Wednesday, February 26, 2014

Cause of Venezuela’s Protests - The Fall of CADIVI?

Is the elimination of state run CADIVI the catalyst for the riots in Venezuela? We think so.

I read this excellent article on Caracas Chronicles today and I could not agree more with their theory on the timing for the riots and protests in Venezuela.

For those unfamiliar with Venezuela’s currency system its in shambles. The government has their official rate around 6.3 to the U.S. dollar while the black market rate is near 90. CADIVI is the Venezuelan government body which administers legal currency exchange in Venezuela. Since 2003 exchange controls were put in place under CADIVI to limit capital flight. As anyone that has studied the use of capital controls knows when a government puts them in place it only exacerbates the problems. The challenge with CADIVI’s rate as one can imagine is under what circumstances can a local Venezuelan access the favorable 6.3 rate to convert their bolivares to dollars?

The answer is that there are few exceptions but the ones that exist have been widely exploited to the max. The most popular is called “el raspadito” and is well outlined in this article by the Guardian. It essentially works like this: Venezuelans travel abroad and are allowed to convert bolivares at Cadivi’s 6.3 rate up to $2,500 on their credit cards for purchases. If you know a friendly credit card operator you can take this as cash return to the country and then convert the dollars back to bolivares at the black market rate for an extraordinary profit. Now this is currency arbitrage trading if ever I’ve seen it!

As Juan Cristobal Nagel at Caracas Chronicles points out things in Venezuela have been getting bad for some time so why riots and protests at this moment? The tipping point as his theory goes is that it is due to the ending of CADIVI. A country full of currency traders just got the rug pulled out from underneath them. It would be interesting to know what percentage of the population was dependent upon currency arbitrage for being able to survive. I would love to see some stats on that.

Well we agree with Mr. Nagel about CADIVI. When a medium of exchange becomes highly diluted and alternatives to this deteriorating medium of exchange are eliminated chaos is sure to follow.

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