Venezuela:

Collapse or Transition?
 Where are we?

Venezuela is experiencing the deepest economic depression

suffered by any Latin American country since 1980.

Acceleration of inflation with sharp leaps in Venezuelans

purchasing power.

Strong cuts in imports and a depletion of assets.

A costly and messy adjustment without a stable equilibrium.

An unstable political confrontation scenario.

The government chose a radical path.

 Where are we going to?

In the economic area, 2017 will be similar to 2016.

Economic growth close to zero.

A fall in purchasing power has avoided hyperinflation so far.

It seems that the possibility of sticking to the imports-cut strategy

(or financing them through assets liquidation) is limited.

The increase in the average oil price does not alleviate cash flow
difficulties due to a strong drop in oil production.
 ENCOVI: an implosion in the social front

93.3% of Venezuelans believe that their income is insufficient to buy

food.

32.5% of Venezuelan eat less than 3 meals a day. 86.3% of the

households in extreme poverty eat less than 3 meals a day.

72.7% have said that they have loss weight (involuntarily) in 2016.

Poverty has increased from 48.4% in 2014 to 81.8% in 2016. Extreme

poverty from 23.6% to 51.5% and chronic or structural poverty went
from 16.1% to 31.1% during the same period.

For 2017, similar levels of poverty are expected, but chronic or

structural poverty will continue to increase.

91.8 homicides per 100.000 habitants or 28.479.

 For now the government has been able to remain
in office

We are at a maximum uncertainty point.

I do not expect any change in the economic model Crisis will

continue

In this environment, it is unlikely that the government wins any election

in the upcoming months:

General elections?

Governor, mayors and presidential elections?

Postponing elections forever seems to be a hard task to achieve.

Time is playing very against the government. They are wrong when
they say they are gaining time. The government is wasting time.
Luis Ugalde S.J.
 Index (1920=100)

1,400
1,600
1,800
2,000

1,000
1,200
2,200

200
400
600
800

0
1920
1923
1926
1929
1932
1935
1938
1941
1944
1947

Sources: BCV, INE and Ecoanaltica

1950
1953
1956
1959
1962
1958

1965
1968
1971
1974
1977
1980
1983
1986
Venezuela's per-capita GDP

1989
1992
1995
1998
2001
2004
2007
2016

2010
2013
2016
50 years lost
 Venezuela: Leader in terms of crisis.

Cumulative GDP Contraction

El Salvador (1980-1982)

Uruguay (1999-2002)

Argentina (1999-2002)

Haiti (1992-1994)

Peru (1988-1990)

Nicaragua (1984-1993)

Venezuela (2014-2016)

-25 -20 -15 -10 -5 0

%
Sources: IMF and Ecoanaltica
 GDP contraction started before the decline in oil
prices

GDP Growth vs. Venezuelan Oil Basket

10 120

6
100
2
80
-2
y/y (%)

USD
-6 60

-10
40
-14
20
-18

-22 0

II-2016E
I-2016E

IV-2016E
III-2013

III-2015
III-2012

III-2014
II-2013

II-2015
II-2012

II-2014
IV-2012

IV-2014
IV-2013

IV-2015

III-2016E
I-2012

I-2014
I-2013

I-2015
Source: BCV, MENPET and Ecoanaltica

8
 mb/d

2.20
2.40
2.60
2.80
3.00
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11

Sources: OPEP and Ecoanaltica

May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Oil Production

Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
the decline in oil prices
The contraction in oil production also started before
 Continued cuts in imports seem unlikely

Imports (Per-Capita)
1600

1400

1200
USD

1000

800

600

400

200

2016E
2015E
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Sources: BCV, Bureau of Labor Statistics and Ecoanaltica
* Deflated through the Consumers Price Index (1996=100).
 There is a clear relation between level of imports
and GDP
GDP vs. Imports
(Adjusted Linear Regression)
400
GDP GDP (Forecast)

350

2012
300
2015

250 2013
GDP (USD Bn)

200 2014

150
2016

1999
100
1998

50

0
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

Imports Level (USD Bn)

= 19.8 + 4.9 1 = 0.913

 Inflation is out of control

NCPI vs. Underlying Inflation

1,440
Underlying Inflation NCPI NCPI*
1,240

1,040
Var. % (a/a)

