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International Finance: Venezuela - Essay Example

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This essay discusses the task to determine the viability of Venezuela as a venue for investment. Towards the end of 2006, BMI came out with its analysis of the Venezuelan situation. The analysis identified a “triple threat” attributable to three aspects of macroeconomic mismanagement…
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International Finance: Venezuela
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International Finance: Venezuela

Download file to see previous pages... Firstly, the level of liquidity has increased dramatically, by as much as 45.1% in less than a year, as a result of capital controls and government splurging during preparations for elections in December of that year. Secondly, the level of net international reserves, which should have been much higher due to the high price of the country’s oil exports, dwindled at an increase of only 14.2%. This is because the government “raids the central bank when reserves exceed US$29 billion, and no longer requires state oil firm PDVSA’s dollar receipts to be transferred directly to the central bank.” (BMI, 2006) Thirdly, the conditions brought about by the first two situations caused the Bolivar to progressively weaken in the parallel market; investors who had wanted out of the Bolivar had difficulty changing their local currency into foreign currency because only US$1billion worth was available in the legal exchange. They just turned to the parallel (or black) market, forcing the exchange rate lower in this market. This caused a further crisis of confidence in the Venezuelan economy. (BMI, 2006)
Because of the conditions described above, the Economist Intelligence Unit (EIU) in 2007 forecasted the possibility of continued inflation (already at 20%) and a devaluation of the fixed official exchange rate (the Bolivar was already overvalued, with the parallel market rate at a premium of 125% to the official rate), and export growth is expected to slow down faster than import growth.
In November 2008, the EIU adjusted its forecasts lower, in light of the escalation of the global financial crisis. The oil price has trodden lower, placing Venezuela’s oil exports in a precarious position. It is believed that Chavez will not abandon his expansionary fiscal policy but will instead devalue the fixed exchange rate of the Bolivar.   ...Download file to see next pagesRead More
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