Change and Challenge: Venezuela’s Currency Exchange System Leaving Foreign Cash in Limbo
by Abby Larson on February 12, 2015
As we explored previously in our blog, Venezuela’s economy is going through somewhat of a rough patch. While oil prices, inflation, and foreign debt are the major contributors to the South American country’s current woes, the situation is exacerbated by Venezuela’s overly complicated currency exchange system. The convoluted structure of Venezuelan foreign exchange controls can cause bureaucratic headaches and significant delays for corporations outside of the country trying to receive funds. As a result, many businesses in the United States and elsewhere are increasingly hesitant to conduct business with Venezuela, a situation that does no favors for their slowly recovering economy.
For international debt collectors and accounts receivable managers whose businesses depend on reliably recovering funds from overseas, it’s important to understand the potential difficulty and delays arising out of Venezuela’s complex currency exchange.
Scaling Back and Losing Profits
Last year, the Ford Motor Co. reduced their production in Venezuela by about 75 percent. Citing price controls and a “very limited and uneven supply of foreign currency” that made paying suppliers difficult, the US’s second-largest automaker joins other foreign corporations who have scaled back their operations as a result of Venezuela’s currency regime. Coca-Cola, Procter & Gamble, and Colgate-Palmolive has also reported exchange losses in the hundreds of millions, citing the currency exchange system as the culprit behind lagging profits. According to a Reuters analysis, at least 40 major US companies carry a total $11 billion of monetary assets in the bolivar, Venezuela’s currency.
Foreign airlines in particular have been hit hard by the Venezuela’s currency exchange system. In 2014, American Airlines had about $750 million in cash tied up in Venezuelan currency and significantly reduced flights to Venezuela as a result. In the same year, Delta slashed its daily service to Venezuela, while Air Canada suspended all service to Venezuela due in part to “onerous currency restrictions.” All told, 24 airlines were unable to bring home a total $3.9 billion from Venezuela thanks to the government’s currency controls.
The Trouble with Three Tiers
The major difficulty with Venezuela’s currency exchange is that it’s actually composed of three different exchange rates. The three-tiered currency exchange system essentially assigns different rates depending on the nature of the sector or product surrounding the transaction. The first mechanism sells dollars for imports of goods and services deemed high national priorities, namely food, medicine, housing, and education. This is the only tier based on the official exchange rate of 6.3 bolivars to the dollar. The second mechanism conducts period dollar auctions for specific priority sectors identified on an ad hoc basis, roughly at a rate of 10-12 bolivars per dollar, while a third offers even weaker rates ranging from 20-60 bolivars/dollar. These tiers all come with their own complex procedures and volume limitations that can lead to complications and delay. As a result, a fourth exchange on Venezuela’s robust black currency market has emerged, with dollars fetching up to 150 bolivars.
Venezuela’s complicated currency exchange has resulted in a massive backlog of currency exchange applications. According to President Nicola Maduro, there are pending applications for currency exchanges dating back nearly two years. Critics of Venezuela’s policy cast doubt on the capacity for state institutions to fairly and efficiently distribute foreign currency, and calls for reform abound.
Recovery Begins with Reformation
President Maduro has pledged to reconfigure the currency exchange system by 2015, though skepticism surrounds the oft-delayed plans. In a January address to Venezuela’s parliament, Maduro dismissed the idea of a single unified foreign exchange system as “unviable,” and planned to stick with a three-tier system while bolstering the main 6.3 bolivar/dollar rate for food and medicine. Instead, Maduro plans to merge the lower two currency tiers into one rate for non-essential imports and create a new third tier to offer dollars via private brokers to compete with the black market rate, essentially legalizing the currency black market.
Whether reform will actually see the light of day remains to be seen, as the ruling party may lack the political clout to push it through legislature. What is clear, however, is that the system is in desperate need of change. Among foreigners, Venezuela has traditionally held a reputation as a consistent, strong payer of its debt. As an emerging market on the path to regaining its hard-earned economic stability, currency reform could heal Venezuela’s relationships with foreign businesses and reinvigorate trade within.