The widening gap between the official and black-market rates for Venezuela’s currency is heightening expectations of another devaluation of the bolivar. It is two years since the last one. Since then inflation and an exorbitantly high fiscal deficit as a result of extensive public spending in an election year have pushed the rate that matters most to the import-dependent country to unsustainable heights. The gap between the two rates has gone from 100% at the end of last year to more than 300%. A U.S. dollar that cost 8.63 bolivars at the start of the year now costs 14. The official fixed rate is 4.3 bolivars. In other words, the 100 bolivar note in the picture above would have bought almost a dozen U.S. dollar at the start of this year on the unofficial market; it now buys barely seven. Good luck in getting the $23.25 at the official rate.
The deficit is forecast to rise to 6% of GDP in 2013 after 2012’s election-winning splurge. Assuming the government won’t want to run down its foreign-exchange reserves, financing it requires boosting U.S. dollar export revenues, i.e. oil revenues, via a weaker currency as the Chavez government has limited ability or appetite for the only other alternative apart from devaluation, to do so through local or external debt issuance. Venezuela has sold no dollar bonds this year after issuing a record $7.2 billion-worth in 2012 to meet foreign-currency demand and finance government spending. A $3 billion private placement with the central bank and other state-owned lenders in May by state oil company Petroleos de Venezuela (PVSA) is about it. That has not stopped market speculation that the country would go back to the international markets. The president’s ill health does not make it an opportune time, as well as adding to the heft political uncertainty premium already priced into Venezuela’s sovereign debt.
One option for the government would be to devalue only the exchange rate used on the central bank-administered SITME exchange, an artifact for converting bolivar-denominated bonds into U.S. dollars, where the rate is currently fixed at 5.3 bolivars to the U.S. dollar, and where politically favored importers that can get access to it can make a killing on the arbitrage with the black-market rate. The government could then leave the finance ministry’s Cadivi exchange rate–the 4.3 bolivars to the U.S. dollar one–untouched. That would leave Venezuela with an exchange rate regime that would look like the multi-tiered one it had in 2010–and give the Chavez government the ability both to devalue the currency and to claim that it had not done so.