The Venezuelan Bolivars Black Market Ari Wardana 0849013 Mochammad Hamzah Fanzurry 0849039 Yohanes Andy Seputro 0849057
Case Overview • The Reign of Chavez • Venezuelan Currency “Bolivar” – January 21 st, 2003 Closed at 1. 891, 5/US$ – Venezuela yearly inflation rate touch 30% – Foreign Exchange trading stopped for 2 weeks – The rise of black market trading for FOREX • Chavez Economic Policy
Capital Control dan CADIVI • The Passage of the 2003 Exchange Regulation Decree (February 5 th, 2003) 1. Set the official exchange rate Bs 1596/$ (bid) and Bs 1600/$ (offer) 2. Established the Commission de Administracion de Divisas (CADIVI) 3. Implemented strict price control
Grey Market • Local Venezuelan investors are allowed to purchase local shares of CANTV (Local telecommunication company) • CANTV was dual listed in NYSE • There was a loophole to avoid foreign exchange curb • Practice : – Local Investor bought CANTV local shares at local stock exchange convert it to American Depository Receipts (ADRs) which denominated in US$.
Grey Market
Black Market • Sophisticated practice using services from local stock broker or banker who simultaneously held US$ account offshore. • The exchange rate of foreign currency was negotiated on the day of the deposit • The rate usually was within a 20 % band of the grey market rate • The transaction took two business day to settle • For example in February 6 th, 2004 the exchange rate was Bs 3300/$
Venezuela in early 2004 • President Chavez ask Venezuelan central bank to give him fund from it’s foreign exchange reserves to be invested in agricultural sector. – The request was denied • February 9 th, 2004 – The Venezuelan Government announced the devaluation of Bolivar for 17% from Bs 1600/$ to Bs 1920/$. • The devaluation of Bolivar meant that the country’s proceeds from oil export grew by the same number as the devaluation (17%). • Venezuelan government actually had significant control over it’s balance of payments.
Santiago’s Problem • A business man in pharmaceutical distribution • Need US$30. 000 to fulfill the payments of his supply. • Legal approach (CADIVI) resulting only US$10. 000 approved for transaction @ Bs 1920/$ – Had to paid Bs 500 extra for each US$
Case Question 1. Why does a country like Venezuela impose capital controls? 2. In the case of Venezuela, what is the difference between the gray market and the black market? 3. Create a financial analysis of Santiago’s choices and use it to recommend a solution to his problems.
Why does a country like Venezuela impose capital controls? • Preventing capital flight out of Venezuela – Depreciation of Bolivar – The come back of Chavez’s authority • Empowering Chavez’s economical authority – Limitation of foreign exchange – The Passage of the 2003 Exchange Regulation Decree – Devaluation of Venezuelan currency • Balance of payment manipulation
In the case of Venezuela, what is the difference between the gray market and the black market? • Grey market CANTV shares mediation (Using ADRs in NYSE). For example in February 6 th, 2003 : – CANTV shares closed at Bs 7945/$ – CANTV ADRs closed in NYSE at US$ 18. 84/ADR – 1 ADR = 7 shares of local CANTV shares Implicit gray market rate = 7 x Bs 7945/share /($18. 84/ADR) = Bs 2952/$
In the case of Venezuela, what is the difference between the gray market and the black market? (Continued…. ) • Black market – Using local stock broker or banker services who continuously held foreign currency off shores. – Exchange rate determined by negotiation (usually within 20% band of the gray market rate) – For example in February 6 th, 2004 : Exchange rate at black market was Bs 3300/US$ which were 10, 5% higher than the grey market.
Create a financial analysis of Santiago’s choices and use it to recommend a solution to his problems • Santiago need $30. 000 to pay his supplier bills • CADIVI application was approved for $10. 000 at Bs 1920/US$ rate – Plus extra Bs 500/US$ to expedite his request – Final rate for Santiago was Bs 2420/US$ • Two option for $20. 000 shortage : – Grey market – Black market
Create a financial analysis of Santiago’s choices and use it to recommend a solution to his problems • Grey market (Assumed at February 6 th, 2004 rate) Bs 2952/US$ x US$20. 000 = Bs 59. 040. 000 • Black market (Assumed at February 6 th, 2004 rate) Bs 3300/US$ x US$20. 000 = Bs 66. 000 • Santiago should pick grey market option that should save him : Bs 66. 000 -Bs 59. 040. 000 = Bs 6. 960. 000 • Another consideration is the time limit of bill payment
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