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Venezuelan currency tanks; inflation seen near 100%

Venezuela's black market exchange rate weakened below a key level on Thursday, as the bolivar's decline steepened in the face of hyperinflation and a rapidly shrinking economy.

The unofficial exchange rate for the bolivar has fallen sharply in recent weeks, so that on Thursday, one dollar would get you 300.72 bolivars, according to widely used rate-tracking website dolartoday.com.

Over the past couple of years the value of the currency has plummeted against the dollar to its present 300 bolivar level. In 2012, a dollar would get you 10 bolivars, according to unofficial exchange rates. By the time President Nicolas Maduro was inaugurated in April 2013, it was 24 bolivars to the dollar and by this January it was at 173.

This black market rate of 300.72 on Thursday was almost 50 times the official rate set by Venezuela's hard-line socialist government of 6.3 bolivars to the dollar.

The oil-reliant Latin American country is suffocating under a highly interventionist government, led by Hugo Chavez's successor, Nicolas Maduro, rocketing hyperinflation and the tumble in oil prices since June last year.

The International Monetary Fund sees Venezuela's economy shrinking 7 percent in 2015, with prices rising by a staggering 96.8 percent.

The country's economy is highly reliant on oil, which accounts for around 95 percent of its exports, according to the Organization of Petroleum Exporting Countries (OPEC), of which Venezuela was a founding member. The broader oil and gas sector constitutes roughly one-quarter of Venezuela gross domestic product (GDP).

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Both Moody's Investors Service and Standard & Poor's have cut Venezuela's credit rating deeper into speculative territory this year.

"We see default risk stemming from the collapse in oil prices," BBH analysts led by Marc Chandler warned in a research note earlier this week, with the caveat that this prospect had abated somewhat since the partial recovery in energy prices.

A bank note with the face of Venezuela's President Nicolas Maduro and the word "devaluated" at a market in Caracas.
Jorge Silva | Reuters
A bank note with the face of Venezuela's President Nicolas Maduro and the word "devaluated" at a market in Caracas.

Nonetheless, the spread on five-year credit default swaps (CDS)—which markets use to judge how likely an issuer is to default—for Venezuela rose by 0.3 percent on Wednesday, according to Markit data. In percentage terms, this was the joint-worst deterioration of any country, along with Mexico and Peru.

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Despite his fears, BBH's Chandler said that Venezuela was more likely to officially devalue the bolivar than default.

"It is true that Venezuela has a relative extreme macroeconomic situation," the analyst said in a note last week. "We suspect that when push comes to shove, and it will, Venezuela is more likely to officially devalue than default on its local debt."