Venezuela: Economic Outlook and Perspectives 2015 April, 2015

Leonardo.vera@eeas.europa.eu Phone: (58 – 212) 958 6623

The Current Macroeconomic Context

• SEVERE EXTERNAL CONSTRAINT

• RECESSION

• ACELERATING INFLATION

• PERSISTENCE OF GOODS SHORTAGE

FOUR (4) PROBLEMS

RISK PERCEPTION (April-2015)

Country risk has improved during the last month (a) Foreign Debt Repayment was accomplished

(b) Oil Prices has improved a bit

Venezuela's Country Risk - EMBI Spread+

Date Value Variation

17/04/2015 2.482 3,72%

16/04/2015 2.393 0,13%

15/04/2015 2.39 0,08%

14/04/2015 2.388 0,59%

13/04/2015 2.374 -1,29%

10/4/2015 2.405 -6,53%

9/4/2015 2.573 -3,31%

8/4/2015 2.661 -1,92%

7/4/2015 2.713 -3,00%

6/4/2015 2.797 -1,83%

3/4/2015 2.849 0,28%

2/4/2015 2.841 -0,39%

1/4/2015 2.852 -1,72%

31/03/2015 2.902 2,87%

30/03/2015 2.821 -0,77%

27/03/2015 2.843 -1,32%

26/03/2015 2.881 -1,06%

25/03/2015 2.912 0,90%

24/03/2015 2.886 1,62%

23/03/2015 2.84 3,88%

20/03/2015 2.734 -6,66%

19/03/2015 2.929 -5,64%

18/03/2015 3.104 1,27%

Source: Bloomberg

CREDIT DEFAULT SWAPS SAYING SOMETHING

(up to 5 years)

CDS spreads indicated a probability of default (in a year horizon) close to 80% in December

Higher oil prices and high willingness to repay (foreign debt) lower this probability

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%98 I IV III II

01I

IV III II

I04 IV III II

I07 IV III II

I10 IV

III1

1

II12

I13

IV13

III1

4

Producto Interno Bruto Trimestral

Rate of Variation t/t-4

REAL GDP GROWTH (QUARTERLY FIGURES),

1998:1 to 2014:3

77% of Venezuela’s total imports corresponds to raw material, intermediate and capital

goods.

Import compression yields a supply-side constraint.

Source: BCV

-5

-3

-1

1

3

5

7

20

12

III

20

12

IV

20

13

I

20

13

II

20

13

III

20

13

IV

20

14

I

20

14

II

20

14

III

Quarterly GDPGrowth

23%

57%

20%

Consumption Good

Intermediate Inputs

Fixed Capital

Composition of the Value of Imports

Fuente: Datos del BCV

FX RATIONING HAS BEEN AFECTING THE PRODUCTIVE

SECTOR

Vehicle Sales, Monthly Figures (Jan-11 to Jan-15)

Vehicle Sales

Vehicle sales reached 683 unit in January (a fall of 5.6% against January 2014) For year 2014 the registered fall of vehicles sales was 76% (against 2013)

Source: Banco Central de Venezuela

0

50

100

150

200

250

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

27.0

29.0

31.0

33.0

35.0

j-09

d-0

9

m-1

0

o-1

0

m-1

1

a-1

1

e-1

2

j-12

n-1

2

a-1

3

s-1

3

f-1

3

j-14

d-1

4

Index of Scarcity

Parallel Exchange rate

Shortage and Parallel ER

Since the fourth quarter of 2012 the non-official exchange rate, the rate of inflation, and the index of scarcity of goods have increased and show strong correlation

68.5

15

25

35

45

55

65

J0

9

M1

0

N10

J1

1

M1

2

N12

J1

3

M1

4

N14

CPI

CPI Inflation (t /t-12) – Jan 09 to Dec 15

INDEX OF SHORTAGE, NON-OFICIAL ER AND CPI INFLATION RATE

The Source of the Difficulties in the External Front

Source: Banco Central de Venezuela

0

20

40

60

80

100

120

140

ma

y-0

0

ab

r-01

ma

r-0

2

feb

-03

en

e-0

4

dic

-04

no

v-0

5

oct-

06

se

p-0

7

ag

o-0

8

jul-09

jun

-10

ma

y-1

1

ab

r-12

ma

r-1

3

feb

-14

en

e-1

5

Cesta de Crudos Venezolana

Linear (Cesta de CrudosVenezolana)

30

40

50

60

70

80

90

100

110

120

jul-1

1

oct-

11

ene-1

2

abr-

12

jul-1

2

oct-

12

ene-1

3

abr-

13

jul-1

3

oct-

13

ene-1

4

abr-

14

jul-1

4

oct-

14

ene-1

5

Cesta Venezolana

Linear (Cesta Venezolana)

May-2000 - Mar-2015 Jul-2011 - Mar-2015

Trend

The rapid fall in oil prices started in Q3 2014. There has been a minor recovery lately.

