A Currency Black Market Quickly Re-Emerges in the Streets of Caracas

(Bloomberg) -- Venezuela’s epic 95 percent currency devaluation was in part an attempt, it appeared, to squash the black market where most people have bought and sold dollars for years.

Those illusions were dashed quickly, though. 

Within hours of the financial system re-opening this week, black market quotes for the bolivar were already flying around. Some quoted it at 65 bolivars per dollar. Others had it as high as 100 bolivars -- well above the new, official exchange rate of 60 per dollar that President Nicolas Maduro set Friday night. (If those numbers seem very small, it is because a simultaneous re-denomination of the bolivar lopped five zeros off the currency to simplify transactions.)

The bid to unify the official and black-market exchange rates failed for many reasons. For one, currency controls that dictate who can buy and sell dollars in the official market were left in place. For another, the new exchange rate isn’t credible in the eyes of investors. With the government announcing an accompanying 3,500 percent increase in the minimum wage, hyperinflation seems likely to rage on and erode the value of the new bolivars.

A Currency Black Market Quickly Re-Emerges in the Streets of Caracas

Lastly, it’s unclear who exactly will supply the market with dollars at the official rate. The government, seeking to preserve precious hard currency after defaulting on its foreign bonds, said it wouldn’t. “The money traded will come from the private sector,’’ said Finance Minister Simon Zerpa. 

Auctions in the new currency market will begin Wednesday. Supply and demand will determine the exact exchange rate, Zerpa said, but the sense in Caracas is that the government won’t let it stray too far from the original 60-per-dollar rate that Maduro set. Individuals will be limited to purchasing $500 per month on the new exchange and companies will be capped at $400,000. But that only really comes into play if there’s enough supply.

With hopes dashed that Venezuela was finally going to allow a single, free-floating official exchange rate, the outlook for inflation is still grim. The International Monetary Fund had already forecast a 1 million percent increase in consumer prices this year driven by a shortage of dollars for importers and a government printing press gone wild. Bloomberg’s own Cafe Con Leche index puts the annualized rate at more than 108,000 percent.

The end result of the devaluation could be the government imposing more economic pain on its citizens without actually resolving the imbalances that created the economic crisis in the first place.

Venezuelans are now left wondering just how long it will take before the new monthly minimum wage of 1,800 bolivars -- or $30 at the official rate -- will feel worthless too.

©2018 Bloomberg L.P.