VENEZUELA FIXED EXCHANGE RATE CASE STUDY:

BRIEF HISTORY OF THE VENEZUELAN EXCHANGE RATE: Venezuela adopted a fixed exchange rate system in 2003, in an attempt to reduce capital flight & currency speculation. What is capital flight?? The official currency is the Venezuela Bolivar Fuerte (VEF).

THE OFFICIAL EXCHANGE RATE FOR THE VENEZUELA BOLIVAR: 2003 TO Source: Exchange Rate set at 2.15 Bs = $ 1US Currency Devalued by the Government to 4.3 Bs = $1US Currency Devalued by Government 6.3 Bs = $US

IN THE LAST FEW DAYS, $1US = 845 BOLIVARS….

The Black Market (or Parallel market) exchange rate for the Venezuelan B

WHY IS THERE A BIG DIFFERENCE BETWEEN THE BLACK MARKET RATE & THE OFFICIAL RATE? The government restricts the amount of dollars people can exchange at the official exchange rate. This creates a shortage of dollars, and this shortage means people will pay more to get dollars which are necessary for a range of transactions. In addition, high levels of inflation also impact on the real value of the currency.

HOW DOES THE OFFICIAL EXCHANGE RATE IMPACT ON VENEZUELAN BUSINESSES? If a business needs dollars to buy an imported item, it has to apply to a government agency for approval which can take many months, with no guarantee they will receive the dollars. As a consequence many businesses are forced to pay for imported items at the black market rate, which can result in very high prices for consumers.

HOW DOES THE OFFICIAL EXCHANGE RATE IMPACT ON FOREIGN BUSINESSES? Foreign businesses which earn money from their operations in Venezuela, ultimately want to repatriate their profits (send their money back home to their parent company) However, in recent times the Venezuela government has refused to repatriate profits at the official exchange rate and this can result in major losses for companies. See the airline case study (article) & Herbalife video

HOW DOES THE OFFICIAL EXCHANGE RATE IMPACT ON VENEZUELAN CONSUMERS? There are major shortages of essential items OR most goods are grossly overpriced for Venezuelans, paid in their local currency. When Venezuelans travel abroad they have a restricted amount of dollars they can have at the official exchange rate, using their credit cards. However, this also creates opportunities for Venezuelans to make big money from international trips. This has changed recently. See CNN video.

WHAT IS THE OVERALL IMPACT OF AN OVERVALUED CURRENCY ON EXPORTS?? It makes Venezuela goods/services very expensive for foreigners to buy. However, the exception is oil which is determined by the world price. Still, when Venezuela receives payments for its oil, the amount it receives in local currency is a lot less than it would receive if the currency reflected a real market rate.

WHAT IS THE OVERALL IMPACT OF AN OVERVALUED CURRENCY ON IMPORTS?? Theoretically Venezuela should be able to import a range of goods very cheaply, but due to restricted access to dollars, this often does not happen.

HOW DOES THE FIXED EXCHANGE RATE IMPACT ON THE TOURISM INDUSTRY IN VENEZUELA? The official exchange rate has severely damaged the tourism industry in Venezuela. Many services are very expensive at the official exchange rate.

CASE STUDY TOURISM INDUSTY HOTEL INDUSTRY EXAMPLE/ QUESTION: HOW MUCH WILL A 4 STAR HOTEL COST IN CARACAS? Step 1 Go toe the following website to check the official exchange rate? Go to the following website to check the black market rate today/ Step 2 The Price of a Hotel in Caracas Go to the following website: Type in Caracas, and this Saturday night as the reservation date. What is the price in VEF? What would be the cost of this hotel at the official exchange rate vs the black market rate?

OPPORTUNITIES TO TAKE ADVANTAGE OF THE FIXED EXCHANGE RATE SYSTEM AIRLINE TICKETS (From 2010 to 2013) Until the end of 2013, foreign airliners in Venezuela priced their tickets at the official exchange rate and provided unlimited access to ticket sales for consumers. For consumers with access to dollars at the black market rate this created incredible opportunities to travel internationally, at very low cost. See Time Magazine Article However, in early 2014, the Venezuelan Government would not let airlines repatriate profits at the official exchange rate, and airlines have refused to sell tickets in Venezuela and significantly reduced flights.

AIRLINE TICKET EXAMPLE. On 26 th November 2013, I purchased this business class ticket on United Airlines from Caracas to Lisbon Portugal, via Houston & London. I paid VEF (Venezuelan Fuerte). Just before buying the ticket I exchanged dollars in the parallel market at a rate of 70. How much did the ticket cost me in US dollars? How much is United Airlines hoping to collect from this ticket sale in Venezuela?

OPPORTUNITIES TO TAKE ADVANTAGE OF THE FIXED EXCHANGE RATE SYSTEM EXPAT HEALTH CARE COSTS IN VENEZUELA Virtually all expats (foreigners) working in Venezuela have a private health insurance, provided by a major US or European company. Key Question: Why is getting sick in Venezuela a very profitable event for an expat being paid in dollars??

VENEZUELA – THE CHEAPEST OR MOST EXPENSIVE COUNTRY IN THE WORLD?? ItemPrice in Bs Price at the Official Exchange Rate Price at the Black Market Exchange Rate McDonalds Combo Meal Frozen Pizza Cost to Rent 2 bed apartment. in Middle Class suburb. Second Hand Car: 5 years old (eg: Small Size. 2 doors) BUT SOME THINGS ARE CHEAP: Fresh Milk (1 Litre)** Unlimited Monthly Internet Price of Gasoline12 cents per gallon (subsidy costs government $US 8 billion per year) Note: Average Monthly Salary for a Professional: eg: engineer VEF.

HOW HAS THE GOVERNMENT TRIED TO ALTER THE FIXED EXCHANGE RATE SYSTEM?? The government has introduced multiple official exchange rates for specific types of goods and services in the last 12 months While the official exchange rate is 6.3 Bs, this exchange rate is normally reserved for imports of essential goods like food and medicine. Other exchange rate are available at 10.5 and 50, but the operations of these exchange rates has been limited. The simply reality is that the Venezuelan Central Bank needs to maintain its US dollars reserves, to meet payments to international creditors – otherwise the country will default.

WHAT IS THE BLACK MARKET RATE TODAY IN VENEZUELA? Go to the following website: :