Venezuela Special


Venezuela: Venezuelan economic tragedy is far from over

December 2, 2014

The bolivar traded in the parallel market continued to tumble in recent weeks due to the ongoing shortage of U.S. dollars and strong purchases of the greenback by Venezuelans in an attempt to protect themselves from soaring inflation. Venezuela’s decision not to devalue the currency along with the sharp fall in oil prices that is taking place—crude revenues represent around 95% of the country’s dollar income—also played a role in the plunge of the parallel bolivar.

On 2 December, the non-official exchange rate traded at 158.5 VEF per USD. The Venezuelan currency was an astonishing 59.4% weaker than on the same day of the previous month and marked yet another all-time low. On an annual basis, the bolivar traded in the black market lost 162.2% of its value. LatinFocus Consensus Forecast panelists project a non-official exchange rate of 130.8 VEF per USD by the end of this year. In 2015, the panel sees the non-official exchange rate depreciating even further to 240.6 VEF per USD.

In yet another sign that the country is facing a severe credit crunch, data from the Central Bank showed that the most recent auction to buy dollars under the Sicad I system was held on 15 October. In addition, analysts warn that supply through the Sicad II has declined in recent months, thereby contributing to the widening of the gap between the official rates and the parallel bolivar. In this regard, President Nicolás Maduro announced on 2 December that the Sicad II system, "will be enhanced in the upcoming days." On 2 December, the bolivar traded at a weighted average of 50.0 VEF per USD under the Sicad II mechanism. LatinFocus Consensus Forecast panelists expect the Sicad II exchange rate to continue to be relatively stable for the rest of this year and to trade at 50.9 VEF per USD in 2014. Next year, the panel sees the bolivar in the Sicad II system weakening to 61.1 VEF per USD.

As expected, the official exchange rate was unaltered at 6.30 VEF per USD. Although a majority of LatinFocus Consensus Forecast panelists expect that the official exchange rate will remain unchanged this year, some panelists still expect a devaluation in the weeks to come. The panel sees the official exchange rate forecast ending this year at 7.66 VEF per USD. Next year, the panel expects the bolivar to weaken to 16.65 VEF per USD.

In November, the government used USD 4.0 billion from the Joint Chinese-Venezuela Fund to bolster its waning international reserves after they hit an 11-year low in October when foreign exchange reserves totaled USD 20.5 billion. International reserves rose to USD 22.2 billion in November, which represented the highest level in six months. LatinFocus Consensus Forecast panelists expect the country’s international reserves to be USD 21.6 billion by the end of this year and to fall slightly to USD 21.2 billion in 2015.

Recession, runaway inflation, the sharp fall in oil prices and policy paralysis have combined to push Venezuela into its worst economic crisis since former President Hugo Chávez came into power. Despite government assurances that all is under control, however, economic conditions continue to deteriorate. Moreover, the sharp fall in oil prices is adding pressure to Venezuela’s battered economy and put additional strain on the government finances. The negative economic climate observed throughout 2014 will likely carry into next year and, with crucial parliamentary elections in 2015, the government is more likely to continue printing money, selling off assets and cutting imports, rather than introducing politically unpopular measures.

LatinFocus Consensus Forecast panelists expect GDP to decline 3.2% this year, which is down 0.2 percentage points from last month’s projection. Next year, the panel sees the economy contracting 1.5%, which is down 0.7 percentage points from last month’s estimate.

Author: Ricard Torné, Lead Economist

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Venezuela Special Chart

Venezuela Exchange Rate December 2014

Note: Official, non-official and Sicad II exchange rate of Venezuelan bolivar (VEF) against U.S. dollar (USD).
Source: Thomson Reuters Datastream, Venezuela Central Bank (BCV) and local sources.

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