Sample Case Study On The Saga Of The Venezuelan Bolivar Fuerte

Question 1

There are many factors that would make a country to devalue its currency. Firstly, devaluation is a tactic that governments employ to stimulate growth of exports (Owen, p.11). Devaluation makes the exports of a country cheaper and, hence increasing their demand. Similarly, a country may decide to devalue its current to discourage imports. When the government wants to stimulate growth of local economies and enterprises, it may resort to devaluation as a measure of reducing demand of foreign goods and, services. As indicated in the case study, the Venezuelan government devalued its currency on many economies to enhance consumption of its local products and services.
Countries also devalue their currencies to correct trade imbalances(Owen, p14). Specifically, when the government realizes that its balances of payments are not conducive then, it may decide to go for devaluation. During the devaluation period, the aggregate value of imports rises but, they do not exceed the aggregate value of exports. A balance of payment is attained when the values of exports is higher than the value of imports (Owen, p14).
Finally, a country can opt for currency devaluation if it wants to eliminate levels of uncertainties in the markets. Specifically, devaluation eliminates speculation in the business sphere hence stimulating growth of investments. Other reasons for devaluation can include stimulating growth of foreign aid and enhancing the inflow of foreign remittances to boost foreign citizens sending money to their home country.

Question 2

During the repeated currency devaluation era, the Venezuelan regime under President Hugo Chaves gained many benefits. Firstly, the devaluation of 2008 helped the government stimulate the consumption of locally produced products. The devaluation also boosts the value of exports since the local Bolivar fuerte traded at a low value than foreign currencies.
Secondly, the devaluations helped the country eliminate business speculation that was rampant in the economy. Through signing of the currency reform measure, President Hugo helped stop speculation especially in the bond market. President Hugo instituted financial laws that would fine any person who traded in US dollars that ranged between $10000 and $20000.
The Venezuelan government also wanted to use currency devaluation to help address inflation problem. The regime has been battling with a growing inflation rate and, they thought by devaluing its currency, then it will help cushion the economy. Besides that, the government employed devaluation to boost its domestic monetary resources especially earnings from oil exports.

Question 3

Analysts predicting the path of the Bolivar used various factors to base their predictions. Firstly, they observed the prevailing inflation rates to form basis of their projections. Consistent growing inflation levels made them realize the government will adopt measures to contain the inflation, and inflation was one of the ideal ways to deal with the inflation menace.
Secondly, Venezuela is an oil exporting nation and, through devaluation the government would realize increase in foreign earnings. The government always wanted to ensure the value of its exports were higher hence allowing providing an easy access market for its oil. The analysts thus used the oil predictions to predict if the government would opt for devaluation.
Finally, the currency analysts assessed the prevailing economic conditions especially in the bonds market to predict the direction of the Bolivar. For instance, if the analysts’ data showed slow investments and, high cases of speculations then, they were optimistic the government would call for devaluation.

Works Cited

Owen, James R. Currency Devaluation and Emerging Economy Export Demand. Aldershot: Ashgate, 2005. Print.
Wise, Carol, and Riordan Roett. Exchange Rate Politics in Latin America. Washington: Brookings Institution Press, 2000. Print.