Venezuela’s Currency Is Collapsing on the Black Market Again

  • The currency traded flat for most of 2016 but is now falling
  • If history is a guide, black market bolivar may fall further

Venezuela’s currency is so weak, shopkeepers have taken to weighing it. In 2015, the black-market bolivar frequently fell more than 10 percent a month. In the six months through September the black-market currency actually appreciated, even as prices for unregulated goods began to skyrocket. The calm ended in October, when the bolivar lost almost a third of its value compared to the U.S. dollar in a matter of weeks.

“There are a combination of things going on, as the stability we saw for most of this year was because things last year had been so abrupt and the decline so steep,” Henkel Garcia, director of Caracas-based consulting company Econometrica, said in a telephone interview. “Public spending may be pressuring the black-market rate, in addition to the exasperation of the people and political tension. People see the decline and start to buy more” dollars.

Venezuela has maintained strict currency controls since 2003 and currently has two legal exchange rates -- known as the Dipro and Dicom rates -- of 10 and 658 bolivars per dollar used for priority imports. On the black market, where people and businesses turn when they can’t obtain government approval to purchase dollars at the legal rates, the bolivar has weakened 50 percent over the past year to 1,567 bolivars per dollar on Nov. 1, according to dolartoday.com, a widely watched website that tracks the exchange rate in Caracas. On the border with Colombia, the rate is even weaker at 1,737.50 bolivars per dollar, according to the website. 

While steep, the 28% decline last month is not unprecedented. The currency fell 29% in July of last year, 31% in May 2015 and a whopping 33% in November 2014. Monthly losses of more than 10 percent became frequent starting in mid-2012. Since the start of 2011, the currency has increased in value in only 15 of the past 70 months. The general trajectory has been down, and without a floor.

For years, the black-market rate had closely tracked the so-called implicit rate -- the number of bolivars in circulation divided by foreign reserves. At times, it even fell below the implicit rate, meaning people had confidence that bolivar was worth more than just the gold and cash the central bank had to back it up.

The black market rate started to diverge dramatically from the implicit rate in early 2015. The gap between the two narrowed earlier this year, as Venezuela devalued the Dicom exchange rate, but widened again in October. Falling hard currency reserves weaken the implicit rate as the central bank has less assets to back its ever-expanding money supply. Yet even with Venezuela’s international reserves at a 13-year low, the black-market rate is now more than two times the implicit rate.

Whenever the bolivar plunges on the black market in Caracas, Venezuelans can be heard asking the same question: Is now a good time to sell my dollars? If history is any guide, the answer is probably not. The ratio of the black market to the implicit rate hit a high of 4.28 in October of last year. It’s only 2.4 at the moment. To put it simply, dollars might actually be cheap. People have been willing to pay a much higher premium in the past.

“People are afraid of what happened last year,” Econometrica’s Garcia said, adding that the black market rate could end this year around 1,700 bolivars per dollar.

— With assistance by Sebastian Boyd

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