Venezuela: Parallel dollar plummets following introduction of Simadi
March 16, 2015
The bolivar traded in the parallel market tumbled in recent weeks following the Venezuelan government’s overhaul of the exchange rate system. The new regime, launched on 12 February, includes a new third mechanism called “Simadi” that allows for legal trading of the bolivar. The new second tier, Sicad, is a combination of the former second and third tiers, Sicad I and Sicad II, with a rate of approximately 12.0 VEF per USD for non-essential goods. In the first tier, the official exchange rate is unchanged and sells dollars at 6.3 VEF per USD for preferential goods.
On its first day, the exchange rate from the Simadi system traded at 170.1 VEF per USD, which was relatively close to the parallel dollar’s value (178.3 VEF per USD) on the same day. However, the parallel dollar has plummeted in value since Simadi’s introduction, while little fluctuation has occurred in the Simadi exchange rate. On 5 March, the non-official exchange rate traded in the parallel market at a record low of 271.1 VEF per USD, which represented a 52.0% depreciation over its value on the day that Simadi was introduced. On the same day, the exchange rate from the Simadi system traded at 177.7 VEF per USD, which represented only a 4.5% depreciation over its initial value. In recent days, the parallel dollar has gained some of the ground lost, closing on 10 March at 232.4 per USD, however this is still far weaker than the Simadi rate of 179.8 VEF per USD on the same day.
While the new regime was initially designed to help ease dollar shortages and counteract widespread black market activity, little has changed since its introduction. It is estimated that less than 2% of U.S. dollar sales have gone through the Simadi mechanism, which is below the 3–5% that President Nicolás Maduro had originally stated. The small supply of U.S. dollars available on the Simadi exchange has contributed to the parallel dollar’s drastic depreciation and the wide gulf between the two rates. Moreover, Simadi’s exchange rate has experienced relatively little volatility, suggesting that prices are not truly fluctuating with supply and demand. In addition, the new Sicad mechanism has not held an auction yet and the last auction under the old system was held in October of last year.
At this time it appears that dollar shortages and extensive black market activity are likely to persist. The country’s battered finances are under pressure due to the sharp drop in oil prices as oil revenues represent around 95% of Venezuela’s dollar income. While a depreciation in the bolivar may help shore up the country’s finances—and Simadi appears as if it is a step in this direction—it could increase inflationary pressures, which are already high. Further, for Simadi to be effective greater volumes and a larger supply of U.S. dollars will need to be available on the mechanism. Looking forward, Ben Ramsey and Diego W. Pereira, research analysts at J.P.Morgan comment:
“SIMADI could move lower, temporarily, if supply is forthcoming. […] The caveat here is if the government begins putting substantial volumes on SIMADI at the expense of the preferential platforms. […]. The more dollars that go to SIMADI, the less fuel there is for arbitrage and capital flight via the preferential platforms. Moreover, the more dollars that go to SIMADI, the better the fiscal results above the line for PDVSA and the government, helping to short-circuit the current vicious cycle of deficit monetization. However, so far the Maduro administration seems committed to keeping SIMADI “marginal” and prioritizing preferential USD flows. “