The average price this year is hardly half the average price registered during the previous 3 years

OIL PRICES: RECENT EVOLUTION

(Jan 2000 - March 2015)

ADVERSE DEVELOPMENTS IN THE EXTERNAL SECTOR

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

jul-1

2

sep

-12

no

v-1

2

en

e-1

3

ma

r-13

ma

y-1

3

jul-1

3

sep

-13

no

v-1

3

en

e-1

4

ma

r-14

Exports of Crude Oil

Linear (Exports of Crude Oil)

0

500

1000

1500

2000

2500

2005

I III

2006

I III

2007

I III

2008

I III

2009

I III

2010

I III

2011

I III

2012

I III

2013

I III

2014

I III

Non-oil Exports

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2005

I III

2006

I III

2007

I III

2008

I III

2009

I III

2010

I III

2011

I III

2012

I III

2013

I III

2014

I III

Total Imports

Linear (Total Imports)

1 2

3

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e

External debt Repayments4

Millions of US$

Millions of US$ Millions of US$

Thousand of Barrels/day

0%

10%

20%

30%

40%

50%

60%2

00

5 I III

20

06

I III

20

07

I III

2008 I III

20

09

I III

20

10

I III

20

11

I III

20

12

I III

20

13

I III

20

14

I III

Public Sector Imports/Total Imports

Poly. (Public Sector Imports/Total Imports)

%

Source: BCV and Own Calculations

Very rapid increase in the share of public imports

PUBLIC SECTOR IMPORTS AS A PERCENTAGE

OF TOTAL IMPORTS (Quarterly, 2005:1 – 2014:3)

MM USD/b

-5,000

0

5,000

10,000

15,000

20,000

20

05

I III

20

06

I III

20

07

I III

20

08

I III

20

09

I III

20

10

I III

20

11

I III

20

12

I III

20

13

I III

20

14

I III

Current Account Result

CA Ajusted by Commercialagreements

Linear (Current Account Result)

Source: Data from BCV

RECENT EVOLUTION OF THE CURRENT ACCOUNT

(2005:1 – 2014:3)

Official figures show a declining current account surplus

Ultima actualización: 07/11/13

OIL SUPPLY SUBJECT TO COOPERATION

AGREEMENTS IN 2012 – Thousand of Barrels per day

PETROCARIBE

Antigua y Barbuda 1.3

Belice 0.8

Dominica 0.4

El Salvador 12.7

Grenada 0.8

Guyana 6.9

Haiti 14.2

Jamaica 25.9

Nicaragua 27.5

Republica Dominicana 26.9

San Cristobal y Nieves 0.9

San Vicente y las Granadinas 0.5

Surinam 2.2

Acuerdo de Cooperacion Energética de Caracas

Bolivia 8.3

Paraguay 1.1

Uruguay 19.6

Convenio Integral de Cooperación

Argentina 25.6

Cuba 91.1

Fondo de Cooperación con China

China 264

TOTAL 530.7

Petrocaribe 121

Acuerdo de Cooperación Energetica de Caracas 29

Convenio Integral de Cooperacion 116.7

TOTAL 266.7

Convenios de Cooperación Energética (not including China)

Portion not generating cash-flow (P, ACEC, CIC) 133.35

Fondo de cooperación con China 264

TOTAL 397.35

Barrels not generating Cash-Flow

The payment system of most agreements allows for purchase of oil on market vale for 5%-50% up front with a grace period of one to two years; the remainder can be paid through a 17-25 year financing agreement with 1% interest if oil prices are above US$40 per barrel.

Assuming the 50% of the purchases of oil remain unpaid and adding to this 264 thousand barrels used to repay the debt with China, then about 400 thousand barrels per day are not generating revenues.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000ju

l-05

mar-

06

nov-0

6

jul-07

mar-

08

nov-0

8

jul-09

mar-

10

nov-1

0

jul-11

mar-

12

nov-1

2

jul-13

mar-

14

nov-1

4

Liquid Reserves

Millions of US$

Source: BCV

In 2012 liquid reserves were already at a critical level ¿Why?

LIQUID STOCK OF INTERNATIONAL RESERVES

(Jan 2005 – NOV 2014)

Ultima actualización: 07/11/13

Fuente: Memoria y Cuenta del MPP de Energía y Petróleo ; MPP Planificación y FInanzas

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BCV PDVSA

USD MM

SOURCE: BCV and PDVSA

TRANSFERS TO FONDEN (2005 – 2013)

For years the central bank was allocating substantial amounts of forex to FONDEN. In ten years FONDEN received US$ 127.069 millions both from PDVSA and the Central Bank… The Central Bank took out this money from the country’s precautionary fund (international reserves).

