Venezuela: Volatility persists in parallel market
February 6, 2017
The first shipments of the VEF 20,000 banknote to replace the VEF 100, which was the largest bill in circulation, started to arrive in mid-January after multiple delays. The VEF 100 bill, which constituted over 75% of the country’s money supply in Venezuela’s mostly cash-based economy, has become virtually worthless due to ballooning inflation. This forced the government to introduce larger denomination bills to facilitate economic transactions. The collapse in value of the VEF 100 bills reflects in part the structural imbalances plaguing the Venezuelan exchange rate system and the economy at large. The last VEF 100 bills are expected to be removed from circulation by 20 February.
Taking a look at exchange rate movements since the start of the year, on 10 February, the bolivar traded in the parallel market at 3,720 VEF per USD. The result marked a 9.9% depreciation from the same day of the previous month. The parallel dollar has shed 14.9% of its value since the start of the year, representing a massive 72.4% depreciation from the same day last year. The bolivar traded in the parallel market has experienced extreme volatility since October. The currency depreciated starkly in Q4 2016 due to a reduction in the Central Bank’s reserves requirement, an increase in monetary financing to PDVSA and political developments at home and abroad.
Panelists participating in the LatinFocus Consensus Forecast see continued pressure on the parallel dollar and project a non-official exchange rate of 7,403 VEF per USD by the end of 2017. In 2018, the panel sees the non-official exchange rate depreciating further to 6,274 VEF per USD.
Meanwhile, the Dipro exchange rate—the first tier of the official exchange rate system—remained unchanged at 10.00 VEF per USD on 10 February. According to the government, the Dipro is used exclusively to purchase essential goods such as medicine and food products and can face devaluations when authorities deem it necessary.
The free-floating Dicom—the second-tier of the system—has remained broadly stable since early July, after having depreciated continuously since its introduction in March 2016. On 10 February, the Dicom traded at 690.6 VEF per USD, depreciating 2.1% from the same day last month and 2.5% since the start of 2017.
On average, panelists expect the bolivar at the Dipro exchange rate to end 2017 at 235.4 VEF per USD. Next year, the panel sees it trading at 544.8 VEF per USD.