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 New exchange-rate mechanism announcedFeb. 11, 2015 — Caracas, Venezuela Published by Economist Intelligence Unit Event The authorities have unveiled the latest new exchange mechanism designed to allow Venezuelans to obtain foreign exchange. Analysis The new Sistema Marginal de Divisas (marginal currency system, known as Simadi) is the third rate in a complex three-tier currency-exchange system. The strongest official rate is BsF6.3:US$1, reserved for essential goods. The second mechanism, Sicad I, will continue to hold auctions at around BsF12:US$1 for certain sectors of the economy. While the rate for the Simadi mechanism is not yet known, it is likely to hover at around BsF120:US$1. This would represent a significant devaluation from the weakest rate, Sicad II (which Simadi replaces), of around BsF50:US$1. The government is touting Simadi as a free-exchange mechanism, based solely on supply and demand. Very similar language was used with the launch of Sicad II last year. However, that failed to satiate demand and so a black market in hard currency continued to flourish. Currently, the local currency sells at BsF190:US$1 on the black market. We expect similar issues with fulfilling the demand for hard currency with the Simadi mechanism. By simply replacing Sicad II with another mechanism at a weaker exchange rate, the government is not making the fundamental economic changes needed to pull the country out of economic crisis. Multiple devaluations have taken place since the currency controls were enacted by the former president, Hugo Chávez (1999?2013), in 2003—all of which have failed to make any meaningful long-term impact. The government promised to meet 70% of hard currency requirements at the strongest rate of BsF6.3:US$1. However, this is unlikely to happen, given low oil prices and the government's depleted reserves of hard currency. The popularity of the president, Nicolás Maduro, is dwindling. The latest polls put his approval ratings, which are on a downward trend, at just above 20%. Shortages and long supermarket queues have worsened in recent weeks, adding to disaffection among government supporters. The latest economic shift is unlikely to improve things for the president. Impact on the forecast We are maintaining our current forecasts, as we did not expect the government to make any fundamental changes to the exchange-rate system. However, we will be reviewing our inflation forecast, as prices are likely to rise even more steeply as a result of the quasi-devaluation.