Tensions Rise In Venezuela

by: Lipper Alpha Insight

Summary

Political tensions in Venezuela have escalated in recent weeks, fueled by pronounced economic instability.

Fiscal deficit monetization has bred rampant inflation.

Which has lead to rapid real appreciation of the exchange rate.

By: Konstantinos Venetis, Fathom Consulting

With the currency pegged to the US dollar, FX reserves have been depleted as devaluation pressures mount. Total reserves are reported at just below $22 billion, out of which liquid assets are only around $2 billion, on some estimates. Inflation is running at 56% and real GDP grew at 1.1% in the twelve months to September, according to the central bank. Venezuela's external debt is estimated to be around $40 billion, or a third of GDP, while the country's annual import bills amount to roughly $50 billion.

Venezuela CPI vs. The BolivarClick to enlarge

In response to acute shortages of basic goods, the government has announced immediate plans to ease exchange controls by introducing a new, market-based mechanism. Under the so-called Sicad 2 platform, "there will be no pre-set band or rate, it will be a market with a free supply of foreign currency… we will also supply currency to help the market flow", according to Venezuela's vice-president for the economy. Effectively, this move amounts to a devaluation. Not surprising, since Venezuela's existing two-tier exchange rate structure - where a 6.3 bolivar per dollar rate applies to "preferential" goods, such as medicine, and 11 to other items - is way below the black market rate of around 80.

Default risk, as measured by CDS prices, has eased a little in recent days, but remains elevated. China is coming to the rescue (again), with a $5bn credit line repayable in oil and other fuels, while a $2bn deal is apparently being negotiated with Russia. Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.