Venezuela’s Economic Crises: Case Study
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Added on 2020-03-01
Venezuela’s Economic Crises: Case Study
Added on 2020-03-01
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Venezuela’s Economic Crises: Case Study1
Introduction This study aims to analyse the current financial situation and elaborates reason of economiccrises in Venezuela. This research focuses on situations and financial solutions of the businessesand subsidiaries of other multinational organisations (Gillespie and CNN Money, 2016). Alongwith this, this study depicts alternative options that can be employed in the present situationsfollowing its advantages and disadvantages. Moreover, effects of crypto currency in the financialdecisions and its objectives have also been explained in this study. Thus, this report describes thebusiness 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 400percent of inflation rate and capricious currency exchange rate. The basic supplies in theVenezuela is at very high prices as well as it has severe debt problem. In this context, thepresent 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 inflationrates above 475% (Gillespie and CNN Money, 2016). The prices of basic goods and foodsupplies are very high and with an estimation of IMF remains at least till 2019. This financialcrisis occurs due to mismanagement and extravagant spending of governments on welfareprograms. Second is continuous downfall in the oil prices. It has been reported that Venezuela haslargest oil reserves in the world and its economy totally depends on the revenue from oilexports. However, when in 2014 oil prices dropped from $100 per barrel to $50 and currentlythe 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 lessrevenues and crashing currency. Government of Venezuela controlled the goods and itsprices of food and basic medical facilities in the supermarket which raised the blackmarketing in the economy at a very high price. Government is unable to take debts andarrange enough food supplies in the economy. The medical facilities are very poor that ledmany infants to die this year without proper medicines (Aljazeera, 2017). 2
In the end Forth is Venezuela has left with a very less cash and gold in its reserve. Recentdebt 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 alsoan issue (Gillespie and CNN Money, 2016). Gold has been shipped to Switzerland to makethe payment of rest of the debts. Thus, these following reasons are main cause of presentsituation of Venezuela’s economic crisis. 2.Situational analysis of Subsidiaries in VenezuelaThe present situation of Venezuela is severe in terms of economic and financialmanagement. Various multinational companies are being shut down after the crises andvarious were forced to close by the public and rebellions (Reuters, 2016). It has beenobserved that food chains were out of supplies and others were sold by the owners with nocash payments as consideration. As per the reports, Venezuela is not in a condition where thecash payment can be made for purchase of the company. The company can resolve the issueeither by offering a barter system which is moil for medicines in the current conditions or byno payment and writing off the assets. For example ford motor co. faced several operationaldifficulties that led it to write off their assets (Reuters, 2016). It has also been found thatmany 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 valuedat 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 thathas its operations in the subsidiary company in Venezuela where the capital is comprised of50% debt and 50% of equity. Medical supplies in Venezuela are at very high demand and thepayments 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 oilcompanies along with the political environment in the country. The company can get 5% to10% of its assets in utmost case. Thus, debt holders and investors can be satisfied with thelittle amount and equity shareholders cannot be given any consideration (Pharmaceuticalsand Healthcare Insight, 2016). It has also been noted that these negotiation also depends onthe risks pertaining to currency control and devaluation by the political influence. 3
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