The Venezuelan Bolivar Black Market How do companies survive when their own government makes it nearly impossible to exchange domestic currency for foreign currency?
Venezuelan Bolivar "Rumor has it that during the year and a half that Venezuelan President Hugo Chávez spent in jail for his role in a 1992 coup attempt against the government, he was a voracious reader. Too bad his prison syllabus seems to have been so skimpy on economics and so heavy on Machiavelli." Money Fun in the Venezuela of Hugo Chávez, The Economist, February 13, 2004. 5-2
The Venezuelan Bolivar Black Market Santiago s once-thriving pharmaceutical distribution business in Caracas, Venezuela, has hit hard times Since capital controls were implemented in February of 2003, dollars had been hard to come by He has been forced to pursue various methods methods that were more expensive and not always legal to obtain dollars, causing his margins to decrease by 50% The Venezuelan currency, the bolivar (Bs), had been recently repeatedly devalued This had instantly squeezed his margins as his costs have risen directly with the exchange rate Santiago s immediate problem is that he needs to get his hands on hard currency US dollars He could not find anyone to sell him dollars His customers needed supplies and they needed them quickly, but how was he going to come up with the $30,000 the hard currency to pay for his most recent order? 5-3
Exhibit 1 Venezuelan Official and Gray Market Exchange Rates, Venezuelan Bolivar/U.S. Dollar (January 2002 March 2004) 5-4
Venezuelan Bolivar: Case Questions 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 make a recommend a solution to his problem. 5-5
Venezuelan Bolivar: Case Questions 1. Why does a country like Venezuela impose capital controls? Capital controls allow a country to preserve a fixed rate of exchange for its currency without risking its holdings of hard currency or foreign currency reserves. The problem, however, is that this control or preservation comes at a substantial cost, as many investors will no longer be willing to invest the same levels of funds in that country, if at all. Capital controls allow a country, whether Venezuela, Malaysia, or China, to control the level and flow of capital flowing in and out of the country. Because few countries have a problem with too much capital flowing in, but rather with capital out flows capital flight capital controls are typically utilized to prohibit massive capital outflows following unfavorable or crises in political or economic events 5-6
Venezuelan Bolivar: Case Questions 2. In the case of Venezuela, what is the difference between the gray market and the black market? The black market is the easier to define: the trading of currency through unlicensed or unrecognized organizations or institutions, which by definition in these countries is illegal. The gray market is the use of a legal process to achieve what is generally considered inconsistent with government desires or policy goals. Although by definition not illegal, gray market trading is often considered inappropriate and may be politically dangerous by the participants. 5-7
Venezuelan Bolivar: Case Questions Venezuelan Bolivar Item Value Rate (Bs/$) Bolviars Funds needed $30,000 CADIVI approval $10,000 1,920 500 2,420 24,200,000 Remaining Funds Needed: $20,000 Alternatives: 1. Gray Market $20,000 3,400 68,000,000 2. Black Market $20,000 4,080 81,600,000 (gray + 20%) 3. Create a financial analysis of Santiago s choices and use it to make a recommend a solution to his problem. 3. Vebonos Bonds $20,000 2,973 59,460,000 The solution criteria is to find the "best" effective exchange rate for obtaining the $30,000. The CADIVI rate, if available for the first $10,000, is the first step. The reamining funds needed, $20,000, is obtained at the lowest possible cost via the Vebonos Bonds, where the exchange rate of Bs2973/$ is the cheapest solution. 5-8
Venezuelan Bolivar It s not clear whether Mr. Chávez understands what a massive hit Venezuelans take when savings and earnings in dollar terms are cut in half in just three years. Perhaps the political-science student believes that more devalued bolivars makes everyone richer. But one unavoidable conclusion is that he recognized the devaluation as a way to pay for his Bolivarian missions, government projects that might restore his popularity long enough to allow him to survive the recall, or survive an audacious decision to squelch it. Money Fun in the Venezuela of Hugo Chávez, The Wall Street Journal (eastern edition), February 13, 2004, p. A13. 5-9