Venezuela’s Sicad II gets tentative thumbs up

Venezuela’s Sicad II gets tentative thumbs up

Venezuela Economy & Policy Corporate & Sovereign Strategy

Sicad II, Venezuela’s new foreign exchange regime, has been greeted with cautious optimism by analysts who say it could cut the country’s deficit.

The new law, announced last week, makes it legal to buy and sell dollars privately. It is likely to result in a much-needed devaluation of the Venezuela bolívar, analysts said.

Sicad II allows public sector institutions to sell dollars at a higher price than the official rate of 6.3 VEF, according to Barclays analysts. The probability success in the new regime was “high”, they said.

“The appreciation of the non-official exchange rate is an important step in reducing the major problems of the economy, such as balance of payments concerns, the high level of scarcity, and the excess liquidity held by the financial system, which is clearly pressuring prices.”

The new forex regime could result in an average exchange rate of 25 to 40 VEF to the dollar, a devaluation of 43% to 57%, according to economists at Bank of America Merrill Lynch.

That could lower the 2014 deficit to 9.2% to 3.2% of GDP — from around 14.4% at the current average exchange rate of 14.7 VEF to the dollar — the analysts said. The average exchange rate blends the official and black market rates.

They cautioned, however, that many details were still to be provided.

“The law does leave the specifics of these transactions to be set out in further regulations to be published in coming days. In principle, it is not hard to imagine that these regulations could place severe limits on participation, making it into simply one more tier of the exchange controls system.” LF