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New FX Law Hurts Venezuela

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Venezuela's new foreign exchange law will lead to a significant and enduring loss of intellectual capital and financial resources.

BY RAUL A GARCIA

Doing business in Latin America will always offer a component of risk and volatility.  Foreign countries don’t always subscribe to the same commerce practices. Conflicting laws and regulations, tax structures, and cultural norms have an effect on daily operations.  The foreign exchange limitations recently implemented by the central government of Venezuela prove this point yet again.   

The parallel exchange market, known as the “Permuta,” was disbanded by a law that was enacted to force companies to solely exchange currency through the Venezuelan Central Bank (BCV).  The government has also issued a limit on the amount of money that can be exchanged from Bolivares, Venezuela’s currency, into other currencies. The limits are $50,000 a week, and no more than $350,000 a month. The central bank is now the exclusive vehicle of exchange and they will only swap a fraction of what many of the local and foreign businesses need to operate effectively.  

The implications of this law have severely hindered typical business activities and will play a major role in shaping Venezuela’s market landscape moving forward. 

Prior to this law, the Permuta market facilitated the trading of various investment vehicles, such as stocks and bonds, to US dollars. This exchange was able to operate freely and thus give the going market rate for its transactions.  The central bank isn’t so generous. It’s now commonplace to receive about half the market rate for dollars. On top of that, there are strict limitations to the amount that can be traded, as previously mentioned.

 Venezuela is a net import country, meaning they bring in more goods and services than they produce, such as food and raw materials.  The United States is by far the largest exporter there. These facts make this decision even more puzzling.  One would think that the government would attempt to limit restrictions and ease market barriers to promote trade; however this is not the case.  

The consequent result has been emigration on a rather scale. Many are of the belief that this move is an aggressive act on the middle and upper classes as well as foreign companies operating in Venezuela.  This law will lead to a significant and enduring loss of intellectual capital and financial resources.  Some wealthy citizens have fled the country because of the consequences of the act. 

The market landscape has now been severely modified and is obstructing those businesses that previously thrived there.  Many were typically doing business well over $1 million a week prior to these new regulations.  Foreign and domestic companies in Venezuela are now inhibited from operating in the way they are accustomed. The essential aspects of business, such as cash flow and access to credit, have come to a standstill as liquidity and purchasing power have been diminished.  Companies operating in Venezuela now fear the nationalization of their property and goods.  In fact, just this month Vestey, an international food provider from the U.K. was nationalized by the government. 

The future market outlook in Venezuela may appear bleak, but opportunities exist. The government recently held public elections, and Chavez lost some power in the assembly. However, the effect remains to be seen. In the past, Chavez has changed the rules to meet his needs, as demonstrated when the mayor of Caracas was stripped of his power for opposing the President.   

If you currently operate in Venezuela, are considering expanding your business there, or if you have clients engaged in Venezuelan commerce, approach with care and be sure to explore the impact of these regulations. 

Raul A. Garcia is a manager in the audit financial services department at Kaufman, Rossin & Co..   

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