The government has devaluated the official exchange rate from 4.30 bolivars per USD to 6.30 and has abolished the central bank-run system known as SITME, under which the private sector was permitted to obtain foreign currency for a limited amount under strict conditions. Given the high reliance on imports of consumer goods, the widely expected move is likely to increase further the already high inflation rate and shortages of essential goods even if the government has warned it will crack down on businesses that raise prices as it did after the devaluation of January 2010. The devaluation is likely to reduce somewhat imports but is unlikely to boost exports as the larger part consists of oil. Despite the devaluation, the discrepancy between the official and the unregulated market exchange rates remains huge. On the positive side, the devaluation of the official exchange rate will have a positive effect on public finances given that the oil revenues denominated in USD will increase in terms of domestic currency.

Impact on country risk

The devaluation increases further the commercial risk, which is already in ONDDs highest risk category. Additional devaluation could occur given the high discrepancy between official and unofficial exchange rates and given the fact that foreign exchange reserves are at a very low level, even by Venezuelan standards. In the coming months, FX reserves are likely to stabilise as imports are expected to decrease following the devaluation. But, if the latter continue to follow their downward trajectory, ONDD’s short-term political risk, which reflects the country’s liquidity, will be revised downwards ceteris paribus. Political uncertainty remains high as President Chavez, who is still suffering from severe respiratory infection, has not appeared in public since his return from Cuba, where he was treated for cancer.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com