Venezuelan Macroeconomic Outlook (Updated, May 2010)

Venezuela Macroeconomic Outlook Exchange rate regime, risk and uncertainties Miguel Ángel Santos www.miguelangelsantos.blogspot.com Twitter: @miguelsantos12 miguel.santos@iesa.edu.ve Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

1 Macroeconomic results by year-end 2009 2 What has happened so far in the first quarter? 3 Exchange rate arrangements, risks and uncertainties 4 What is likely to happen? Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

In 2009 average oil price for the Venezuelan basket nose-dived 34%... Over Jan-April 2010 oil price bounced back to an average of $71.7 per barrel... Precio Petróleo - Cesta Venezolana 140 Precio Promedio (Enero 1998 - Abril 2010) Cesta Venezolana: 120 1999: 16,2 2000: 26,0 100 2001: 20,2 2002: 22,2 2003: 25,7 80 2004: 33,6 2005: 46,0 2006: 56,4 60 2007: 64,7 2008: 86,5 40 2009: 57,0 2010: 71,7 20 Valor Nominal Valor Real (Base: Dic-07) 0 Ene 1998 Jul 1998 Ene 1999 Jul 1999 Ene 2000 Jul 2000 Ene 2001 Jul 2001 Ene 2002 Jul 2002 Ene 2003 Jul 2003 Ene 2004 Jul 2004 Ene 2005 Jul 2005 Ene 2006 Jul 2006 Ene 2007 Jul 2007 Ene 2008 Jul 2008 Ene 2009 Jul 2009 Ene 2010 Fuente: Ministerio de Energía y Petróleo Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Venezuelan exports collapsed 40%: 39% oil exports (volume effect) and 44% non-oil exports Exportaciones Petroleras y No Petroleras (Millones de Dólares - 2000-2009) 100.000 Petroleras No Petroleras 90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Real oil exports per capita fell 43%, but from a historic stand-point are still at their highest level in the previous 25 years (excluding 2005-2008) Exportaciones Petroleras (en dólares de 2009) Embargo petrolero de países a EEU - Guerra de Yom Kippur 100,000 5,000 92,693 Salida del Sha de Exportaciones Petroleras (millones de dólares de 2009) 90,000 4,500 Exportaciones Petroleras per Cápita (dólares de 2009) Irán - Inicio de la Revolución 3,960 de Khomeini 80,000 4,000 Comienza Guerra 3,327 70,000 3,215 Irán-Iraq 3,500 60,000 3,000 54,201 50,000 2,500 Invasión Iraq a Kuwait Guerra del Golfo 40,000 2,000 1,913 30,000 1,500 1,247 20,000 1,000 10,000 500 0 0 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Export. Petroleras (Base 2009) Export. Petroleras per Cápita Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

The economic outcome of 2009 was quite similar to the one registered in the first five years of Chavez, but with significantly higher oil revenues Promedios Promedio PIB PIB PC INF VZLA INF USA Devaluación Oil Exports Oil Exp. per Cap. Presidente Período (%) (%) (%) (%) Oficial (%) US$ 2009 US$ 2009 Betancourt 1959-1963 6.6% 2.7% 1.6% 1.2% 0.0% 15,696 1,996 Leoni 1964-1968 5.4% 1.9% 1.4% 2.6% 7.6% 15,943 1,701 Caldera I 1969-1973 5.0% 1.6% 3.0% 5.0% -0.7% 16,397 1,469 Pérez I 1974-1978 6.0% 2.3% 8.2% 8.0% 0.0% 36,731 2,807 Herrera 1979-1983 -1.2% -3.9% 13.2% 8.9% 0.0% 41,286 2,679 Lusinchi 1984-1988 3.4% 0.8% 18.4% 3.5% 33.6% 21,727 1,248 Pérez II * 1989-1993 3.0% 0.5% 45.8% 4.1% 59.7% 19,761 992 Caldera 1994-1998 1.6% -0.6% 61.3% 2.4% 42.7% 21,521 962 Chávez I 1999-2003 -3.3% -5.2% 21.2% 2.4% 25.9% 45% 28,339 1,146 Chávez II 2004-2008 10.5% 8.7% 21.1% 3.6% 6.4% 16% 64,234 2,366 Chávez 2009 -3.3% -4.9% 26.9% 2.8% 76.0% 41% 54,201 1,913 Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

