Wednesday, February 28, 2007

Price Controls In Venezuela

I posted on ordinary price controls in Venezuela a little while ago. But a new development is occurring with the exchange rate, which is pegged.

Toyota's Venezuela unit will halt production for 15 days beginning March 1 because the government has not sold it enough dollars to import the components it needs, a company executive told Reuters.
The government of Venezuelan President Hugo Chavez has maintained strict currency controls since 2003 as part of his self-styled socialist revolution that has broadened government involvement in all aspects of the OPEC nation's economy.
"We are going to shut operations, we expect for 15 days, as of March 1," Toyota Venezuela Planning and Marketing Manager Felix Orta said in a telephone interview on Tuesday. "This is because we still have not received hard currency to produce the vehicles."

Venezuela pegs their exchange rate at 2,150 bolivars to the $ (meaning you need 2,150 Bolivars to purchase one dollar). However, the black market trades bolivars closer to 4,000 to the $. This means the government is keeping the currency stronger compared to what would exist on the open market (technical term: the bolivar is overvalued). Pressure exists for the Bolivar to weaken (i.e. more bolivars to purchase dollars) due to concerns over nationalization of key companies and worries over inflation, which is expected to push above 20%y/y tomorrow.

(The way to think of this is to think in terms of price. The Price of buying USD should be rising. It should take more bolivar's to purchase one dollar. It is not because the government has pegged the currency at a lower price (stronger) than it should be).

For a law abiding company like Toyota that does not go to the black market there is a problem in that there is a shortage of USD available on the market (since price controls are keeping the bolivar artificially strong). Hence they have to shut down production for (hopefully) 2 weeks.

I admit that the opposition to controls on exchange rate is not as unanimous as opposition to price controls on goods is. However, given the recent experience of Latin American currencies with pegged exchange rates (cough cough, Argentina, cough cough), maybe it should be!

1 comment:

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