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« Rather Obscure | Main | 10-K Activism »

The Island of Venezuela

Apparently in imitation of his hero, Hugo Chavez is slowly turning Venezuela into an island, or at least an economic one. Morgan Stanley is seeking consultation of the investment community as to the removal of Venezuela from its Emerging Market Index. Morgan Stanley gives three interrelated reasons for this proposal:

  1. The continued presence of investability restrictions linked to the foreign exchange regime put in place in the country in February 2003,
  2. The lack of liquidity of most of its constituents,
  3. The continued weight decrease of the MSCI Venezuela Index in the MSCI Emerging Markets Index over the last several years.

Point 2, for the Oakland Raiders fans, means that you can't sell if you want to get out, and you can't buy if you want to get in. The Point 3 means that Venezuela's market has collapsed relative to those of other Emerging Markets. It should be obvious, even to Diana DeGette, that (2) is a direct consequence of investment controls, and (3) is an indirect consequence.

How illiquid is Venezuela? Morgan-Stanley uses a measure called the "Annualized Traded Volume Ratio," which means, roughly, the average monthly dollar volume in a stock divided by its market cap at the end of that month. The Venezuelan securities in the index traded at an average of 1.5% ATVR as of February. That means that in a month, a stock only traded about 1.5% of its market cap. By comparison, Latin America traded at 37% ATVR, Argentina at 26%, and Columbia (heh) at 40%.

How poorly has Venezuela performed? Right now, Venezuela accounts for 0.085% (yes, you read that right) of the entire MSCI Emerging Market Index. Two-thirds of that is the national telephone company, the only Venezuelan company able to repatriate its dividends outside the country. It has been worse. At the end of 2005, the number was 0.07%. But don't get too excited.

At the end of 2001, Venezuela accounted for 0.28% of the Index. That's not terrific - it was 6th-worst - but it's better on both absolute and relative terms. Right now, the next-least-important country on the index is Morocco, at 0.22%. Venezuela's current relative value is about half of the last important country in 12/01, Columbia at 0.14%.

The potential removal is more than a sign that the Venezuela should join the Receding Market Index. It's also going to make it harder to attract capital by completely submerging the country's international investment profile.

Bolivia, take note.

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