In 2009 the government faced the oil shortfall with a policy-mix comprising a significant loss of international reserves: US$10.262 million Reserva Internacionales (BCV + FEM) 45.000 40.000 35.000 (MM USD) 30.000 25.000 20.000 In 2010 (Jan-Apr) an additional US$4.500 loss in RIN ocurred, due to the transfer of US$5.000 15.000 million to FONDEN 10.000 mar- may- mar- may- ago-98 oct-99 dic-00 jul-01 abr-03 nov-03 jun-04 ago-05 oct-06 dic-07 jul-08 Abril feb-02 feb-09 ene-98 sep-02 ene-05 sep-09 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

International reserves and FONDEN funds burnt in order to avoid a larger fall in imports and provide support to the parallel market Balanza de Pagos 2009 57.595 38.442 (4.939) USD Millones 10.592 18.124 (9.023) Var. Activos 4.783 Exportaciones Importaciones Errores Públicos Inversión Servicios/ Otros Var. Activos Variación de (20.000) Privados Reservas (10.262) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

By year-end 2009 it was already obvious that the parallel market was demanding a increasingly (unsustainable) large amount of foreign currency Fuga de Capitales (Millones de Dólares, 2000-2009) 30.000 24.415 25.000 21.589 20.000 17.002 15.000 11.738 9.403 9.841 10.000 8.797 7.364 6.118 5.000 3.783 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV, Cálculos Propios Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

The government also increased external debt by 27% (US$12.400 million) … Deuda Externa (2008-2009 - Miles de millones de dólares) 4.0 58.9 20.0 16.6 46.5 34.9 29.9 2008 31/10/2009 Gobierno Central Fondo Chino PDVSA Total Deuda Externo Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Consolidated public sector debt grew by US$14.974 million, reaching Debt-to-GDP levels of 50%-58% - The major leagues of debt! Deuda pública (USD Millones) 70.000 Deuda Ext. / PIB 2008 2009 61.626 Total Promedio 60.000 @ Oficial (2.6) 2008-2009 32,10% 14%32,10% 20% @ Oficial (4.3) 2007-2009 58,25% 14% 25,80% 33% @ Paralelo 2001-2009 137,55% 35%11,42% 50% 50.000 @ M2/RIN116,57% 31% 1998-2009 7,28% 58% 46.652 38.942 40.000 30.534 28.705 28.455 29.067 28.853 28.138 30.000 27.702 26.598 26.104 25.942 20.000 10.000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Internal debt was heavily, growing 61% nominal and 25% in real terms, taking total debt-to-GDP ratios to 57%-64% Deuda Interna Nominal y Ajustada por Inflación (Millones de VEF nominales, y de 1998) Deuda Total / PIB 2008 2009 @ Oficial (2.6) 19% 23% 49.072 @ Oficial (4.3) 19% 40% @ Paralelo 39% 57% @ M2/RIN 35% 64% 36.221 35.991 33.712 29.802 30.515 24.049 16.189 11.000 7.250 3.827 8.930 2.530 9.450 9.825 9.711 7.240 7.198 8.086 5.811 5.329 4.655 2.530 3.185 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Acum Sep09 Fuente: Ministerio de Finanzas Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Over the course of 2009 CADIVI also reduced its allotments of foreign currency at the official rate by 42% Entrega Diaria Promedio de Dólares por el BCV (Millones de Dólares) 250,00 Ene05 - Dic09 Media Movil 6 Meses - BCV Media Movil 6 Meses - CADIVI 200,00 Liquidación de Divisas BCV Autorización de Divisas CADIVI 150,00 100,00 50,00 - Ene-05 Ene-06 Ene-07 Ene-08 Ene-09 Abr-05 Jul-05 Oct-05 Abr-06 Jul-06 Oct-06 Abr-07 Jul-07 Oct-07 Abr-08 Jul-08 Oct-08 Abr-09 Jul-09 Oct-09 Fuente: CADIVI Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Lower foreign currency allotments at the official rates resulted in a 22% decrease in imports (significantly lower than the fall in exports) Importaciones (Dólares, 1998 - 2009) 49.482 50.000 46.031 45.000 First half 2009: -5% 40.000 38.442 Second half 2009:-22% 35.000 33.583 30.000 24.008 25.000 19.211 20.000 16.865 17.021 15.105 15.000 13.213 13.360 10.483 10.000 5.000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