200

400

600

800

1000

1200

1400

1600

1800

2000

-2500

-1500

-500

500

1500

2500

35002

00

5 I III

2006 I III

20

07

I III

20

08

I III

20

09

I III

20

10

I III

2011 I III

20

12

I III

20

13

I III

20

14

I III

20

15

I

Ajuste por Revalorización de Activos

Precio del Oro

USD MM US$ per fine ounce

SOURCE: BCV, Bloomberg and Own calculations

PRICE OF GOLD AND RESERVE GAINS AND

LOSSES (Quarterly Figures, 2005:1 to 2014:3)

… but since Q4 of 2012 the price of gold started to decrease in international

markets. During 2013 the Central Bank reported a loss of US$ 4,300 millions.

Policy Reaction

M o n to L iq u id a d o B C V

U S $ C o m p o sic ió n U S $ C o m p o sic ió n

A l im e n to s 3 .6 5 2 ,3 6 3 1 ,1 % -5 ,4 % 3 .9 2 1 ,6 5 4 1 ,2 % 7 ,4 %

S a lu d 1 .8 6 7 ,2 4 1 5 ,9 % -1 5 ,0 % 2 .0 5 5 ,2 2 2 1 ,6 % 1 0 ,1 %

A u to m o tr i z 8 8 2 ,6 3 7 ,5 % -2 6 ,7 % 1 6 3 ,8 2 1 ,7 % -8 1 ,4 %

C o m e rc io 1 .2 7 9 ,6 1 1 0 ,9 % 7 ,1 % 3 4 6 ,4 4 3 ,6 % -7 2 ,9 %

Q u ím ic o 1 .0 1 3 ,1 0 8 ,6 % 3 1 ,4 % 8 6 6 ,8 2 9 ,1 % -1 4 ,4 %

M a q u in a r ia s y E q u ip o s 7 2 6 ,0 9 6 ,2 % -3 7 ,1 % 4 0 5 ,0 3 4 ,3 % -4 4 ,2 %

O tro s 2 .3 1 5 ,3 3 1 9 ,7 % -1 4 ,7 % 1 .7 6 2 ,8 5 1 8 ,5 % -2 3 ,9 %

Im p o rta c io n e s O rd in a r ia s

(In c lu y e A L A D I y S U C R E ) 1 1 .7 3 6 ,3 7 1 0 0 % -1 0 % 9 .5 2 1 ,8 4 1 0 0 % -1 9 %

V a r . (%)S e c to rA c u m u la d o J u l io 2 0 1 3

V a r . (%)A c u m u la d o J u l io 2 0 1 4

IMPORTS APROVED BY CENCOEX (US$ MM)

*/ estimaTED Last updated: 27/11/2014

Source: Own Calcaulations

US$ MM

0

200

400

600

800

1000

1200

1400

1600

feb-14 mar-14 abr-14 may-14 jun-14 jul-14 ago-14 sep-14 oct-14 nov-14 dic-14

SICAD I SICAD II

SICAD I and SICAD II (millions of US$)

0

2,000

4,000

6,000

8,000

10,000

12,000

2010 III 2011 I 2011 III 2012 I III 2013 I III 2014 I III

SICAD II

Allocated through CADIVI/CENCOEX

SITME/SICAD 1

Source: BCV

By the end of 2012 a higher rationing in the allocation of FX starts to develop.

FOREIGN CURRENCY EXCHANGE RECEIVED

BY THE PRIVATE SECTOR, 2010:3 TO 2014:3

FOREIGN CURRENCY EXCHANGE RECEIVED

BY THE PRIVATE SECTOR

BCV’s Average Daily Sales of FX to the Private Sector

Higher rationing of FX to the Private Sector is taking place

Source: Sintesis Financiera

• A multiple exchange rate system with forced devaluations seems to be norm

• The system is working today with 4 different exchange rates. On the extremes we have a rate close 260 Bs./US$ and another one at 6.3 Bs./US$

January 12 2010

Bs./$ 2.15 2.6

4.3

Two-tier system

May 18 2010

Swap Market was

eliminated

2.6

4.3

SITME is created

June 10 2010

2.6

4.3

5.3 5.3

4.3

January 1 2011

The official rate at 2.6 is eliminated 2.6

February 8 2013

SITME is eliminated and the official rate is adjusted to 6.3

6.3

SICAD 1 is created

6.3

10.9

July 13 2013

SICAD 2 is created

March 24 2014

12.0

6.3

52.1

RECENT EVOLUTION OF THE FX REGIME

February 2015

12.0

6.3

196.0

SICAD 2 is eliminated and SIMADI is created

¿Other severe Institutional Developments?

