Venezuela: Parallel dollar value remains low amid deteriorating economic situation and increasing capital controls
April 20, 2015
The bolivar traded in the parallel market continues to fluctuate around record lows in recent weeks amid Venezuela’s deteriorating economic situation and increasing cash shortages in the country. Since hitting an 271.1 VEF per USD on 5 March, the non-official exchange rate gained back some lost ground in the following days reaching 229.9 VEF per USD on 20 March. However, on 10 April, the government announced additional capital controls were being placed on Venezuelan travelers, reducing the amount of foreign currency travelers are authorized to use on their credit cards down from 2,500 USD to 700 USD of purchases. The move caused the bolivar traded in the parallel market to fall to 260.7 VEF per USD on 14 April, which represented a 13.1% depreciation over 20 March, and erased most of the previous gains made by the currency. The parallel dollar has lost just over half its value this year alone as recession, runaway inflation and the sharp fall in oil prices have combined to push Venezuela into its worst economic crisis since former President Hugo Chávez came into power.
Meanwhile, relatively little fluctuation has occurred in the Simadi exchange rate, the third tier of Venezuela’s overhauled exchange rate system. The new system, launched on 12 February, was designed to help ease dollar shortages and counteract widespread black market activity, however little has changed since its introduction. On 14 April, the exchange rate from the Simadi system traded at 195.0 VEF per USD, which represented a 3.9% depreciation over the same day of the previous month. While the exchange rate from the Simadi system traded relatively close to the parallel dollar’s value at its introduction,in recent weeks a wide discrepancy has emerged between the two rates. As expected, the official exchange rate was unaltered at 6.3 VEF per USD on the same day. In addition, data from the Central Bank showed that an auction has yet to be held this year to buy dollars under the revamped Sicad system.
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, it could increase inflationary pressures, which are already high. Ramiro Blazquez, economist at HSBC Bank adds:
[A]necdotal evidence points to very limited supply of FX to the productive sectors. We think that this supports our view that, in the aftermath of the oil collapse, the Maduro administration will implement an adjustment of external accounts only by compressing private imports, or, in other words, by severely restricting dollar allocations for private imports. We think that the political cycle with legislative elections due in 2015 (no date has been set) will prevent the government from conducting a relative price adjustment and also from reigning in inflation.