1. The Venezuelan Bolivars Black Market Ari Wardana 0849013 Mochammad Hamzah Fanzurry 0849039 Yohanes Andy Seputro 0849057

2. 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

3. Capital Control dan CADIVI The Passage of the 2003 Exchange Regulation Decree (February 5 th, 2003) 1.Set the official exchange rate Bs1596/$ (bid) and Bs 1600/$ (offer) 2.Established the Commission de Administracion de Divisas (CADIVI) 3.Implemented strict price control

4. 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$.

5. Grey Market

6. 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 Bs3300/$

7. 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 Bs1600/$ 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.

8. 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$10.000 approved for transaction @ Bs1920/$ –Had to paid Bs500 extra for each US$

9. 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.

10. 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

11. 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 Bs7945/share /($18.84/ADR) = Bs 2952/$

12. 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 Bs3300/US$ which were 10,5% higher than the grey market.

13. 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 $10.000 at Bs1920/US$ rate –Plus extra Bs500/US$ to expedite his request –Final rate for Santiago was Bs2420/US$ Two option for $20.000 shortage : –Grey market –Black market

14. 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) Bs2952/US$ x US$20.000 = Bs59.040.000 Black market (Assumed at February 6 th, 2004 rate) Bs3300/US$ x US$20.000 = Bs66.000.000 Santiago should pick grey market option that should save him : Bs66.000.000-Bs59.040.000 = Bs6.960.000 Another consideration is the time limit of bill payment