OREANDA-NEWS. February 16, 2015. Recently announced changes to Venezuela's foreign exchange (FX) system have so far added little clarity to the authorities' policy response to the oil price shock, Fitch Ratings says. While they might be interpreted as a move toward increased exchange rate flexibility, previous initiatives have been abandoned or reversed and have not been accompanied with broader policy adjustments. Even if these changes are successfully implemented, the sovereign has yet to increase sources of fresh FX funding for the economy.

Venezuelan authorities announced the latest iteration of their multi-tier FX system this week. The government will continue to supply dollars at the official exchange rate of VEF6.3 per dollar to meet 70% "of the economy's needs." A secondary regulated auction system, derived from the consolidation of the SICAD I and II systems, will offer dollars at a variable rate starting at VEF12 per dollar. And a third marginal FX system (SIMADI) will see the rate purportedly determined by supply and demand through securities, deposits and (cash) retail transactions. The SIMADI rate reportedly reached VEF170 per USD in the first day of operation.

Venezuelan authorities have reorganized the country's multi-tier exchange rates several times in recent years. The introduction of a new official FX channel less than a year ago, the SICAD II, failed to correct the distortions in the FX market and provide a reliable supply of FX to the economy.

This week's announcements appear to aim at continued hard currency rationing and a gradual exchange rate adjustment largely managed by disbursing different quantities of FX at different rates. A high degree of policy uncertainty remains concerning the lack of information regarding the extent of the flexibility of the SICAD and SIMADI rates, the potential magnitude of FX volumes disbursed at these rates and the willingness of authorities to undertake broader policy adjustments to address fiscal and macroeconomic imbalances.

One of the main challenges to the effectiveness of the new system is the limited sources of fresh dollar funding. Based on YTD average oil prices, exports could decline by USD40bn in 2015, eroding the economy's main source of FX. Maintaining real positive FX inflows (adjusted for continued oil diplomacy outflows and China loan debt repayment) will be a challenge given that material additional financing support from China beyond existing facilities remains uncertain.

Therefore, FX system reform alone would not meaningfully boost Venezuela's credit profile, which is also constrained by the lack of a credible and coordinated response to macroeconomic instability and fiscal imbalances, external financing constraints and weak external buffers.

The magnitude of the challenges facing Venezuela is reflected in the sovereign's 'CCC' rating.