Venezuela: Parallel dollar freefalls past 700 VEF per USD
September 10, 2015
The Venezuelan bolivar traded in the parallel market continued tumbling in recent weeks, with no end in sight to the downward trajectory that has been in place over a year. The non-official exchange rate plummeted past 700 VEF per USD on 2 September, closing the day at a new record low of 711.6 VEF per USD. The result represented a 5.0% depreciation over the same day of the previous month and a massive 729% depreciation over the same day of the previous year. The parallel dollar has lost over 300% this year largely due to intense dollar shortages. Moreover, the parallel dollar is now worth less than a hundredth of the official exchange rate of 6.3 VEF per USD.
At the heart of the parallel dollar’s rapid freefall is the country’s dire financial situation combined with a convoluted exchange rate system. Oil revenues represent around 95% of Venezuela’s dollar income and low oil prices have squashed the government’s ability to supply dollars to its three-tiered exchange rate system. Recession and runaway inflation combined with the fall in oil prices have pushed Venezuela into a full-blown economic crisis. Moreover, the government has a number of debts due at the end of 2015 and throughout next year which will likely intensify the current dollar shortage if oil prices remain low. While, so far, the government has been able to cobble together funds to make debt repayments, including borrowing USD 5 billion from China, the government’s ability to fulfill debt commitments throughout next year is unknown.
LatinFocus Consensus Forecast panelists see the parallel dollar continuing its downward trajectory this year and project a non-official exchange rate of 839.0 VEF per USD by the end of 2015. In 2016, the panel sees the non-official exchange rate depreciating to 2,063.2 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 2 September, the exchange rate from the Simadi system traded at 198.7 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.
At the end of August, the government held a new auction under the Sicad mechanism, the second tier of Venezuela’s exchange rate system. It was the first auction held since June as the government tries to limit dollar shortages and boost public approval. The government auctioned USD 150 million to companies in the agricultural sector at 13.5 VEF per USD, which represented a 5.5% depreciation over the previous auction price.
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 21.50 VEF per USD. Next year, the panel expects the bolivar to weaken to 47.84 VEF per USD.