And not without reason. This was an opportunity to revive and reclaim a struggling industry, which had been cruelly persecuted in the preceding years, and left in tatters as a result of several brokers being temporarily imprisoned without charges.
But some were guilty of excessive optimism. “The dollar will fall to 120 Bs. (at that point the black market dollar stood slightly above 180 Bs.),” they said. “We must sell dollars now, have bolívares, and buy them cheaper.”
Expectations were positive, because Venezuela was announcing a new exchange mechanism: the System of Marginal Currencies (Simadi). It was supposed to be a market regulated solely by supply and demand — managed by the stock exchange with some operations still overseen by banks and exchange houses.
With the announcement of a potentially free currency market, many thought there would be a return to the golden age of the stock exchange: the swap market. Industry professionals expected that this new system would lead to the collapse of the parallel or black market for foreign currency.
But many others remained skeptical, and with good reason.
1. Supply is very limited. The government controls 97 percent of the dollars entering the country and is restricting the flow to the Simadi to less than 2 percent — an insufficient amount to meet demand.
If PDVSA, the largest supplier of dollars in Venezuela, participated in the market, this would be another story entirely. But 98 percent of the dollars available are selling at 6.30 Bs. Until August 2012, the black-market dollar was hovering at around 8.50, versus the official rate of 4.30, simply because PDVSA was selling dollars in the market.
2. Demand continues to grow. Whenever the BCV prints money to finance PDVSA, the money supply increases. The bolívares in circulation grow and grow, and those who have them want to dump them, because of the inflationary dilution of their worth.
To curb the demand for dollars, the BCV would have to restrict its monetary policy, or at least stop printing money to finance the government. Furthermore, the Venezuelan government needs to mold foreign perceptions of the country to encourage a greater inflow of dollars that can be exchanged for bolívares. Unfortunately, this requires a competent government and a credible economic team, neither of which Venezuela currently possesses.
3) The Simadi is simply not a free market. If it were a free market, the price of the dollar on the Simadi would converge with black-market prices. But the government won’t allow this to happen quickly. Were they to do so, it would constitute a recognition of their failure; so instead of admitting defeat, they manipulate the currency.
In short, Venezuela has reached a new level of policy failure with regard to monetary exchange, but the worst is yet to come. With the continuing fall in oil prices, the flow of dollars has continued to decline since April — in part due to the fact that oil sold in April is based on the price of oil in December.
In addition, the United States (previously a major petroleum export market) is producing at least one million barrels a day more than she consumes. The nation no longer has room to store excess product, leading her to dump it on the international market.
The black-market dollar will be above 400 bolívares at the end of 2015.
It is likely that there will be another drop in oil prices between the second and third trimesters. Therefore, we maintain our forecast from late last year that the black-market dollar will be above 400 bolívares at the end of 2015 — perhaps higher.
Maduro played his hand by keeping the dollar at 6.30 per bolívar, to retain the loyalty of those who support him. But, paradoxically, that same record could end up taking him out of the game. Shortages and inflation will worsen as a result of his government’s stupidity. Maduro’s popularity will plummet, and the opposition are poised to take his place and inflict a crushing defeat for Chavismo.
Translated by Michael Pelzer. Edited by Fergus Hodgson.