Caracas Chronicles

The activity in the Caracas Stock Exchange or Bolsa de Valores de Caracas (BVC) has become a key talking point of the Venezuelan government’s latest campaign to lure international investors. However, it’s not yet clear whether it’s an oasis or a mirage in the dearth of Venezuela’s economic and financial desert.

The market was hit by a massive selloff during 2020, in the worst moment of the crisis created by the pandemic, on top of eight straight years of recession, four years of hyperinflation, and extreme devaluation. But, as it would be expected, the stock exchange showed growth in 2021. During the first quarter of 2021, bond market volume traded in the BVC reached 1,353 million dollars, an 81.3% increase compared to the same period in 2020. In nominal terms, the Caracas Stock Exchange, which must be one of the world’s smallest stock markets, would have one of the strongest nominal performances (40% or 50% per month).

Sounds incredible, right? Well, the caveat here is that the BVC is required to trade in bolivars. In consequence, while nominally the BVC could have top-notch performance, in real terms, it had one of the weakest performances in the world at the same time, a classic Venezuela-style distortion. So, hold your horses.

Still, recovery appears to be real. In 2017, only four companies were issuing debt in the stock market, and now there are 32. In 2021, four new players joined the stock exchange, and two of them have private capital funds aimed at securing financing for the development of new corporate projects.

The total amount of daily trades varies between 250 and 300 which, as mentioned, is very small, but it’s three times the amount of 2017 (109) and 25-50% more than in 2020 (200). Weekly trades don’t hit the $500,000 mark.

“The stock market exchange has served to fund the companies that are left and are investing towards a new Venezuela, an open economy, and a change of model,” Gustavo Pulido, president of the BVC, pointed out to the BBC.

Hyperinflation and the bolivar’s devaluation have crushed Venezuelans’ savings and purchasing and investment power in national currency. Also, the banking system’s liquid assets and funding capacity have dried up after the government increased reserve requirements. In light of these realities, the stock market exchange has tried to establish itself as an alternative for funding and developing projects. The main question being: is it working?

Playing Monopoly?

So, most of the trades that take place in the BVC are settled in bolivars, which basically taints them with all the problems that come with using Venezuela’s devalued currency. Andrés Guevara, director of Omnis Business Partners, believes this is one of the biggest limitations the BVC has: “Almost everything is being listed in bolivars in the stock market right now. And since the liquidity of foreign currency is five or six times bigger than the bolivar’s in this country, the few bolivars you have, you won’t invest them in stocks, you don’t have an incentive to do that. So, migrating to a multi-currency market would be very good, but there’s been resistance from some against this change, among them the government.”

Players from the private sector have suggested to the authorities relaxing the current regulations and giving way to a multi-currency stock exchange market. Meetings were held with government deputies, members of the Finance Commission, and the vice minister of Economy and Finance, to discuss these and other topics. But the proposed changes are still nowhere to be seen.

The Bolsa de Valores de Caracas even presented a multi-currency and foreign investment project to the Banco Central de Venezuela last year, but the proposal didn’t get the necessary backing from the government.

The refusal to relax the regulations in the stock markets stand in contrast to those that are taking place in other areas, such as banking, where foreign currency savings accounts and some commercial operations have been authorized.

Still, although trades are taking place in bolivars, the nominal yields for some securities are higher than the inflation and depreciation rates, which has attracted investors.

Asdrúbal Oliveros, director of Ecoanalítica (a Caracas based consulting firm), thinks that even with 2021’s rebound, the Venezuelan stock market is still very small. “What’s happening there is associated with the fact that some companies are finding in the BVC a way to access funding in a context of severe loan restrictions,” says Oliveros. In fact, bank loans in Venezuela shrank in real terms by at least 90% since the government imposed draconian reserve-requirement ratios on bolivar deposits in 2018. “However, this is a symptom of what could happen if we have a different, more favorable context for investment, where many of the economic distortions are corrected. In that case, the stock market could take off.”

Stock Market a la Bolivariana

During the past seven years, there have been relevant regulation reforms in the Venezuelan stock exchange market, to try and update the sector and to adapt it to current international standards. Starting in 2015, for example, new funding rules were put in place for SMEs and Public Bids, rules for stock notes, and rules on prevention and money laundering. But, as it has become customary, solid initiatives tend to get entangled with bad ideas and individual interests of people who don’t really understand how things work.

The government has tried (several times) to capitalize, pun intended, on financial investment by creating its own stock exchange. The Bolsa Pública de Valores Bicentenaria (BPVB) in 2010 and the Bolsa Electrónica Descentralizada de Venezuela (BDVE) in 2020 are the latest examples. Similar initiatives to that time when chavismo tried to create its own cryptocurrency. There are rumors that the BDVE allows transactions in crypto and foreign currency. But just rumors, since it’s not open to all players. Unsurprisingly, these Bolivarian stock markets still appear to be operating under murky rules and circumstances that don’t make them appealing for mainstream investors. Bluntly put, as one of Caracas Chronicles econ-nerds said: “There’s only one stock exchange, the Bolsa de Valores de Caracas, the rest are failed experiments to cook guisos.”  

