Bolívar devalues more than any other currency in the region

Leonardo Vera / Informe Carpe Diem.–

While the dollar has strengthened globally against the rest of the currencies, the media stress that three major economies in Latin America have the hardest-hit currencies by depreciation against the dollar this year: Argentina, Colombia and Chile. However, Venezuela does not seem to grab the headlines. 

As shown in table 1, as of July 6 of this year, the bolivar was the most devalued currency in the region so far this year 2022. The bolivar’s depreciation rate strengthened since the second week of March, compared to the revaluation it had shown during the first months of the year.
Although during the first two and a half months of the year the bolivar revaluated against the dollar by about 8 %, since the second half of March the depreciation continued steadily. As of July 6, the depreciation had already reached 34%. In fact, throughout the year and up to July 6, the bolivar lost 23% of its value against the dollar, above the rest of the currencies in the region.

This change of course in the value of the bolivar against the dollar seems to be picking up speed towards the third quarter of the year, and it is putting into question the policy that the Venezuelan Central Bank has been implementing to stop the extended inflation that Venezuela has endured by trying to anchor the value of the currency.

In its strategy to maintain a fixed exchange rate, so far this year, the BCV has intervened 28 times in the exchange market conducted by the banks, for which it has injected near 2.4 billion dollars, exceeding by 34% the amount placed during the 12 months of 2021. 

It is worth recalling that banks are forced to sell these currencies at the same price established by the monetary authority within a peremptory term, to avoid penalties. The countervalue of these funds is deducted from the accounts that the financial entities have open with the Central Bank of Venezuela (BCV).

Meanwhile, the so-called Hedging Securities launched by the BCV since March 28, 2022 with the complementary intention of absorbing liquidity, have not yielded the expected results. These securities are addressed to private individuals and legal entities through banking institutions and have 28-day and 56-day terms with an interest rate of 3.00% at 28 days and 3.25% at 56 days. The securities have a par value and are not negotiable, unless they are sold by their holders only to the BCV prior to maturity.

At the same time, inflation continues to rise. Although the BCV has not reported the variation of the inflation rate in June, the Venezuelan Finance Observatory (OVF), an independent research firm that issues a price index with a method similar to that of the BCV, shows a significant price acceleration, with 14.5% increase in the sixth month of the year and 53.8% increase in the first half of the year.

Paradoxically, with such accumulated inflation, the overvaluation of the currency is still present. The inflation-devaluation spiral that the Venezuelan economy has been experiencing for years, leaves only room for thinking that the overvaluation of the exchange rate will continue to raise expectations of new exchange rate corrections, and therefore renewed pressures on the exchange rate market.

The international context of rising prices of agricultural inputs (agrochemicals and fertilizers) and food prices, as well as the new direction and changes in interest rates in mature economies, do not suggest that the pressure on the currencies of emerging countries will cease in the short term. So far, the countries in the region with comfortable levels of international reserves have been able to cope with exchange rate pressures, and this is certainly a far cry from being the Venezuelan case. 

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