August 28, 2018 – This post was written by Latin America Research Intern, Ramiro Sugranes
As part of President Nicolas Maduro’s new economic plan in Venezuela (Programa de Recuperación Económica, Crecimiento y Prosperidad), on Monday August 20, the Venezuelan administration issued a new currency—the “Bolívar Soberano” (BsS). The new Bolívar Soberano is worth 100,000 Bolívar Fuertes (BsF), which slashed five zeros off the old currency’s value. The new currency overhaul is not expected to lead to greater stability or improved confidence in the new Bolívar as no economically sound measures were implemented; rather, these changes were largely superficial.
Here are six things MNCs need to know about the new regime:
- Despite government claims that the new exchange rate will be freely floating, numerous currency controls remain, which make this impossible. The most notable of these is that the Bolívar Soberano will be pegged to the government’s cryptocurrency, the Petro, which itself is purportedly anchored to the value of a barrel of oil. If this worked as planned, then the Bolívar Soberano would be a commodity-backed currency, but the mechanism in which the cryptocurrency maintains its oil peg is widely unknown and highly questionable. Since the government controls the elusive value of the Petro, as well as its exchange rate to Bolívars, it will continue to be able to artificially manipulate the value of the currency that prevails during the official DICOM (Venezuela’s Central Bank’s official foreign exchange mechanism) auctions. Further, there are no measures in place which would prevent the administration from continuing to excessively print Bolívars and fuel the soaring inflation.
- In practice, the new currency was born 96% devalued, and it will continue to depreciate: The first official Bolivar Soberano DICOM auction held on Wednesday August 23rdset an initial exchange rate of BsS 60 per USD, which implied an approximate depreciation of 96% for the Bolívar Fuerte over its past official rate. This rate closely aligned the Bolivar Fuerte to parallel market rates of BsF 6 million per USD. The government stated that one unit of the cryptocurrency will be equal to 3600 BsS or USD 60—the equivalent of BsF 360 million, which led to this officially recognized sharp depreciation. Ongoing depreciation pressures have already caused the Bolívar Soberano’s parallel market rate to begin to significantly diverge from the official rate, and MNCs should expect this continue.
- “Free” auctions among private entities will not improve supply of US dollars: The government claimed that it will no longer offer foreign exchange in the official DICOM auctions, and that instead all the bids will be determined between private entities, which means that MNCs should expect strikingly low foreign currency offerings in official exchanges.Considering that this new currency regime mainly implies a simple renumeration, there is no reason to believe that individuals will be willing to give up valuable foreign currencies for the new Bolívar Soberano in these central bank auctions where rates do not match that of the parallel market. During the first auction, only 7 companies participated and together with individuals nearly USD 41,000 was exchanged—an extremely low figure.
- The elimination of supply restrictions in private auctions will also not lead to higher supply of US dollars: There will no longer be controls on how much can be offered in total during an auction, only on how much can be purchased by participants. Businesses will be limited to exchanging USD 400,000 and individuals USD 500 per auction. The government announced that there will be three auctions per week and this will ramp up to five per week by December. The central bank will publish how much is exchanged at each auction, which is expected to remain low so long as foreign currency sellers can continue to obtain more favorable rates in parallel markets.
- Banking institutions—whether public or private—will be able to buy foreign currency but will not be able to sell it. This entails another control that will only create greater disparities between official and parallel market exchange rates.
- Transaction complications will arise as old Bolívar Fuertes will continue to be used and slowly phased out. The government stated that notes of BsF 500 or less can only be deposited in banks, but larger notes remain functional.This current multi-currency system will burden consumers and businesses alike who will face greater complications to complete transactions as all prices will be changed to the new currency, while the old notes remain in circulation.
FSG will continue to monitor the effects of President Maduro’s new economic plan and the operation of the currency regime. For a more detailed analysis of our political scenarios and signposts to watch, please schedule an analyst conversation with your Client Services Director.
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