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Finance minister nixes possible devaluation
Nov. 11, 2014

Published by Economist Intelligence Unit

Event

The finance minister, Rodolfo Marco Torres, has stated that the government has no plans to devalue Venezuela's currency or change the country's exchange mechanisms.

Analysis

Venezuela offers three rates of exchange with the US dollar. The strongest rate, of BsF6.3:US$1, is reserved for what the government deems priority goods (such as medicine and food). The second rate, known as Sicad 1, is around BsF12:US$1 and the third, Sicad II, is BsF50:US$1. However, with Venezuelans struggling to get hold of dollars at these overvalued rates, a black market has emerged, on which the local currency sells for more than BsF100:US$1.

Mr Torres said in a television interview that the government has no plans to devalue the currency, adding that 80% of foreign currency is provided at the strongest rate. He also said that the authorities continuously evaluate the country's exchange mechanisms. Venezuelans are becoming more desperate for foreign currency, as is demonstrated by the country's black-market exchange rate, which has devalued from BsF8:US$1 to the current rate in less than three years. Annual inflation is over 60%, and shortages of basic goods are widespread.

With the combination of the recent drop in oil prices and of major debt obligations falling due, Venezuela had been expected to devalue the BsF6.3:US$1 rate at the beginning of 2015, in a push to alleviate some of the country's myriad economic problems. Should Venezuela not devalue this rate, the country's economic situation will continue to worsen, which could be politically dangerous for the president, Nicolás Maduro, whose approval ratings are in the low thirties. However, devaluing also carries political risks. Mr Torres also indicated that any decision to raise petrol prices, currently the cheapest in the world, would be taken by Mr Maduro himself. A generous fuel subsidy costs the government around US$12bn annually, but any adjustments to it would be politically dangerous for Mr Maduro.

Impact on the forecast

We maintain our forecast that the official exchange rate will remain heavily overvalued. Efforts to boost foreign-exchange inflows are likely to fail and, given that the money supply is growing increasingly rapidly (it has risen by around 70% year on year in recent months), these imbalances will continue to worsen, requiring further downward exchange-rate adjustments or interest-rate increases.




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© Girish Gupta