840

640

440

240

40
oct-15

jun-16
oct-14

jun-15

oct-16

jan-17
mar-15

mar-16
may-15

may-16
apr-16
apr-15

aug-15

sept-16
aug-16
sept-15

jul-16
jul-15
feb-15

feb-16
dec-14

nov-15

Jan-16

dec-16
nov-14

dec-15

nov-16
Jan-15

Sources: BCV and Ecoanaltica

* Data estimated through the original methodology published by the BCV in 2007.
 Monetary financing has grown exponentially

Monetary Finincing from BCV to Pdvsa

4,000 6,000
Monetary base Monetary finincing
3,500
5,000
3,000
4,000
2,500

VEF MMM
VEF MMM

2,000 3,000

1,500
2,000
1,000
1,000
500

0 0
abr-15

abr-16
dic-14

dic-15

dic-16
feb-15

feb-16
jun-14

ago-14

oct-14

jun-15

ago-15

oct-15

jun-16

ago-16

oct-16
Sources: BCV and Ecoanaltica
 Real VEF of 2007

100
200
300
400
500
600
700
800

0
2009 - I
2009 - II
2009 - III
2009 - IV
2010 - I
2010 - II
2010 - III
2010 - IV
2011 - I

Sources: BCV and Ecoanaltica

2011 - II
2011 - III
Deflated through NCPI

2011 - IV
2012 - I
2012 - II
2012 - III
2012 - IV
2013 - I
2013 - II
2013 - III
2013 - IV
2014 - I
2014 - II
Real Wage Evolution

2014 - III
2014 - IV
2015 - I
2015 - II
2015 - III
2015 - IV
2016 - I
Deflated through Underlying Inflation

2016 - II
2016 - III
2016 - IV
Price system has destroyed real wages
 Poverty levels have nearly doubled

Evolution of poverty in Venezuela

90
Non-extreme Poor Extreme Poor
80

70

60

% 50

40

30

20

10

0
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
Sources: Survey of households by sampling, INE. UCAB-UCV-USB Encovi 2014 - 2015 - 2016.
 Exchange rate differences are problematic

Different Exchage Rates* (VEF/USD)

Exchange Rate 2012 2015 2016 Jan-17 feb-17
Official ER 1 4.3 6.3 10.0 10.0 10.0
Official ER 2 5.3 - - - -
Official ER 3 - 13.5 - - -
Official ER 4 - 52.1 - - -
Official ER 5 - 200 674 690 700
Non-Official1 17 833 3,165 3,545 4,329
Sources: BCV and Ecoanaltica
*End of Period
1
Average
 Public imports will represent 2/3 of total imports

Imports Through Sector and Mechanism

Exchange Rate 2016E 2017P
Public Imports 62.0% 65.0%
Dipro 88.7% 75.8%
Dicom 11.3% 24.7%
Private Imports 38.0% 35.0%
Dipro 34.5% 40.7%
Dicom 31.1% 25.5%
Non-Official 34.4% 33.8%
Sources: Ecoanaltica
 The parallel market is financing 35% of private
imports

Percentage of private imports financed through

the parallel exchange rate
40

35

30

25

% 20

15

10

0
Average 2005- 2014 2015 2016*
2013
Sources: BCV and Ecoanaltica
* Year average.
 Price adjustment is occurring faster considering the
rise of the parallel rate

Weighted Exchange Rate of the Venezuelan

Consumer
1400

1200

1000
VEF/USD

800

600

400

200

0
Sep-14

Sep-15

Sep-16
Nov-14

Nov-15

Nov-16
Mar-14

Mar-15

Mar-16
Jul-14

Jul-15

Jul-16
May-14

May-15

May-16
Jan-14

Jan-15

Jan-16

Jan-17
Sources: BCV and Ecoanaltica.
 Exchange rate adjustment is slow to occur

Exchange Rate Indicators

(VEF/USD)
Jan-17 Var. % (m/m) Var. % (a/a)
M2/IR* 1,058.1 23.5 292.2

RER** 637.0 5.3 485.3

DICOM*** 681.1 1.4 240.9

Consumers WER 1,274.1 -4.3 308.4

Sources: BCV, another
Central Banks and
* Months Closure. ** Monthly Average. *** It is compared to the SIMADI.
 Is it possible to cover the gap in 2017?

