large-scale protests led by taxi and bus drivers over their inability to maintain and service their vehicles due to a lack of foreign currency to purchase auto parts.
As expected, the official exchange rate remains unaltered at 6.30 VEF per USD. That said, LatinFocus Consensus Forecast panelists expect a devaluation in the official rate this year as dollar shortages and public unrest force the government to act. The panel sees the official exchange rate ending 2015 at 24.80 VEF per USD. Next year, the panel expects the bolivar to weaken to 46.33 VEF per USD.