Bolivar Time Bomb To Keep Ticking, Towards 2014 Devaluation
BMI View: The fundamental dynamics at play in Venezuela's exchange rate continue to deteriorate, with rapidly rising inflation and supply of money contributing to record-weakness on the black market. While another devaluation of the currency is warranted, we expect that authorities will try and hold off for as long as possible, likely until after the elections in December, in order to prevent a political backlash.
We believe that the downside risks to the Venezuelan bolívar fixed exchange rate are on the rise, with fundamental dynamics pushing the black market rate to new lows. While the official exchange rate, currently at VEF6.292/US$, will likely have to be significantly adjusted over the medium term to account for growing imbalances and market distortions, we expect authorities to refrain from devaluing through the remainder of the year , in part in order to avoid a political backlash against the ruling party, with local polls scheduled for December 8.
While our previous forecasts call ed for a currency devaluation in 2015, we now believe that this timeline is changing, with an adjustment now more likely to occur in 2014 . The magnitude of the devaluation is nearly impossible to ascertain due to political dimensions of such a decision - bringing the unit to par with the black market exchange rate would require a devaluation of around 700%, which is extremely unlikely - but for now we are pencilling in an adjustment to VEF9.00/US$ in 2014, implying a decline in value of about 43%. We believe that the risks to this forecast are weighted towards a weaker bolívar.
|Venezuela - Official & Black Market Exchange Rates, VEF/US$|