Venezuela's Economic Crisis

This assignment explores the multifaceted economic crisis gripping Venezuela. It delves into key contributing factors such as plummeting oil prices, mismanagement of finances, and a shortage of essential goods. The text examines possible solutions, including the establishment of a currency board, conversion to foreign currencies, and the adoption of cryptocurrencies.

Venezuela’s Economic Crises: Case Study
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Introduction
This study aims to analyse the current financial situation and elaborates reason of economic
crises in Venezuela. This research focuses on situations and financial solutions of the businesses
and subsidiaries of other multinational organisations (Gillespie and CNN Money, 2016). Along
with this, this study depicts alternative options that can be employed in the present situations
following its advantages and disadvantages. Moreover, effects of crypto currency in the financial
decisions and its objectives have also been explained in this study. Thus, this report describes the
business financial issues in the recent financial situations of Venezuela.
1. Four main reasons behind the economic crisis of Venezuela at present
At this time, Venezuela is facing from the most unpleasant economic crises with over 400
percent of inflation rate and capricious currency exchange rate. The basic supplies in the
Venezuela is at very high prices as well as it has severe debt problem. In this context, the
present situation of Venezuela has four main reasons that affected the economy adversely.
First is economic crisis in the country for more than three years which has led to inflation
rates above 475% (Gillespie and CNN Money, 2016). The prices of basic goods and food
supplies are very high and with an estimation of IMF remains at least till 2019. This financial
crisis occurs due to mismanagement and extravagant spending of governments on welfare
programs.
Second is continuous downfall in the oil prices. It has been reported that Venezuela has
largest oil reserves in the world and its economy totally depends on the revenue from oil
exports. However, when in 2014 oil prices dropped from $100 per barrel to $50 and currently
the price is $26, Venezuela’s earning slowed down since then (Aljazeera, 2017).
Furthermore, third reason is deficiency of food supplies and medical supplies, due to less
revenues and crashing currency. Government of Venezuela controlled the goods and its
prices of food and basic medical facilities in the supermarket which raised the black
marketing in the economy at a very high price. Government is unable to take debts and
arrange enough food supplies in the economy. The medical facilities are very poor that led
many infants to die this year without proper medicines (Aljazeera, 2017).
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In the end Forth is Venezuela has left with a very less cash and gold in its reserve. Recent
debt of country is $15billion; however central bank has only $11.8 billion in its reserve.
Other source of cash is only oil export which is very low and oil field operations cost is also
an issue (Gillespie and CNN Money, 2016). Gold has been shipped to Switzerland to make
the payment of rest of the debts. Thus, these following reasons are main cause of present
situation of Venezuela’s economic crisis.
2. Situational analysis of Subsidiaries in Venezuela
The present situation of Venezuela is severe in terms of economic and financial
management. Various multinational companies are being shut down after the crises and
various were forced to close by the public and rebellions (Reuters, 2016). It has been
observed that food chains were out of supplies and others were sold by the owners with no
cash payments as consideration. As per the reports, Venezuela is not in a condition where the
cash payment can be made for purchase of the company. The company can resolve the issue
either by offering a barter system which is moil for medicines in the current conditions or by
no payment and writing off the assets. For example ford motor co. faced several operational
difficulties that led it to write off their assets (Reuters, 2016). It has also been found that
many multinational companies written off all the assets of its subsidies in a single time.
Because of the declining worth of the Venezuelan currency, the prices of assets where valued
at a low price and which owing to balance sheet losses every year in the subsidiary.
In the present situation, the Australian parent company is a pharmaceutical company that
has its operations in the subsidiary company in Venezuela where the capital is comprised of
50% debt and 50% of equity. Medical supplies in Venezuela are at very high demand and the
payments can be made in kind with oil only (Pharmaceuticals and Healthcare Insight, 2016).
However, the situation is fully depends on the decision of government and other private oil
companies along with the political environment in the country. The company can get 5% to
10% of its assets in utmost case. Thus, debt holders and investors can be satisfied with the
little amount and equity shareholders cannot be given any consideration (Pharmaceuticals
and Healthcare Insight, 2016). It has also been noted that these negotiation also depends on
the risks pertaining to currency control and devaluation by the political influence.
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3. Alternative currency options for Venezuela with its benefits and drawbacks
It has been analysed that in Venezuela bolivars has lost its value to a high extent.
The government has introduced currency denomination scheme in December last year
which has facilitated currency with higher domination. However, the solution is not a
suitable measure for the currency issue (Capital flow, 2017). There are some alternative
solutions which might help the country in stabilising the needs of currency.