There’s a push to reopen the Bolsa Agrícola, where agricultural commodities used to be traded (with good results), until it was killed in 2013 by price controls over food products. We’ll see.

A New Era of Investment?

The BVC’s market capitalization exceeded the $3 billion peak before the pandemic, and in 2020 plummeted to $1.2 billion. In 2021, it recovered significantly—and it’s nearing the $2 billion mark.

The level of decapitalization which corporations with stock in the system have gone through is very high. Some companies, which had managed to be valued between 30 and 50 million dollars at their best in the stock market, went down to 2 or 3 million dollars during the worst moment of the pandemic.

In an economy that’s been in recession for eight years straight, that has faced an aggressive hyperinflation since 2017, and an extreme devaluation (the “soberano” bolivar has lost 99% of its value in three years), you can find high price assets at ridiculously cheap prices in many sectors. Including the stock exchange.

Textile company Telares de Palo Grande (Ama de Casa) is a signature case. “There’s an enormous economic distortion when a large company like Telares de Palo Grande (TPG) is valued at the same amount as a house in La Lagunita (an upscale neighborhood in Caracas),” Andrés Guevara says. “Those 2 million dollars of market value are nothing compared to its assets. This same company, maybe three or four years ago, was valued at 30 million dollars. Fortunately, they have gained ground.”

Mutual and investment funds, aware of the opportunity to acquire these undercapitalized companies, multiply. And those vehicles allow purchases in dollars.

“In practice, you can buy with dollars there,” Guevara says. “If you open an account in any of these custodian banks, you can buy in dollars, but the investor doesn’t have to pay using dollars directly, he uses bolivars, so that the investment units in those mutual funds have a segment dedicated to covering purchases in dollars which are then bought in the banks’ money desks.”

After many years of stale transactions, larger trades are returning to the BVC in 2021. “The most recent case was Corimon,” Guevara says. “9% of that company is being acquired through a tender offer. That process is still in development, it hasn’t ended.”

The recent introduction of Calox, a pharmaceutical company, into the stock exchange and public offerings by real estate funds such as the Fondo de Valores Inmobiliarios (FVI), have also favored this growth.

Another novelty is the addition of four new stock market players (companies and private investment funds) to the Bolsa de Valores de Caracas: Impulsa Agronegocios, PC-IBC Fondo Mutual de Inversión de Capital Cerrado, Fivenca Fondo de Capital Privado, and Pivca (Promotora de Inversiones y Valores). Several of those firms offer interesting options to fund corporate projects from different sectors and sizes.

Furthermore, privately funded associations, such as  Venecapital, have sprung to promote foreign investment in Venezuelan companies.

Harness Your Fears and Access Will Be Granted

Venezuelan assets are, in general, undercapitalized. We’re not only talking about apartments in Margarita, businesses and houses in the country’s main cities which are being sold at prices way below what they cost a few decades ago, but also productive farms and public and private companies in all areas.

The crisis is a synonym for opportunity as well, although those interviewed for this analysis agree that the market must be studied in depth before making these types of decisions in today’s complex Venezuela.

There are interesting investment opportunities in the basic needs sectors (health, food, transportation, for example), but also in those who cater to the mid-high and high targets of the country. Likewise, you’ll find interesting options in the production and agribusiness areas.

However, the Caracas Chronicles Political Risk unit warns:

“Even when the growth is undeniable, precedent provides certain cautionary tales that can’t be overlooked. In 2010, when bond swap operations with dollar denominated securities were prohibited, the government shut down several casas de bolsa and jailed stock brokers for transactions that were legal at the time. We’re talking about a level of risk that goes way beyond losing money. Legislative changes and regulatory controls can vanquish a lively financial market overnight.  

“Also, this is a minuscule market. 200 operations—or so—a day reveal a weak volume that raises the financial risk, as well as the volatility of a market that can have a drop of over 60%—mind that during the pandemic, the stock markets across the world that registered 20% drops raised all the alarms. It appears that new investments are motivated by the expectation of an economic recovery, which today shouldn’t be tied to regime change—as that possibility seems to be off the table for the foreseeable future—but to a relaxation of local controls, fiscalization and the possibility of sanction relief.”

There was a 2020 experiment, widely covered by international media, in which Ron Santa Teresa was allowed to sell $300,000 in commercial papers denominated in dollars. Although it was a very small issuance, it was the first of its type in decades. “It was a very informal process. You had to take the dollars straight to Santa Teresa’s office in Baruta, with a bunch of security guards; another picture of the implausible and pharaonic Venezuela that we’re living in now. So, it has nothing to do with the normal process for these types of things,” Guevara says. While incredible and entertaining, this story speaks volumes of how precarious our investment landscape is. 

While a few local entrepreneurs and investors have found solace in the stock exchange, there’s still a long way to go before Venezuela can offer the legal assurances and risk levels that the average cautious investor may require. Yet, it may still be interesting for thrill-seekers and adrenaline junkies from abroad. 

Caracas Chronicles reached out to the Superintendencia Nacional de Valores (Sunaval), to find out if the Bolsa Descentralizada is really using cryptocurrency and foreign currency to carry out operations and if they were considering a market migration or not, but at the time this article was written, the institution hadn’t responded.

Marianela Palacios Ramsbott contributed with reporting for this piece.