The South African currency is Rand while the Venezuelan currency is in Bolivar. The currency code for the Venezuela Bolivar is VEF. The history behind the Venezuelan Bolivar is that, in the year 2010, the government of Venezuela formed an exchange rate that occurs in two tiers (Bhundia & Gottschalk 2013).
The first tier contained the exchange rates for the items that the government considered as non-essential. The second tier has exchange rates for the items considered as crucial and essential. The exchange rates for the items considered as essential and placed in the first tier were higher than that of the items placed in the second tier and considered as non crucial. Additionally, aside from the two official tiers in the exchange-rate, there is as well a third informal exchange rate that is not used or recognised by the government despite its existence.
The exchange rates on investments in Venezuela is categorised as essential, and the items placed in that category are the imports that are to be segmented as belonging to the categories of basic commodities such as food, education sector and also technology
On the other hand, the exchange rate policy in South Africa is not static or fixed. The rate of exchange of the South African Rand is established by the economic forces in the market, specifically the aspects of demand of a product and service and the supply of the same to meet demand. The participation of the South African Reserve Bank is also noted in the determination of the currency through the trading by buying and selling other currencies such as the Venezuelan Currency in this case (Bhundia & Gottschalk 2003)
The risk of investing in Venezuela lies in the different exchange rates. In Venezuela, it is the government that determines the exchange rate directly by placing a higher exchange rate on items that it considers as vital while, in South Africa, the determination of the exchange rate is the market forces prevailing at any given time. Further, the government of South Africa is not keen on the determination of the exchange rates; rather, it only controls global liquidity.
Additionally, the risk of investing in Venezuela is the decline in the Bolivar due to keeping goods with the intention of gaining higher profits when sold after a rise in prices and also speculation as to the stability of the Bolivar. The South African Rand, on the other hand, can adjust in times of the financial crisis, and the economy does not experience a complete overhaul, thus its stability (Bhundia & Gottschalk 2013)
Recommendations for Hedging this Risk
This risk can be hedged by encouraging foreign investment in the company so as to make sure that, in case of depreciation of the Venezuelan Bolivar or the South African Rand, there will be an automatic distribution of adjustment and as such will result in fewer losses.
Financial Development of both South Africa and Venezuela
The financial developments of South Africa and Venezuela are different. The South African financial development is viewed from the angle of the exchange rate system. The system in the country allows for the restoration of the economy by itself, and there is no abrupt change even when there exists a worldwide economic crisis. Further, the retaining of this method of foreign exchange in South Africa is viewed by the International Monetary Fund as an important aspect in the stabilization of the South African Rand. The financial development in South Africa has thus been determined by a large extent, by the market forces, specifically demand and supply existing at a period. In Venezuela, on the other hand, the financial development is pegged directly by the government through the determination of the exchange rates placed on items. This distinction by the government as to which items to have higher exchange rates in terms of imports and exports is what has determined the financial growth in Venezuela. The items placed as vital have a higher exchange rates when importing and exporting such as items necessary in health, education and technology sectors.
The financial development in South Africa has also been determined by the non distinct exchange rate. This is because the private companies that are not affiliated to the government have no incentive to borrow in the form of other currencies. This is due to mismatched records while reconciling the financial books. The records indicated at the time of buying and selling or investments are solely determined by the market forces, which may not be the same in both countries.
However, the International Monetary Fund stated that the financial development of South Africa could be greater if the capital inflow that is consistent could be used in setting up of financial reserves. This would be used later by the same government in controlling, however, minimal the foreign currency exchange rates. The Venezuelan financial development, on the other hand, is firmly pegged on trade, economics and also political good will associated with the cooperation from other regional states. There are considerable procedures that the government in Venezuela has taken to create financial agencies that have a sole mandate of increasing its financial development (Zalduendo 2012)
These issues in the long run cause major disparities in the exchange rates between Venezuela and South Africa in terms of imports and exports, and also the stability of the currencies against prevailing economic situation of either South Africa or Venezuela.
- Bhundia, A & Gottschalk, J 2013, “Sources of nominal exchange rate fluctuations in South Africa” International Monetary Fund, African Dept. Available from: http://site.ebrary.com/id/10302926 [Accessed 08 October 2013]
- Zalduendo, J 2012, “Determinants of Venezuela’s equilibrium real exchange rate” International Monetary Fund, Western Hemisphere Dept. Available from: http://site.ebrary.com/id/10380875[Accessed 08 October 2013].