%

20%

30%

40%

50%

60%

70%

80%

90%

100%19

99

I III

20

00

I III

20

01

I III

20

02

I III

20

03

I III

20

04

I III

20

05

I III

20

06

I III

20

07

I III

20

08

I III

20

09

I III

20

10

I III

20

11

I III

20

12

I III

20

13

I III

20

14

I III

FX revenues recived by the BCV from PDVSA/Total oilrevenues

Log. (FX revenues recived by the BCV from PDVSA/Total oilrevenues)

Source: Data from BCV

BCV’s FX REVENUES FROM PDVSA AS A PROPORTION

OF OIL INCOME (1999:1 – 2014:3)

Foreign currency exchange needed to attend public and private sector imports, and debt repayment is limited…, the Central Bank has been receiving a decreasing share of petrodollars.

PDVSA

Imports of Crude and Derivatives

Payments to providers and

suppliers

Current Debt

Debt arrears (overdue)

Capital Investment

(CAPEX) External Debt FONDEN

US$ Expenses in Social

Programs

Housing

PDVAL

Social Missions

BCV The remaining is sold to BCV

PDVSA’s ALLOCATION OF FX REVENUES

Private sector The remaining is

sold to the private sector

BCV US$ 42,000 MM

Non-financial public enterprises

US$ to the Treasury FONDEN Public Banks

BCV’s Own Needs BCV´s Debt Repayments

External debt

It seems to be clear that the adjustment variable is the allocation of FX to the Private Sector

BCV’s ALLOCATION OF FX REVENUES

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

05

I III

20

06

I III

20

07

I III

20

08

I III

20

09

I III

20

10

I III

20

11

I III

20

12

I III

20

13

I

III

20

14

I III

Public Debt Treasury FONDEN Non-Financial Public Enterprices Public Banks BCV Private Sector

Source: Data from BCV

Debt Repayment

COMPOSITION OF FOREIGN EXCHANGE PROVIDED BY BCV (2005:1 – 2014:3) Quarterly

The public sector is obtaining about 40% of the total allocation from the BCV

The Fiscal and Monetary Problem…

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Fuente: Ministerio de Finanzas

Government Oil Revenues and Total Spending of the Central Government (1999 - 2013)

Thousand of Bs

While spending is inflation adjusted fiscal oil revenues are tied to the nominal exchange rate.

The fiscal gap is increasing. Source: Data from the Ministry of Finance, BCV and own calculations

THE EFFECT OF INFLATION AND A FIXED ER ON

PUBLIC ACCOUNTS

Government Oil Revenues in domestic currency did not grow as much

Government Spending increase with Inflation (Inflation adjusted)

PDVSA’s EBITDA AND CASH FLOW

Source: IPD

LIABILITIES OF PDVSA (UP TO 2013)

USD MM

0

20,000

40,000

60,000

80,000

100,000

120,000

2

4

6

8

10

12

14

16

dic

-09

jun

-10

dic

-10

jun

-11

dic

-11

jun-1

2

dic

-12

jun

-13

dic

-13

jun

-14

Acervo de FinanciamientoMonetario a PDVSA

Razón M2/RI

Coeficiente de correlación: 0.98

Fuente: BCV and own calculations

CENTRAL BANK’ FINANCIAL SUPPORT TO PDVSA AND

MONETARY LIQUIDITY (Jan 2010 – Dec 2014)

In the case of PDVSA, the firm has resorted to monetary financing of the central bank, leading to a very dangerous dynamics

THE EFFECTS OF EXCESS MONEY

US dollars demand

Real Estate

Vehicles Electronics

An scenario for 2015

• Lower oil prices. Oil revenues could fall up to 30,000 million dollars in one year

• External Debt Repayments will continue to be high and constraining. Roll-over does not look as an alternative

• Lower Imports and higher adjustments in the FX allocations.

• Higher adjustment in Private Sector allocations

• Very difficult conditions to get external financing and to mitigate the external crises, and the government will do as much as it can to get unconventional sources of financing

• Borrowing requirements in “bolívares” can be attended by devaluation, monetary expansion and higher taxes.

• Government spending has to be adjusted (in real terms) with uncertain political effects

ASSUMPTIONS

50,0

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0

20

40

60

80

100

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Venezuela: Oil Prices and Imports, 1998-2015

Crude Oil Prices (US$/bl) Total Imports (millions of US$)

OIL PRICES AND IMPORTS

Si la disponibilidad para las importaciones llega a 30.000 millones de US$, el sector privado podría recibir cerca de 18.000 millones en 2015. Eso es 55% de lo entregado en 2014

EVOLUTION OF THE LEVEL OF IMPORTS

Source: Síntesis Financiera

EXTERNAL DEBT REPAYMENT (PDVSA AND CENTRAL

GOVERNMENT)

ESTIMATED FOREIGN EXCHANGE CASH FLOW

Source: BCV and own calculations and estimations

MACROECONOMIC FORECAST

Source: Institute of International Finance, IIF, February