No End In Sight For Venezuela’s Currency Plunge As Risk Of Default Grows Closer

The OPEC nation of Venezuela has long been home to the world’s highest inflation rate, and now the nation is set to become the site of the 57th hyperinflation event in modern recorded history, says Steve Hanke, professor of applied economics at Johns Hopkins University, Bloomberg reports.

As Venezuela’s currency has plunged 32 percent over the past month on the black market, according to DolarToday.com, and as falling oil prices have further plagued the cash-starved nation’s largest revenue source, the government may run out of money to pay its debts by the end of the year, according to Societe Generale.

In the derivatives market, traders have hiked the probability of a default within one year to 63 percent, versus 33 percent two months ago.

According to DolarToday, the most popular exchange rate reference website in Venezuela, the unofficial exchange rate in Venezuela broke through 500 bolivars per dollar on July 3 — which was a new record low at the time and marked a 65 percent plunge on the year, then it broke through 600 bolivars per dollar on July 9, and has continued its tumble to reach a new record low of 630.62 bolivars per dollar on Friday.

To understand how dire this situation is, at the start of 2015 the unofficial exchange rate was at 173.24 bolivars per dollar.  At the beginning of 2014 the rate was at 64.13 bolivars per dollar.

And as the currency continues its sharp plunge, things could get worse, as there does appear to be any end in sight to the fall.

Chart courtesy of DolarToday

“They’re very close to hyperinflation,” Hanke told Bloomberg. “When you have a domestic currency that is withering on the vine, it becomes more problematic servicing foreign debt.”

On Monday, Venezuela’s currency fell so sharp that it implied a monthly inflation rate of 53.98 percent. To meet the definition of hyperinflation requires a full month of days of which the implied monthly rate was faster than 50 percent.

The last time that the Venezuelan government published its consumer price index was in February, where they reported that annual inflation had reached 68.5 percent in December. Since then, it hasn’t published price data.

The bolivar has fallen over 90 percent in the unofficial markets over the past year as the government prints more currency to pay off its budget expenses.

Venezuela’s largest-denomination note available is now worth a mere 16 U.S. cents.

Venezuela relies heavily on oil, as it accounts for around 97% of its export revenue, which the nation urgently needs to pay off its debt.  As the price of crude has fallen around 50 percent over the past year, compounded with a sharp plunge in the nation’s currency, the situation has become extremely grave.

The nation is suffering a severe recession as a result, and its ability to provide U.S. dollars through their complex three-tiered currency control system has been significantly hampered.

Critics have blasted Venezuelan President Nicolás Maduro for failing to take urgent measures to ease or phase out the nation’s currency controls, which have crimped imports and have caused severe shortages of goods, such as food, medicine, and parts.

In 2013, Maduro banned several internet websites, including DolarToday, to prevent its citizens from accessing the country’s exchange rates. Maduro also said that DolarToday is part of a broader right-wing campaign to sabotage his government and has accused them of fueling an “economic war” and claims that they are manipulating the exchange rate.

“It’s a collapsing economy with a massive shortage of dollars, and these guys are printing as much money as they can to survive,” Regis Chatellier, a strategist at Societe Generale told Bloomberg. “At these levels, the shortage of dollars is such that it will be difficult for them to pay debt coming due at the end of this year. The risk of default is increasing substantially.”

Prices in Venezuela have spiked through the roof as citizens struggle amid a monthly minimum wage that is equivalent to less than $15 on the unofficial exchange rate. DolarToday estimates that Venezuela’s current inflation is at 68.5 percent.

Indeed, the prices have soared, and a brand new iPhone 6 on a local Venezuelan e-commerce site will cost $50,000+, according to the official exchange rate.

In May, Venezuela’s foreign reserves fell to under $18 billion for the first time in 12 years, however DolarToday estimates that the country’s foreign reserves have fallen further to $15.631 billion as of July 17.

Chart courtesy of Bloomberg (15MAY2015)

The pace of Venezuela’s economic deterioration worries Siobhan Morden, the head of Latin America strategy at Jefferies Group. “It’s only just beginning,” she told Bloomberg. “This economic shock could eventually undermine their willingness to pay.”

Courtesy of DolarToday