The Venezuelan Bolivar Black Market-Case Analysis

Submitted to: Mr. Awais Rashid

Submitted by:

Tania Shaheen SP19-R04-006

Topic: Case Analysis- The Venezuelan Bolivar Black Market

Assignment # 03

Course Title: Advance Topics in International Finance

Class: MS-1

Submission Date: May 21, 2019

Page 1|4
The Venezuelan Bolivar Black Market-Case Analysis

The Venezuelan Bolivar Black Market

(Case Study)

Q1: Why does a country like Venezuela impose Capital controls?

A1: After the thorough analysis of the case of Venezuela, we come to know that Venezuela was
suffering from political turmoil, which was ultimately deteriorating the economic condition of
Venezuela. Owing to massive devaluation, hyperinflation arose in the country. Thus, investors exit
the Venezuelan market inducing capital flight through the Venezuelan market. Therefore, the
Venezuelan government introduced capital controls over its economy in order to preserve the
Venezuela from financial crisis. Usually, 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. However, such capital controls also have a negative impact over the economy. The major
problem with such controls is that the investors will no longer be willing to invest the same levels
of funds in that country, owing to fixed exchange rate, because investor is always interested in
making huge profits which is eliminated in case of fixed exchange rate, because the investor doubts
on that particular country’s market.

The Venezuelan Government imposed capital controls owing to following reasons:

1) Capital controls allow the Venezuela to control the level and flow of capital flowing out of
the Venezuelan market. This tactic is usually employed by the government to prohibit the
extensive capital outflows following unfavorable or crisis like situations.
2) Through capital controls Venezuelan government introduced fixed exchange rate for their
currency-Bolivar, in order to induce stability in the economy.
3) As the exchange rate for dollar and bolivar was Bs 2500/$, which depicted that bolivar was
very weak currency against the US dollar. Thus, capital controls were introduced in order
to protect the Bolivar-Venezuelan currency, from further devaluation.
4) Another hidden reason for imposing such capital controls by the Chavez government was
to uphold the authority of Hugo Chavez- the president of Venezuela. He introduced the
“Commission de Administracion de Divias (CADIVI)”, a software to monitor the
activities of general public, thus limiting the free choice of general public.

Page 2|4
The Venezuelan Bolivar Black Market-Case Analysis

Q2: In the case of Venezuela, what is the difference between the gray market and the black
market?

A2: Black Market:

The black market is basically an illegal market. Here in this market the trading of currency is done
through unlicensed or unorganized organizations, which are considered as illegal under the law of
country. Trading in this market is very risky, as there is no legal resource or authority backing this
market. In case of Venezuela, the black market rate for us dollar was Bs 3300/$, which was higher
ten the exchange rate of gray market of Venezuela. The exchange rate in this black market of
Venezuela was determined on the day of deposit of currency. Though, it is an illegal market, but
in Venezuela it was quite sophisticated, using the services of brokers and banker in Venezuela.

 Gray Market:

The gray market is the use of legal process of trading by the investor in order to achieve the desired
outcome. However, it is generally considered inconsistent with the government desires or policy
goals. Though this market is not illegal, but sometime trading in gray market is considered as
inappropriate and may be dangerous. In case of Venezuelan gray market, the implicit exchange
rate between bolivar and US dollar was, Bs 2952/$. Here in this market the exchange rate was
based on CANTV closing price and CANTV and ADRs on the same day. The trading in this market
was done in following sequence:

1) Purchase local shares of CANTV

2) Convert these shares prices into dollars through ADRs, which usually trades on NYSE.

Q3: Create a financial analysis of Santiago’s choices and use it to recommend a solution to his
problems.

A3: Santiago’s Scenario:

Funds needed by Santiago = $30,000

CADIVI approval = $10,000

Remaining funds needed = $30,000- $10,000

Page 3|4
The Venezuelan Bolivar Black Market-Case Analysis

= $20,000

 In Case of Black Market:

Funds required = $20,000

The exchange rate in black market is, Bs 3300/ $, thus in case of black market Santiago would
require:

Bs 3300* $20,000 = Bs 66,000,000

 In Case of Gray Market:

Funds required = $20,000

The exchange rate in gray market of Venezuela is, Bs 2952/$, thus in this market Santiago would
require:

Bs 2952* $20,000 = Bs 59,040,000

 Best option for Santiago:

The best alternative for Santiago is “Gray market”, because here in this market he requires less
bolivars in order to buy the US dollars. Thus, Santiago should go for gray market, which would
save him Bs 6,960,000:

B 66,000,000 – Bs 59,040,000 = Bs 6,960,000

Page 4|4