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November 24, 2016 | Venezuela Currency Loses 45% This Month as Hyperinflation Escalates

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

The Venezuelan bolivar lost 45% of its value against the US dollar so far this month, the biggest monthly decline ever.

Officially it takes 10 bolivars to buy a US dollar. On the black market it takes 2,753 bolivars to buy a US dollar.

The bolivar is all but worthless. This is the classic definition of hyperinflation.

bolivar-hyperinflation

Please consider Venezuela’s Currency Just Had the Biggest Monthly Collapse Ever.

Venezuela’s currency – the so-called “strong bolivar” – is weakening beyond levels that analysts had forecast just a few weeks ago as an expanding money supply chases a limited amount of U.S. dollars.

“The government has started injecting bolivars into the financial system in an accelerated manner again, and it’s set off repressed demand,” Asdrubal Oliveros, director of Caracas-based economic consultancy Ecoanalitica, said in a telephone interview. “There are too many bolivars in the street. People have the option of either buying goods or dollars, and they’re buying dollars.”

The currency has lost 45 percent of its value so far this month to trade at 2,753 bolivars per U.S. dollar on Thursday, according to dolartoday.com, a widely-watched website that tracks the exchange rate in Caracas. That’s the biggest monthly decline ever, according to data compiled by Bloomberg.

“Venezuela’s entire economic environment is influencing this phenomenon,” Oliveros said, adding the exchange rate could end the year between 3,500 and 4,000 bolivars per dollar on the black market. “Inflation is going to keep rising, there’s a risk of default, and the political situation is becoming more tense each day. People prefer to protect their money.”

Official Currency Rates vs Black Market

bolivar-exchange-rates

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 661 bolivars per dollar used for priority imports.

Revamped Bolivar

Flashback March 10, 2016: Venezuela Analysis reports Venezuela Revamps Currency Exchange System.

According to Vice-President for Economy Miguel Perez Abad, the government will consolidate its 6 and 13 bolivar exchange rates into a new protected rate of 10 bolivars per dollar, which will be made available for vital imports such as food, medicine, raw materials for production, as well as pensions for Venezuelans living abroad.

The new rate, known as DIPRO, will also be used for payments in the state sectors of healthcare, culture, sports, scientific investigations, and in other cases of special urgency.

Venezuelan students studying at academic institutions abroad will likewise have access to DIPRO to finance their studies.

The vice-president also unveiled a second floating exchange rate known as DICOM, which will govern all other transactions not covered by DIPRO.

DICOM will fluctuate according to market supply and demand, opening at an initial rate of 206.92 bolivars per dollar.

In a crucial modification, travellers’ dollars, which Venezuelans could previously acquire at the CENCOEX rate of 13.5 bolivars per dollar, will now only be available at the floating DICOM rate, amounting to a 1,425.9% devaluation.

In order to access the maximum annual limit of 2,500 travel dollars, Venezuelans will now have to pay 513,300 bolivars in lieu of 33,750 bolivars.

In another important change unveiled yesterday, the state oil company PDVSA will now sell dollars to the Venezuelan state at the DIPRO rate of 10 bolivars per dollar instead of the prior rate of 6.3.

The move is anticipated to generate greater revenue for the state oil giant, which is needed to cover internal operational costs, honor debts with contractors and providers, as well as continue funding social programs.

Venezuela is obligated to make a $8.1 billion payment on PDVSA bonds to international creditors by the close of 2016.

In February, Venezuela earned only $70 million in oil revenues, down from $3 billion in January 2014.

Default Averted for Now

On October 21, Venezuela Analysis noted Venezuela’s PDVSA Warns of Debt Payment “Difficulties”.

Five days later Venezuela Analysis reported PDVSA Secures $2.8 Billion Bond Swap to Avert Default.

Venezuelan state oil company PDVSA announced Monday that creditors had accepted a proposal to exchange US$2.8 billion in bonds maturing in 2017 for $3.4 billion due in 2020.

In late September, the state oil giant presented creditors with a modified offer to exchange $5.325 billion in bonds due in 2017 for securities payable at 1.22 times the principal in 2020.

With the deadline for the deal fast approaching and less than half of bondholders on board, PDVSA extended the cutoff three times and threatened to default if a majority did not accept the deal.

By the final deadline Monday, 52.57 percent of creditors agreed to the offer, amounting to a successful swap of 45.3 percent of bonds due in April and November 2017 equal to $2.8 billion.

Venezuelan Oil Minister and PDVSA President Eulogio Del Pino hailed the deal a “victory over the onslaught of internal and external elements that wagered on a negative result for the company and the country.

While Venezuela’s foreign reserves have fallen to a new low of $11.8 billion, rising oil prices could yield the government an additional $2.5 billion in revenue this year, reports Financial Times.

Venezuela US Dollar Forex Reserves 2006-Present

venezuela-reserves2

Chart from Trading Economics

Crude Price 2006-Present

crude-monthly-2016-11-24

Venezuela’s US Dollar reserves fell from roughly $31 billion to roughly $21 billion from the beginning of 2010 to mid-2014 despite rise in oil from $73 to over $100 per barrel.

As social pressures mount, president Nicolás Maduro will be forced to use more reserves to buy food and other goods to stave off unrest.

I fail to see how another $2.5 billion in oil revenue each year will stave off default.

$50 or even 70 per barrel seems unlikely to stop the hemorrhaging.

Finally, I wonder how much of those reserves padded corrupt politicians pockets exchanging 10 bolivars for one US dollar at the official exchange rate.

Mike “Mish Shedlock

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November 24th, 2016

Posted In: Mish Talk

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