GDP dropped by 3.3%, three times more than world average and almost twice the Latin American average (negative) growth rate Variación Anual PIB (%) (1989 - 2009) 20,00% 18,29% 15,00% 10,32% 9,73% 9,87% 10,00% 8,15% 6,47% 6,06% 6,37% 4,78% 5,00% 3,95% 3,24% 2,79% 0,28% 0,17% 0,00% -0,20% -2,35% -5,00% -3,29% -6,09% -10,00% -9,40% -8,88% -9,24% -15,00% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

GDP per capita fell 5.07% - By year-end 2009 it was 9.05% above 1998 levels (a compounded annual growth rate of just 0.79%) Producto Interno Bruto per Capita (Miles de bolívares 1997, 1998-2009) 2.500.000 2.078.963 1.892.813 1.877.691 1.809.900 1.740.817 1.973.630 2.000.000 1.661.542 1.712.555 1.689.168 1.609.146 1.533.471 1.500.000 1.385.946 1.000.000 500.000 - 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

GDP by sector: Mining (-11%), Retail (-8%), Transport (-9%), Manufacturing (- 6%), Oil (-7%) and Banking and Insurance (-2%) got the worst of the crisis… Crecimiento del PIB 2008/2009 por actividades económicas 4,78% CONSOLIDADO -3,29% 2008 2009 2,45% ACTIVIDAD PETROLERA -7,22% 5,13% ACTIVIDAD NO PETROLERA -2,04% -4,21% Minería -11,19% Manufactura -6,37% 1,43% 5,68% Electricidad y Agua 4,25% 3,72% Construcción 0,17% Comercio -8,33% 4,64% Transporte y Almacenamiento 3,80% -8,52% 18,17% Comunicaciones 9,82% -4,63% Instituciones Financieras y Seguros -2,37% Bienes Inm. y Serv. 2,66% -2,04% 9,50% Serv. Com, Soc. y Pers 3,10% Produc. Servicios del Gobierno General 5,34% 2,41% 5,59% Resto 1/ -0,30% Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

In manufacturing in particular, there are certain sub-sectors production falling at astonishing rates 19%-39%! (still without adjusting for public-private differences) Indice de Producción M anufacturera (Volumen) Muebles, industria y manufactura -11.2% 8.3% 08/09 vehiculos automotores -3.3% -10.1% 07/08 Maquinaria y aparatos eléctricos 0.7% -6.2% Maquinaria y equipo -16.3% 5.6% Productos de Metal -18.3% -5.7% Metale Comunes -38.7% -10.5% Productos minerales no metálico -37.4% 4.1% Productos de caucho y plástico -19.4% -2.9% Sustancias y productos químicos -5.0% -1.4% Edición, impresión y reproducción de grabaciones -9.1% 4.8% Papel y derivados 4.5% 14.1% Madera, Corcho, etc. -24.9% 5.3% Curtido y adobo de cueros, talabartería y calzado -19.0% 12.1% Prendas de vestir, adobo y teñido de pieles -19.7% 13.8% Prod. Textiles -6.0% -3.8% Alimentos, bebidas y tabaco -2.7% 4.1% General -11.9% 1.4% -50% -40% -30% -20% -10% 0% 10% 20% Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

When public vs. Private GDP evolution is considered, it appears a clear trend of institutional change in the ownership of production Crecimiento PIB Público y Privado (IT2000 - IVT2009) 40% Publico Privado 30% 20% -0,31% 10% 0% -10% -6,99% -20% -30% -40% 1Q 00 3Q 00 1Q 01 3Q 01 1Q 02 3Q 02 1Q 03 3Q 03 1Q 04 3Q 04 1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

According to the Central Bank, sales volume at retail level fell 11% in 2009 Indice de volumen de ventas (1997=100) 300 40% General 34,69% Comercio al por mayor 34,10% 30% Comercio al por me nor 250 29,39% Crec. Indice General 27,11% 20% 200 7,97% 10,51% 10% 150 5,38% 0% -10% 100 -16,31% -11,09% -20% 50 -22,02% -30% 0 -40% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

