Variables Influencing Behavior of the Dollar in Venezuela

By Misión Verdad – Oct 17, 2024

Exchange rates in Venezuela, both official and parallel—i.e. when the involvement of foreign currency is taken into account—have been subject to significant fluctuations in recent days. This process is unprecedented so far this year, and has become the main discussion in the Venezuelan economic sphere as a result.

The value of the parallel dollar, mainly referenced in unofficial markers and social media accounts called Monitor Dólar Venezuela, has jumped, distancing itself from the official price of the US dollar published by the Central Bank of Venezuela (BCV).

This exchange rate gap reached 26.2% on October 10, when the parallel dollar exchange rate reached 47.5 bolivars per US dollar, while the BCV dollar reached 37.6.

With this difference of 9.8 bolivars between the rates, there was a disarray in exchange operations and in the prices of economic activities—mostly in informal retail transactions—that do not use the BCV exchange rate to define prices.

But beyond these specific distortions, which have manifested themselves in a speculative manner in the everyday economy, the main element that has arisen due to the exchange rate gap is uncertainty among economic agents.

Exchange rate slippage
So far in 2024, the slide in the BCV dollar has been minimal, fluctuating between approximately 35 and 37 bolivars per US dollar in the January-July period.

The exchange rate has a direct relationship with other variables that have an impact on economic performance, such as inflation. During 2024, Venezuela has managed to reduce inflation in very significant ways, creating records that have not been seen in more than a decade.

In the period from January to September this year, the accumulated inflation was 11.5%. In 2023, the cumulative figure for the same period was 104.9%, according to the BCV. The reduction over the past year has been more than notable.

Over the past two years, the country has broken the hyperinflationary trend that was exacerbated by the illegal US-led imperial blockade of the Venezuelan economy. Clearly, the behavior of the BCV exchange rate has been one of the keys in the construction of prices and, therefore, of the low inflationary rate.

However, at the beginning of July, and in the aftermath of the July 28 presidential election and the far-right violence that briefly followed, the parallel exchange rate began to distance itself from the official one.

This pattern could refer to a link between political variables, such as “uncertainty,” and those that govern the diffuse, informal, and opaque system constructing the parallel dollar price, since it tends to behave irregularly in tense political situations.

Furthermore, on several occasions, the parallel exchange rate has challenged governance over exchange rate dynamics, in many cases promoting economic insecurity, stampede reactions, and speculative tendencies.

In recent days, the slide in the parallel rate created a differential that drove a price adjustment in commercial products where the BCV dollar is used as reference, in order to reduce the “de facto” gap for the continuation of certain daily activities.

As of October 16, the parallel exchange rate reached 46.8 bolivars per dollar. The BCV reference rate also fell to 38.9. The gap narrowed to 16.9%, which is still a high value compared to the differential of between 5% and 8% that both markers had for almost the entire year prior.

So far, there are no definitively clear causes for these landslides. However, the variables that are influencing this behavior are multiple and could coexist with each other, without being mutually exclusive.

Venezuela: Central Bank Moves To Stabilize Currency Exchange

On the one hand, it is natural that in an economy with the characteristics of the Venezuelan economy—under imperial siege—there is a slide in the exchange rate, considering that it remained stable for much of the year. As of October 4, monetary liquidity had increased by 106.6% since January.

There has not been a “drought” of foreign currency in the exchange system. On Monday, October 14, the BCV placed US$180 million for sale, in order to help stabilize the value of the bolivar against the dollar. So far this year, the BCV has placed US$4.163 billion in the exchange system. According to the digital economic news outlet Banca y Negocios, in the period January-August of this year, the entity has increased the allocation by 23%, compared to the same period in 2023.

The variable of “uncertainty” as a component of this picture is clearly a political creation. In theory, the exchange rate is rising given the possibility of political instability, tightening of economic sanctions, and risks of coups. The promotion of “economic insecurity” could be creating a stampede or a reaction in which various economic agents dispense with their bolivars and rush to the exchange market under the expectation of a “shock” in the near future.

In the third quarter of the year, commercial agencies are increasing their activity to acquire goods that will be sold in December, the time of greatest consumption of the year. There could be an additional demand for foreign currency that is not being assimilated by the currency exchange system, prompting various commercial actors to turn to the parallel market.

Measures and adjustments
The BCV has now increased the issuance terms of Foreign Exchange Coverage Securities. From now on, the minimum period of validity of these papers has been set at 14 days, and the maximum set at 90 days.

This measure is complementary and contributes to mitigating pressures on the exchange rate system. These short-term papers are an attractive option for protecting purchasing power since they are indexed to the exchange rate via the investment index (IDI), and offer yields between 14.25% and 16% in terms of 14 to 90 days.

Likewise, hedge securities are monetary policy instruments that are presented as an alternative mechanism to the acquisition of foreign currency with equivalent returns, with the aim of reducing the pressure on the demand for dollars.

As noted, the exchange rate reported by the BCV increased from 37.6 to 38.9 bolivars per dollar, which opens the possibility that the official dollar may suffer increases as an adjustment, due to exchange rate governance and as part of a natural and necessary devaluation trend.

The Nicolás Maduro administration, which maintains a constant policy of buying bolivars in the exchange system, will have to comply with various commitments regarding salaries, pensions, and public works, by the end of this year.

This policy necessitates placing foreign currency in the system in order to obtain national currency. Therefore, the mechanism—sometimes wrongly called “currency interventions”—will continue, and could report bigger volumes in the remainder of the year.

(Misión Verdad)

Translation: Orinoco Tribune

OT/JRE/AU