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 Black-market exchange rate hits new highMar. 2, 2015 — Caracas, Venezuela Published by Economist Intelligence Unit Event The black-market exchange rate surpassed BsF200:US$1 last week, its weakest figure yet and a major psychological hurdle. Analysis Venezuela's black market sprang up as soon as currency controls were enacted by the government of the former president, Hugo Chávez (1999-2013), in 2003. The local bolívar currency was pegged to the US dollar in order to control inflation and stem capital flight. Neither of these objectives have been achieved. Given the government's inability to satiate demand for hard currency, the local currency has weakened significantly on the black market, by around 8% in the last month and 56% in the last year. This is despite a recent revamp of the country's complex exchange mechanisms. Currently, three official exchange rates exist. The primary rate is at BsF6.3:US$1, reserved for essentials such as foods and medicines. The secondary rate is at BsF12:US$1 and known as Sicad. A third rate that was introduced this month is known as Simadi. The government touted it as a free-floating mechanism, however, the rate has hovered around BsF172:US$1 since, and the weakening of the local currency on the black market demonstrates that it is not satiating demand. Many are calling it simply another Sicad. When the now defunct Sicad II rate was introduced last year, it was priced relatively close to the black market rate—then around BsF50:US\$1—raising hopes that it would genuinely fluctuate with supply and demand. However, that did not happen and the local currency significantly weakened while the Sicad II rate remained roughly constant. This appears to be happening with the new Simadi mechanism. The psychological barrier surpassed this week will fuel anti-government unrest, which is becoming more frequent across the country. One death has already been reported and protests are ongoing, although they have not yet affected the capital, Caracas. Impact on the forecast We continue to believe that the local currency will become increasingly overvalued. It is difficult to say when an eventual correction will occur but, when it does, it will be extremely traumatic and plunge the economy into a deep recession.