C&B Notes

Maduro Opens the FX Door, But What Next?

Nicolás Maduro is attempting to alleviate mounting political pressures in Venezuela by giving citizens access to dollars at a free-floating exchange rate, initially set around 172 bolivars to the dollar this week (the black market rate is about 190).  Alas, access and amounts are limited, and Maduro’s government still maintains the other two official exchange rates of 6.3 and 12 bolivars per dollar, which now only look more absurd in the face of the new rate.

The government allowed citizens to buy and sell a limited number of U.S. dollars for the first time in over a decade at exchange houses and banks.  The move is part of a slight loosening of the country’s strict currency controls that have caused a shortage of dollars, as well as a paucity of many basic goods.  Residents on Thursday were limited to buying just $300 a day, or $2,000 a month, but for many the new currency market was the first legal way in a decade to get dollars outside the black market…The new system exchanged 172 bolívares to the dollar, a far weaker rate for the currency than the two official rates, at 6.3 and 12 per dollar, but stronger than the black market rate of about 190 bolívares to the dollar.  The rate will float freely, government authorities have said.

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Venezuela’s government hopes the new market will drain life out of the black market and ease a budget deficit that economists estimate at between 17% and 20% of annual economic output.  The gap has widened because the government sells the majority of dollars it earns through oil exports at the 6.3 and 12 rates as a way to subsidize imports of like milk and meat.  “Venezuela has a very large budget deficit because it subsidizes imports through cheap dollars,” said Francisco Rodriguez, senior Andean economist at Bank of America Merrill Lynch…

Most observers doubt that the new system will offer enough hard currency to significantly narrow the budget gap or breathe new life into the country’s moribund economy, which contracted 2.8% last year and may contract up to 7% this year, according to the International Monetary Fund.  President Nicolás Maduro has said that the new market will only feed between 5% and 7% of hard currency needs, while Venezuela’s dominant rate of 6.3 bolívares to the dollar remains in place for 70% of dollar requests, with the 12 bolivar-to-dollar tier absorbing much of the remaining transactions.