The government should reanalyse the control of currency by itself and start the
independent central bank with a currency board that will fix the rate of exchange of
foreign currency and all the inflows made by the seigniorage income and interest
generated from the foreign currency asset. On the other hand, this solution can be a
trouble to administration as it creates a fixed rate of currency system and there is a
massive loss in the currency reserves already (Capital flow, 2017). Not only this, the
legal issues like right to hold 100% of the reserve can also be challenged with other legal
requirements which can abandon the reserve as per the convenience.
In order to make the currency solution, another way is currency conversion. Right
now, bolivars have no value in the market and to stop the downfall of economy any
further, this situation is the best alternative. Though, the disadvantage of currency is
conversion is loss of seigniorage revenue, but it is a needed step to rise from this
economic crisis. The current administration is anti-America and has not converted
bolivars in Dollars even in the worst situation. Thus, renminbi of China is more suitable
option for conversion (Capital flow, 2017). China is also one of the biggest creditors of
the country and thus, it will help them to repay their debt by collecting the circulated
yuan in seigniorage revenues. Thus, these two alternatives could be the best solution for
the currency valuation issue.
4. Financial management decision and goals affected by crypto currency
Crypto currency is a form of digital currency that allows the individual to trade through
internet. No physical form of money is needed to transact and buy the goods from the
internet. Today, around the world several countries are starting to adopt this crypto currency
phenomenon known as bitcoin, ethereum, ripple and litecoin to rise from the economic crises
of the country such as India and Illinois, whereas some of the countries have banned it like
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Iceland (Kurson, 2016). Crypto currency is a way of exchanging various currencies in a
single digitally usable currency which is accepted by several merchants, regulators,
consumers and investors.
The price of crypto currency is fluctuated by the independent factors and not regulated by
any particular institution or body. It only requires internet to access the currency in this
contemporary and technology embedded world. It has established a global payment system
via internet without hampered by the current administrator of the country (Rands, 2017). In
the present context, bitcoin as a crypto currency is one of the best solution to meet the basic
needs of day to day life. It has been analysed that the average of $9 per month is being
generated and consumed by the Venezuelans at present (Rands, 2017). Thus, it is very
imperative and convenient way to resolve the current economic crises and meet up the daily
goods of necessity.
Conclusion
From the above discussion, it can be inferred that Venezuela is facing one of the worst
economic crises due to some of the key reasons such as downfall of oil prices in the international
market that has made the revenue very low for the survival of the country. The poor
management of cash flows in the good economic situations and long period of financial crises is
the second main reason of the current situation. The administration does not have enough cash
and gold to pay the debt of the country and last is scarcity of food and medical supplies. The
economic solution for the betterment of the situation in front of Venezuela is setting up of
currency board, currency conversion and crypto currency.
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Reference
Aljazeera. 2017. Venezuela's worst economic crisis: What went wrong? [Online] Available at:
http://www.aljazeera.com/indepth/features/2017/05/venezuela-worst-economic-crisis-wrong-
170501063130120.html [Accessed on: 30 August].
Capital flow. 2017. The case for currency substitution in Venezuela. [Online] Available at:
https://www.forbes.com/sites/realspin/2017/01/11/the-case-for-currency-substitution-in-
venezuela/#3fc3d34e62e1 [Accessed on: 30 August].
Gillespie, P., and CNN Money. 2016. 4 reasons why Venezuela became the world's worst
economy. [Online] Available at: http://money.cnn.com/2016/10/25/news/economy/venezuela-
breaking-point/index.html [Accessed on: 30 August].
Kurson, K. 2016. Illinois Is Venezuela and the Solution Is Cryptocurrency. [Online] Available
at: http://observer.com/2017/06/illinois-is-venezuela-and-the-solution-is-cryptocurrency/
[Accessed on: 30 August].
Pharmaceuticals and Healthcare Insight. 2016. Industry Trend Analysis - Drugmakers To Seek
Alternatives to Recover Debts - AUG 2016. [Online] Available at:
http://www.pharmaceuticalsinsight.com/industry-trend-analysis-drugmakers-seek-alternatives-
recover-debts-aug-2016 [Accessed on: 30 August].
Rands, K. 2017. Why Venezuela's Currency Crisis Is A Case Study For Bitcoin. [Online]
Available at: https://www.forbes.com/sites/alfresco/2017/03/10/capital-one-embraces-design-
thinking/#4d63d70230e7 [Accessed on: 30 August]
Reuters. 2016. Multinational companies are dumping their Venezuela operations in fire-sale
deals. [Online] Available at: http://www.businessinsider.com/r-multinational-firms-dumping-
venezuela-operations-in-fire-sales-2016-11?IR=T[Accessed on: 30 August].
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