Venezuela: Bolívar Devaluation Likely In First Half Of 2013

Business Monitor International (BMI) forecasts a devaluation of the Venezuelan bolívar in 2013, most likely within the first half of the year. We see the currency falling from VEF4.30/US$ to VEF8.00/US$.

For now, recent measures by the government suggest it is attempting to delay the devaluation. It is likely buying time until another presidential election, which is likely to be triggered by President Hugo Chávez’s failing health, takes place.

Recent economic measures include a change in the government’s windfall oil tax to channel more US dollars into the foreign exchange system, effectively increasing the supply of dollars to the economy. However, since that measure was implemented, the black market rate (currently VEF18.40/US$, or four times weaker than the official fixed exchange rate) has continued to weaken, suggesting FX shortages are worsening.

While we cannot pinpoint the timing of a new election, Chávez hasn’t been seen in public for two months, since his most recent cancer treatment. Once he officially steps down, an election would have to take place within 30 days, and we anticipate any devaluation would take place soon after.

With a sizeable fiscal deficit, estimated at over 12% of GDP in 2012, a devaluation of the currency would generate more bolívars per petro-dollar for the government, allowing it to narrow the financing gap, and continue spending on social programmes. However, Venezuela’s already high rate of inflation would rise further, bringing with it greater discontent.