As imports plummeted 22%, the rate of growth in consumption came down (%2.2%) and aligned with the rate of growth in GDP (-3.3%) Consumo Total (Miles de Bolívares 1997, 1998-2009) 60.000.000 Público Privado Total 2008-2009 2,3% -3,2% -2,2% 2007-2008 6,7% 7,1% 7,0% 50.000.000 2006-2007 6,1% 18,7% 16,2% 40.000.000 30.000.000 20.000.000 10.000.000 - 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Consumption per capita fell 4.0% - By year-end 2009 it was 49.1% above 1998 levels (a compounded annual growth rate of 3.66%!) Consumo Total per capita (Miles de Bolívares 1997, 1998-2009) 2.000.000 1.800.000 Per Capita 2008-2009 -4,0% 1.600.000 2007-2008 13,1% 2006-2007 6,6% 1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Consumption is another variable were institutional differences have become significant: Public: +2.3%, Private: -3,2% Consumo (Var % Anual) 25,0% 20,0% 15,0% 10,0% 5,0% 2,3% 0,0% -5,0% -3,2% -10,0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Consumo Privado Consumo Público Consumo Total Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

The downward trend in consumption is better seen at a quarterly level: In 4Q 2009 private consumption fell by 6.7% Consumo (Var % Anual) 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% Público Privado Total Per Capita -5,00% 2005-2006 12,9% 16,3% 15,5% 14,3% 2006-2007 6,2% 17,6% 15,1% 15,1% 2007-2008 6,5% 4,8% 5,1% 1,9% 2008-2009 2,1% -6,7% -5,0% -6,7% -10,00% IV-03 I-04 IV-04 I-05 IV-05 I-06 IV-06 I-07 IV-07 I-08 IV-08 I-09 IV-09 II-04 II-05 II-06 II-07 II-08 II-09 III-04 III-05 III-06 III-07 III-08 III-09 Consumo Privado Consumo Público Consumo Total Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Real average salaries have been falling steadily since the first quarter 2008, either for public or private employees (public slope is steeper!) Indice de Salarios Reales (1998=100) 1,3 Ge ne ral Privado Público 1,2 1,1 Indice 1,0 0,9 0,8 0,7 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I 2008-I 2009-I 1998-III 1999-III 2000-III 2001-III 2002-III 2003-III 2004-III 2005-III 2006-III 2007-III 2008-III 2009-III Fuente: BVC Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