Hard Currency Cash Flow (USD Bn)

Concept 2014 2015 2016E 2017* 2017**

Income
Net Oil Exports (mb/d) 1.94 1.76 1.66 1.61 1.67
Oil Exports (mb/d) 2.2 2.2 2.0 1.9 2.0
Oil Imports (mb/d) 0.3 0.4 0.3 0.3 0.3
Energy Agreements (mb/d) 0.2 0.2 0.1 0.1 0.1
Effective Oil Exports (mb/d) 1.7 1.6 1.6 1.5 1.6
Brent Price (USD/bl) 103.5 53.8 44.5 50.6 63.3
Venezuelan Oil Basket Price (USD/bl) 88.4 44.7 35.2 40.0 50.0
Oil Income 65.3 32.1 23.9 27.9 35.9
Oil Imports 10.8 7.8 6.4 7.3 9.1
"Net" Oil Income 54.5 24.3 17.5 20.6 26.8
Non-Oil Income 3.0 2.1 1.3 1.7 1.7
Total Income 57.4 26.4 18.8 22.3 28.5
Expenditure
Non-oil Public Imports 36.7 28.7 11.6 11.6 11.6
Services 7.9 6.4 4.1 4.0 4.0
Rent and Current Transfers 8.6 8.4 7.3 7.2 7.2
Public External Debt 10.3 10.4 10.9 11.7 11.7
Capitals Outflow and Others 9.7 0.9 1.0 0.6 0.6
Total Expenditure 73.2 54.8 34.8 34.9 34.9
Result -15.7 -28.3 -16.0 -12.6 -6.4
Source: BCV, Mefbp, Pdvsa and Ecoanaltica
 There are USD 12.9 Bn in diferent assets
(Excluding other assets in hard currency)

Different Assets Available

Operative IR Gold Position at the IMF Extra-Budgetary Total Reserve
50,000

45,000

40,000

35,000
MM USD

30,000

25,000

20,000

15,000

10,000

5,000

0
Dec-12

Dec-14

Dec-15
Dec-13

Dec-16
Jun-14

Jun-16
Jun-12

Jun-13

Jun-15
Aug-13

Aug-15

Aug-16
Aug-12

Aug-14
Apr-12

Apr-14
Apr-13

Apr-15

Apr-16
Feb-13

Feb-14

Feb-15

Feb-16
Oct-12

Oct-13

Oct-15
Oct-14

Oct-16
Sources: BCV y Ecoanaltica
 2017, First quarter where are we?

Claps consolidation
Progressive Adjustments of the Minimum
Economics Wage (Hogares de la Patria cards)

Strengthening of the Peace Blocks.

Safety

Reinforcement of the Missions

Transfers through the Carnet de la Patria
Social mechanism.
 2017, First quarter Where are we?

Consolidation of a new Public Works

agenda
Infraestructure

Implementation of the New Popular

Power. Rise of the Congreso de la
Patria
Popular
 In summaryhow does 2016-2017 close?

Venezuela Macroeconomic Forecast

Variable 2014E 2015E 2016E 2017F
GDP - y/y (%) -3.9 -5.7 -16.7 -3.0
Oil GDP - y/y (%) -4.2 -0.9 -12.5 -4.0
Non-oil GDP - y/y (%) -3.1 -5.6 -18.6 -2.1
Exports - y/y (%) -15.8 -50.2 -28.9 10.0
Imports - y/y (%) -16.9 -23.2 -50.7 5.0
Oposicin
Oposicin
Imports (USD MM) 47,508 36,496 17,977 17,151
gana mayora
gana mayora
Venezuelan Oil Basket (USD/bl) 88.8 44.8 34.9 40.0
calificada
calificada
Current Account Balance (% GDP) 1.6 -10.7 5.6 -1.5
International Reserves (USD MM) 22,080 16,361 10,977 4,200
Central Government (% GDP) -10.4 -11.7 -11.5 -10.0
Restricted Public Sector Balance (% GDP) -19.6 -20.2 -17.6 -15.4
NCPI (% Dec/Dec) 68.5 180.9 511.3 850.0
Liquidity (M2) - y/y (%) 64.0 100.7 158.8 170.0
Official Exchange Rate Cencoex - Dipro closing price (VEF/USD) 6.3 6.3 10.0 50.0
Weighted Average of Imports Exchange Rate (VEF/USD) 21.7 59.8 321.8 933.9
Non-official Exchange Rate - average (VEF/USD) 95.4 544.5 1,363.3 5,170.0
Non-official Exchange Rate - closing price (VEF/USD) 173.2 833.3 3,164.6 8,100.0
Sources: BCV and Ecoanaltica
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