Venezuela Competitiveness

Among major emergencies, the exchange rate issue remains at the forefront of the concerns of the Venezuelan Government. Currently, every dollar is exchanged by 2.13 units of Bolivar fuerte. This parity is maintained from April 2005 and from that period Venezuela is suffering from high levels of inflation (currently over 30% year on year) that have severely affected the competitiveness of the economy by the strong appreciation of the real exchange rate. Alberto Ramos, a Goldman Sachs analyst, referring to the exchange rate issue saying: hopefully that very soon, possibly after the referendum on Sunday, the Government reset the exchange rate. According to Ramos, the nominal exchange rate should reach 4 bolivares fuertes to be located near its equilibrium level. However there are two problems in the current situation of the Venezuelan economy. The first is that a set of the magnitude required by the nominal exchange rate would produce strong inflationary pressures, which would primarily impact on segments of the population of low-income. In addition, inflationary acceleration would cut in a short time, good part of the profits from the devaluation of the Venezuelan currency.

The second problem that owns Venezuela is related to the dynamic that has reached the inflation rate that prevents the realization of a setting in a single step. The current rate of inflation requires an adjustment continued the exchange rate so that it can maintain a certain level of competitiveness. The problem is that this adjustment is gradually reduced until it disappears and doesn’t happen the opposite that will amplify over time (this second possibility appears more probable). Beyond the issue of exchange-rate competitiveness and despite the resistance offered by the Chavez Government to modify the exchange rate, Venezuela has an additional incentive to devalue its currency and relates to the fulfilment of its fiscal targets. It is the main source of tax revenue of the country comes from oil exports made by PDVSA.