2009 in brief: I don’t think we are in Kansas anymore In spite of the large amount of foreign currency burnt either in international reserves (US$10.262 MM), increased net external debt (14.974 MM), the parallel market depreciated 41% on average (against 2008) As it became impossible to sustain the level of imports (-22%), the decrease in consumption per capita (4.1%) aligned with production per capita (-5.1%), with average inflation on the range of 27-35% Institutional differences either at GDP or consumption level became quite important, with the private sector getting the worst out of the adjustment (particularly manufacturing) Capital outflows (US$24.415 MM) registered are the largest since Luis Herrera Campins government (19798-1983) The government induced a depreciation of the average exchange rate by forcing 42% of official dollars previously allocated out of CADIVI (anticipating somehow the effects of the devaluation occurred in January 2010) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Between Jan-Apr 2010 there were both large devaluation (+/- 65%) of the official rate and depreciation (32%) of the parallel market rate Tasa de Cambio Oficial y Paralela (Ene 2000 - Abril 2010) 10,00 9,00 8,67 8,00 7,00 7,09 6,00 5,00 4,30 4,00 3,00 2,00 1,00 0,00 ene-00 jul-00 ene-01 jul-01 ene-02 jul-02 ene-03 jul-03 ene-04 jul-04 ene-05 jul-05 ene-06 jul-06 ene-07 jul-07 ene-08 jul-08 ene-09 jul-09 ene-10 Fuente: BCV Oficial No Oficial M2/RIN Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Still the BSF at the official rate remains highly overvalued, with the parallel market rate (7.1) close to equilibrium Tasa de Cambio (Ene 2000 - Abr 2010) 9 8,41 8 7,63 7 7,09 6 6,88 5 4,30 4 3 2 1 0 m ay-00 m ay-01 m ay-02 m ay-03 m ay-04 m ay-05 m ay-06 m ay-07 m ay-08 m ay-09 ene-00 sep-00 ene-01 sep-01 ene-02 sep-02 ene-03 sep-03 ene-04 sep-04 ene-05 sep-05 ene-06 sep-06 ene-07 sep-07 ene-08 sep-08 ene-09 sep-09 ene-10 Oficial Mercado Paralelo PPP IPC (1990=100) M2/RIN PPP - IPM (1990=100) Fuente: BCV, Cálculos Propios Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Still the BSF at the official rate remains highly overvalued, with the parallel market rate (7.1) close to equilibrium Tasa de Cambio Real Enero 1990 - Abril 2010 (IPC - Ene 1990 = Jul 1994 = May 1996 =100%) 150% 130% 110% RER = 100% 90% 70% 93,0% 56,4% 50% 30% ene-90 dic-90 oct-92 sep-93 ago-94 jul-95 jun-96 may-97 abr-98 mar-99 feb-00 ene-01 dic-01 oct-03 sep-04 ago-05 jul-06 jun-07 may-08 abr-09 mar-10 nov-91 RER Oficial RER 100% nov-02 RER Paralelo Fuente: BCV, Cálculos Propios Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Depreciation and acceleration of inflation occurred even though liquidity has grown at moderate levels, either in 2009 (22%) or in Jan-April 2010 (+2.0%) Liquidez - M2 (MMM VEF) 300 Tasas de Crecimiento M2: 2003: 58% 238,4 250 2004: 48% 2005: 52% 2006: 70% 200 2007: 29% 2008: 25% 2009: 22% 141,5 150 2010: 2,0% 73,1 100 23,8 50 0 abr-02 jul-02 oct-02 abr-03 jul-03 oct-03 abr-04 jul-04 oct-04 abr-05 jul-05 oct-05 abr-06 jul-06 oct-06 abr-07 jul-07 oct-07 abr-08 jul-08 oct-08 abr-09 jul-09 oct-09 abr-10 ene-02 ene-03 ene-04 ene-05 ene-06 ene-07 ene-08 ene-09 ene-10 Monedas y Billetes Depositos Cuasidinero Liquidez Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Inflation resume at an accelerated pace in April: 5,1% variation at consumer price index and 11,0% in food and beverages! Indices de Precios Anualizado Aréa Metropolitana de Caracas 80% (Ene- 02 - Abr - 10) 70% IPC IPM Nucleo Alimentos 60% 50% 41,06% 40% 32,74% 30% 31,69% 29,08% 20% 10% may- may- may- may- may- may- may- may- sep-02 sep-03 sep-04 sep-05 sep-06 sep-07 sep-08 sep-09 ene-02 ene-03 ene-04 ene-05 ene-06 ene-07 ene-08 ene-09 ene-10 Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Price variations by sector display a large volatility (4% - 52%) VARIACION ANUALIZADA dic-07 dic-08 dic-09 ene-10 feb-10 mar-10 abr-10 INDICE GENERAL 22,55% 31,86% 26,81% 26,81% 26,94% 28,06% 31,69% Alimentos y bebidas no alcohólicas 30,91% 46,67% 20,38% 19,80% 21,00% 25,72% 41,29% Bebidas alcohólicas y tabacos 78,13% 28,30% 47,56% 52,73% 57,89% 53,80% 51,26% Vestido y calzado 18,90% 18,73% 21,90% 22,39% 22,51% 22,15% 20,60% Alquiler de vivienda 5,64% 7,22% 16,17% 16,98% 16,74% 16,05% 16,74% Servicios de la vivienda excepto teléfono 1,90% 5,50% 3,85% 3,54% 4,37% 4,47% 4,26% Equipamiento del hogar 22,31% 34,62% 39,06% 38,11% 30,40% 39,01% 38,46% Salud 28,32% 36,95% 34,09% 31,80% 30,40% 27,52% 27,15% Transporte 17,77% 29,88% 30,62% 30,75% 31,39% 31,01% 30,64% Comunicaciones -5,70% 7,29% 9,65% 11,62% 10,84% 10,51% 6,99% Esparcimiento y cultura 16,82% 25,07% 26,90% 27,39% 29,15% 31,33% 32,35% Servicio de educación 7,25% 28,58% 29,22% 31,74% 31,22% 27,64% 25,88% Restaurantes y hoteles 42,76% 49,76% 33,54% 31,60% 32,24% 32,50% 33,80% Bienes y servicios diversos 25,02% 37,76% 50,84% 52,02% 52,61% 48,65% 42,60% Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

