Here’s why the Venezuela currency ‘bolivar’ has tumbled

Venezuela’s economy is doing moderately well as signs of inflation easing emerge and as oil production continues rising. However, the Venezuelan currency, known as the bolivar, is still on edge and is hovering near its lowest point in years. 

According to TradingView, the USD/VES exchange rate was trading at 35.5 on Monday after losing over a third in the past 12 months. It joins the Argentina peso as one of the worst-performing currencies on record. 

USD/VES chart by TradingView

There have been some good news from Venezuela in the past few months. For one, the US has removed some sanctions on its energy sector, which has helped the country boost oil production. 

Data shows that PDVSA, the state-run company, averaged about 760k barrels per day (bdp) and is expected to hit 963k barrels this year. Production, however, has been growing at a slower pace than expected, which has hurt Chevron a bit.

At the same time, while high, there are signs that Venezuela’s inflation is easing although it remains much higher than in most countries. After hitting 1 million percent in 2018, inflation has cooled recently. 

The most recent data shows that inflation came in at 193% in December while a private sector survey placed it at 170%. Data by the central bank, on the other hand, shows that inflation rose by just 3.5% in December.

The Venezuela bolivar has reacted mildly to these developments although the sell-off has moderated. There are several reasons why the currency has remained on edge in the past few months.

First, this is an election year in the US and there are deep divisions on issues about Venezuela. While Biden has removed sanctions, Trump has criticised the move and there is a likelihood that he will reimpose them if he wins in November. This uncertainty has hindered investments in the country.

There are also signs that western countries will sanction Venezuela as its dispute with oil-rich Guyana increases. In December, the UK sent a warship to the region to try and ease tensions.

The other concern is that Venezuela’s socialist policies might not work as we have seen in Argentina. These policies have led to a lack of confidence in the economy even as the government implemented some positive policies.

Venezuela has increased the flow of foreign currencies to local banks, slashed spending, and hiking taxes. Analysts believe that many Venezuelans have ditched the boliver after seeing their investments plunge over the years.

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