Mounting Pressures To Spur Bolívar Devaluation

BMI View: Based on the fact that the Venezuelan government's bolívar-weakening policies continue apace, and the unofficial devaluation first implemented in December has failed to slow the currency's decline on the black market, we reiterate our view that an official devaluation will take place sometime this year. We have pencilled in a rate of VEF11.30/US$, implying a more substantial adjustment than indicated by our previous projections.

We have revised our year-end forecast for Venezuela's currency, and we expect a more substantial devaluation over the course of 2014, to VEF11.30/US$, compared to the current rate of VEF6.292/US$ and our previous projection of an adjustment to VEF9.000/US$. Predicting the exchange rate that authorities deem appropriate is obviously subject to significant risks, due to the uncertainty regarding policymaking in general and the unpredictability of the administration of President Nicolás Maduro in particular. However, we believe it is most likely that the official rate will be changed to match the Sicad rate administered by the Central Bank, which currently stands at about VEF11.30/US$, given the fact that authorities have already begun expanding the use of this rate for a number of industries, including tourism, oil investments, and certain types of food, among others.

We believe that existing measures have not been sufficient to satsify market demand for foreign exchange, and government claims that a devaluation is not forthcoming are increasingly untenable. Despite the expanded use of the Sicad rate, a policy which is effectively an unofficial devaluation, the value of the bolívar on the black market continues to plummet, reaching VEF75.57/US$ at the time of writing on February 5. This comes against a backdrop of a stepped-up crackdown on black market traders, whom Maduro characterises as unscrupulous speculators. Inflation continues to soar (likely to remain above 50% year-on-year over the coming months) due in large part to the rapidly-expanding money supply (which grew by an incredible 74.4% y-o-y in November, the most recent month for which data is available), and we expect the value of the bolívar to remain under pressure, a reality which policymakers will have to confront more substantively in the near future

Black Market Depreciation Showing No Signs Of Slowing
Venezuela - Official & Unofficial Exchange Rates, VEF/US$

Mounting Pressures To Spur Bolívar Devaluation

BMI View: Based on the fact that the Venezuelan government's bolívar-weakening policies continue apace, and the unofficial devaluation first implemented in December has failed to slow the currency's decline on the black market, we reiterate our view that an official devaluation will take place sometime this year. We have pencilled in a rate of VEF11.30/US$, implying a more substantial adjustment than indicated by our previous projections.

We have revised our year-end forecast for Venezuela's currency, and we expect a more substantial devaluation over the course of 2014, to VEF11.30/US$, compared to the current rate of VEF6.292/US$ and our previous projection of an adjustment to VEF9.000/US$. Predicting the exchange rate that authorities deem appropriate is obviously subject to significant risks, due to the uncertainty regarding policymaking in general and the unpredictability of the administration of President Nicolás Maduro in particular. However, we believe it is most likely that the official rate will be changed to match the Sicad rate administered by the Central Bank, which currently stands at about VEF11.30/US$, given the fact that authorities have already begun expanding the use of this rate for a number of industries, including tourism, oil investments, and certain types of food, among others.

Black Market Depreciation Showing No Signs Of Slowing
Venezuela - Official & Unofficial Exchange Rates, VEF/US$

We believe that existing measures have not been sufficient to satsify market demand for foreign exchange, and government claims that a devaluation is not forthcoming are increasingly untenable. Despite the expanded use of the Sicad rate, a policy which is effectively an unofficial devaluation, the value of the bolívar on the black market continues to plummet, reaching VEF75.57/US$ at the time of writing on February 5. This comes against a backdrop of a stepped-up crackdown on black market traders, whom Maduro characterises as unscrupulous speculators. Inflation continues to soar (likely to remain above 50% year-on-year over the coming months) due in large part to the rapidly-expanding money supply (which grew by an incredible 74.4% y-o-y in November, the most recent month for which data is available), and we expect the value of the bolívar to remain under pressure, a reality which policymakers will have to confront more substantively in the near future

Reserves Still At Historic Lows
Venezuela - Foreign Reserves

Meanwhile, the government's ability to defend the currency peg is waning, and further challenges on this front are expected over the medium term. Although foreign reserves ticked up slightly in December following the devaluation, from US$21.3bn to US$21.5bn, they remain near historic lows, amounting to only 4.7 months of import cover by our estimates. The announcement on February 4 that a Sicad auction for US$220mn had been cancelled further suggests that the availability of foreign exchange is tight, despite government claims that the cancelation was due to a lack of procedural compliance on the part of companies requesting to participate.

Maduronomics Likely To Have Reversed Investment Uptrend
Venezuela - Direct Investment, US$mn

Finally, as we have highlighted on multiple occasions, the business environment in Venezuela is rapidly deteriorating, most recently illustrated by the introduction of the 'Law of Fair Prices', which limits corporate profits at 30% (a nebulous regulation which will be enforced at the discretion of government officials). The law also gives a new government agency the authority to set maximum prices and conduct surprise inspections, and imposes extremely harsh penalties for violators, including expropriation and lengthy prison sentences. As a result, we expect that private sector direct investment, which had been on the rise over much of 2013, has likely already declined sharply (data for the final quarter of 2013 is not yet available), and will continue to do so over the course of 2014, further exacerbating the scarcity of foreign exchange, and contributing to depreciatory pressure on the bolívar.

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