What had happened with CADIVI in 1Q 2010? Official figures have not been published yet A press release was issued stating that over the first quarter 2010: Vs. 1Q 2009 Total foreign exchange assigned at official rates fell 12% Foreign exchange approved for imports grew 11% Foreign exchange approved for travelling fell by 85% Total amount approved to travel agencies to pay commitments in foreign exchange grew 39% Assignment of foreign exchange for remittances fell 39% There is a portfolio re-composition/rebalancing within CADIVI Increased assignments for imports even at a scenario with a large GDP fall, signals the intention of the government to avoid a large fall in consumption per capita Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

What else have happened in 1Q 2010? A summary Even though the official figures have not been published yet, there are talks of yet another large fall in GDP volume (6%-8%) It is hard to measure the specific impact of the energy crises, but the fact is that it has been (and will be) a strong (negative) influence on GDP in the years to come Consumption may have fall a little less (3%-5%) due to increased imports Inflation sky-rocketed in April, with some delay as related to the devaluation implemented in January (controlled prices were allowed to “adjust” in April) Government spending (measured by liquidity) has kept the low pace characteristic of first quarters: +2.0% (in nominal terms!) Large depreciation of the BSF in the parallel exchange rate market (32%) has occurred in spite of no-liquidity growth (lower demand for BSF?) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Exchange rate arrangement: What is going on? The specifics On May 11 new modifications to the exchange rate regime were introduced According to the text of the law the buying and selling of foreign currency, either in cash or through financial instruments, is going to be an exclusive responsibility of the Central Bank Large penalties were incorporated such as: Buying/selling between US$10,000 and US$20,000 in the course of a year without the approval of the Central Bank will be penalized with a fine equivalent to twice the amount of the transactions – plus the amount of US$ bought/sold has to be rendered at the Central Bank Buying/selling more than US$20,000 in the course of a year without the approval of the Central Bank will be penalized same as previous one + 2-6 years in prison With Venezuelan oil price averaging 72$ per barrel… What is going on? Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Some possible explanations: “It was all a big lie” (Bernie Madoff) 2006 2007 2008 2009 Oil Exports (US$ million, BCV) 57.972 62.640 89.128 54.201 Average Oil Price Venezuela 56,4 64,7 86,5 57,0 (US$ per barrel, MENPET) Implicit Volume Exports (MBD) 2,82 2,65 2,82 2,60 Domestic Consumption (MBD) 0,6 0,6 0,6 0,6 Total Oil Production (MBD) 3,42 3,25 3,40 3,20 ? According to international sources (OPEP) the Venezuelan total production volume has been around 2.2 – 2.6 MBD Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

The reserve account: How over-estimated are the Venezuelan oil exports? 2006 2007 2008 2008 Total Production (OPEP - MBD) 2,7 2,4 2,4 2,3 Oil-derived Products not reported 0,3 0,3 0,3 0,3 by OPEP volumes Total Production: OPEP + Derived 3,0 2,7 2,7 2,6 Domestic Consumption (MBD) (0,6) (0,6) (0,6) (0,6) Available to Export (MBD) 2,4 2,1 2,1 2,0 Average Oil Price Venezuela 56,4 64,7 86,5 57,0 (US$ per barrel, MENPET) Maximum Oil Exports (MM US$) 49.406 49.593 66.302 41.610 Oil Exports (US$ MM, BCV) 57.972 62.640 89.128 54.201 Over-estimation of oil exports 8.566 13.047 22.826 12.591 (MM US$) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

It is not a good time either to issue debt in foreign currency (the Venezuelan premium is at 9.87%, though this has not deter them in the past!) Desempeño de la Prima por Riesgo de Latinoamerica Puntos Básicos 2,000 1,800 1,600 1,400 1,200 987 points 1,000 800 600 400 Latin America 200 0 e-09 f-09 a-09 j-09 j-09 a-09 s-09 e-10 f-10 a-10 d-08 m-09 m-09 o-09 n-09 d-09 m-10 Argentina Brasil Colombia Venezuela Chile Latam Mexico Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Insurance against a Venezuelan default (Credit default swaps, 5 years) is the most expensive in Latin America (9.83%) CDS LATAM (5 Years) 4500 Venezuela Chile Brasil Colombia Argentina 4000 3500 3000 Puntos Básicos 2500 2000 1500 983 points 1000 500 0 Jan-09 Apr-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Apr-10 Feb-09 Mar-09 May-09 Jun-09 Feb-10 Mar-10 May-10 Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

