Venezuela's CANTV shares offer forex curbs loophole

Reuters, 05.28.03, 6:38 PM ET By Ana Isabel Martinez

CARACAS, Venezuela (Reuters) - Venezuela's CANTV is stirring up the Caracas stock exchange and not just because the nation's largest telecommunications firm is the traditional market leader.

Shares of CANTV, whose main shareholder is U.S. firm Verizon Communications, skyrocketed this week when investors discovered a lucrative loophole allowing them to skirt the nation's currency controls by buying the firm's stock.

A senior Caracas Stock Market source told Reuters that the Bank of New York Monday restarted conversions of the firm's local bolivar currency shares into dollar-denominated American Depositary Shares.

"From Monday, they have been converting them. The Bank of New York notified trading houses which are in the market," the source told Reuters on the condition of anonymity.

Since February when the government implemented the forex controls, the bank halted conversions while it studied whether the transactions would be legal under the new currency restrictions.

CANTV shares have risen 57 percent this month to historic highs and the stock has gained 18 percent this week alone.

The shares closed Wednesday on the Caracas bourse trading at 3,785 bolivars, down 1.7 percent from the previous day's close. The bolivar is set at 1,600 to the U.S. dollar under the current fixed exchange rate.

Buying the ADS shares (American Depositary Shares) of CANTV allows investors to convert bolivars into dollars and that creates a type of parallel currency market that the government has so far sternly rejected. Under the forex controls, many in the private sector have complained that the curbs are starving the economy of hard currency.

NO AUTHORIZATION

One senior CANTV source, who asked not to be identified, said that the firm was not involved in the conversions. A Bank of New York spokesman in New York said that the bank had not issued any statement regarding such transactions.

The state currency control board, Cadivi, said that it had not authorized the conversions.

"We have absolutely not authorized this kind of transaction...This is a very rigid currency control," Adina Bastidas, one of the Cadivi directors, told Reuters.

Still, the exchange control regime as it stands does not expressly forbid this type of transaction, which offers a discreet loophole with which to circumvent the tough curbs.

The official system only demands that ADS shares issued up to the date the controls were implemented should be registered with the Venezuelan securities and exchange commission. Shareholders must also apply to Cadivi for the currency to convert the stock, earnings and interest.

But Finance Minister Tobias Nobrega Wednesday acknowledged that the CANTV conversions were not illegal because they were not regulated under the controls. He said the government would make an announcement about the issue within the next few days.

Traders estimate that the exchange rate implicit in the transactions stands at around 2,300 bolivars to the U.S. dollar, well above the official 1,600 bolivar fixed rate. The scarcity of dollars has created a thriving black market trading at about 2,500 bolivars to the greenback. (Additional reporting by Silene Ramirez)