With Venezuela’s population divided, social unrest growing and the economy floundering, president Nicolás Maduro needs some good news. But while the latest exchange rate system pleased bondholders and was seen as a step in the right direction by economic analysts it came at a high cost of the bolivar-earning population by effectively devaluing the currency 88%.
And though economists agreed Sicad II, launched on Monday selling dollars at around 51 bolivars, was a positive move, many said it did not go far enough.
The bolivar plummeted after Sicad II’s launch, falling to 82 bolivars per dollar by Wednesday. Though it recovered to 67 yesterday, a more transparent and open system is required, said analysts.
Nevertheless, Venezuela’s debt rallied after Sicad II’s launch, with the 9.25% benchmark 2027s rising from 70 last Friday to around 76.
“It’s good news for bondholders because it is now easier to balance the domestic budget,” Russ Dallen, managing partner at Caracas Capital Markets told Emerging Markets. “Almost all Venezuela’s cashflow is in dollars, but it’s expenditure is in bolivars.”
But though it has to be seen as “a move in the right direction”, this budget balancing comes at the expense of companies operating in Venezuela “in good faith”, said Dallen, as well as “creating a hornet’s nest” among the people.
“The Sicad II price is now the number people will use to price things,” Dallen added. “It comes at a time when Venezuelan people are already up to their necks trying to pay for things.”
But the move does mark a significant change to previous policy. The official bolivar rate is 6.3 to the dollar, while Sicad I – launched earlier this year – offered dollars to a limited number of people at around 11. On the black market, which has now been decriminalized, bolivars had been trading more than 10 times the official rate before Sicad II.
“While Nicolás Maduro goes backwards at over thousand RPM in terms of human rights, freedom and peace and annuls democracy in Venezuela, he has taken small steps forward in terms of economic measures,” said research firm Veneconomía.
Barclays analysts said Sicad II was a “first step in the right direction”, with the potential to reduce FX distortions and improve fundamentals.
Bank of America Merrill Lynch’s Francisco Rodriguez, said: “The fact that the authorities have been willing to accept a depreciation of the exchange rate [...] and have placed few if any limits on transaction size or purpose has been a welcome surprise.”
Barclays said the mechanism “should increase the government’s revenues and maximize its capacity to sterilize the excess liquidity in the domestic market, helping to progressively reduce the pressures on the exchange rate”.
It has been 11 years since Venezuela began currency exchange controls and four years since it made the parallel currency market. Letting supply and demand determine the rate is therefore a new development.
Sicad II also gives international businesses such as airlines the chance to repatriate bolivar denominated revenues, although they would take a huge loss. Multinationals in Venezuela hold the equivalent of $27bn at the official 6.3 exchange rate, said BofA Merrill Lynch.