Venezuela Lets Bolivar Slide But Can't Keep Up With Black Market

(Bloomberg) -- Given Venezuela’s deep economic crisis, the fact that the government has devalued its official rate massively in the past month has barely made any headlines.

Most people focus instead on the black market exchange rate which is accessible for all and which sets most prices in the beaten-down economy. Despite the government’s efforts over the past decade to stamp out the street trading of money, the market has flourished and the struggle to have a single rate looks doomed without a series of economic reforms and policies that would correct the imbalances.

But as you can see from this chart, they are trying.

The bolivar weakened 67 percent on Venezuela’s currency auction system, known as DICOM, over the past month. Last week, dollars were selling at 638 bolivars on the platform, which sets the official price of money for both private business and individuals, compared to about 213 bolivars at the same time in December.

On Monday, as much of the country was returning to work after the holiday season, greenbacks were fetching nearly 1,100 bolivares on the street.

Economists say the move is part of President Nicolas Maduro’s administration’s efforts to “correct” prices by slashing state subsidies and slowly loosen a byzantine system of controls that has fueled hyperinflation and engendered widespread corruption. Henkel Garcia, director of the Caracas consultancy Econometrica, says the move may be an attempt to further incentivize exports and encourage local investment, but it was still a far cry from the adjustments needed.

“The government continues to overvalue the bolivar, but it’s doing it much less than it was in months past,” Garcia said. “We’re still operating on a completely discretionary system and Venezuela’s economy is facing far bigger challenges.”

Venezuela’s ruling socialists have struggled to tame surging prices and address a general collapse marked by widespread hunger and an outpouring of peoples from what once had been one of Latin America’s most affluent countries. Dogged by economic sanctions and a crumbling oil industry, Maduro lopped five zeros off the bolivar last August in a bid to ease transactions and stabilize the currency.

But prices have continued to spiral. Venezuela’s annual inflation now stands at 224,900 percent, according to Bloomberg’s Cafe Con Leche Index. The government insists the country’s woes are the result of “economic sabotage,” while analysts largely blame price and currency regulations put in place by the late Hugo Chavez more than a decade ago.

--With assistance from Fabiola Zerpa and Catarina Saraiva.

To contact the reporters on this story: Andrew Rosati in Caracas at arosati3@bloomberg.net;Patricia Laya in Caracas at playa2@bloomberg.net

To contact the editor responsible for this story: Daniel Cancel at dcancel@bloomberg.net

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