It seems early to take a position on how it is going to work: In a typical Venezuelan fashion, it can be anything! Option A The socialist-police way: Consequences/Risks: The Central Bank becomes the CADIVI BSF in the black-market will suffer a of the parallel market large depreciation to compensate for risk A third rate is created within the Illegal-black market would be very tight exchange control system, with restricted due to US and global practices against access money-laundering A fourth exchange rate, in a parallel Prices may be set at black-market rate, (black-illegal) market will arise, with a fueling inflation large risk-premium over the previous One control will lead to another… one, proportional to the penalties An “exchange police” will prosecute and Uncertainty: arrest people trading in the black-market, How much access to foreign currency at in order to signal the “seriousness of the the “permuta” BCV rate? Criteria? threat”, but in the medium term the market will stabilize and survive What would be that rate? Black-market? (information era) People not allowed into BCV-permuta: Lose value of BSF assets or run the risk of going into prison? (Corralito) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

It seems early to take a position on how it is going to work: In a typical Venezuelan fashion, it can be anything! Option B The practical way: Consequences/Risks: The Central Bank administers a third BSF may appreciate in the short-term rate (2.60 and 4.30 remain), that will This is equivalent to rising the exchange- be flexible, available to anyone who rate control, discouraging the demand of wishes to buy-sell foreign currency US$ through threats (there always exist the possibility of the government It implies rising the exchange-control inquiring why are you buying “so much” on that rate, and the Central Bank foreign currency and where is it going?) will have to defend the rate (using international reserves) and assume any exchange rate movement Uncertainty: (depreciation/appreciation) with no chance of blaming others For how long could this work? Any appreciation is unlikely to be Market will gain in “transparency” sustained because the arrangement is not and may lose operational risk changing drivers of supply-and-demand premium in the short-term How much reserves is the Central Bank willing to burn to defend this rate? Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

A few things that appear to be clear… Any arrangement considered will not change the drivers of demand (negative interest rates, threats and uncertainty as related to private property) and supply (the suppliers of foreign currency are either the oil sector of further debt) The proposed reform implies more control, and that is highly unlikely to produce an appreciation of the exchange rate… In any case, any sudden appreciation of the BSF due to increased “openness” (seems unlikely) will be short-lived, and the government will have in the short to medium-term to move back to changing supply-and-demand drivers (seems too late for Chávez to reinvent himself) or move to the socialist-police control of the market It is unlikely that they move the permuta-market to the Central Bank with the intention of increasing the supply of foreign currency, but you never know… The Central Bank does not seem to have much fuel to support demand of foreign currency and avoid losing face because of depreciation… And it does not seem too willing to accept depreciation of a BCV-administered exchange rate… Public expenditure in an electoral year will have an effect on liquidity… And then? Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

The analyst forecast implies an average basket for Venezuelan oil of US$73-77 per barrel for the rest of 2010… Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Even in the case of a decrease in oil volumes, the price-effect (72-74 against 57) will prevail, producing (theoretically) US$70,000 MM in exports (+20%) Producto Interno Bruto (Var % Anual) 20,00% 16,1% 13,7% 15,00% 12,2% 10,9% 9,6% 10,00% 5,1% 4,2% 4,0% 5,00% 2,3% 2,5% 0,3%-0,1% 0,00% -0,9% -1,5% -1,9% -2,0% -2,0% -5,00% -3,8% -4,2% -6,0% -6,9% -7,4% -7,2% -10,00% -15,00% -14,2% -20,00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 PIB Petrolero PIB No Petrolero PIB Total Fuente: BCV Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Forecast: The Venezuelan Consensus Balance del Gobierno Var% Consumo Var% Formaciòn Var% PIB %Desempleo Central Inflación (%) Tasas de Interés (%) Privado Bruta de Capital Fijo (%PIB) Compañía 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 AGV -3,80 0,50 - - - - 8,00 8,50 0,00 -1,10 42,40 28,20 15,50 15,00 Banco Federal -1,00 0,50 - - - - 12,00 13,00 - - 38,00 42,00 17,00 20,00 Banco Mercantil -2,40 0,80 -0,80 2,60 -12,00 -3,90 9,20 9,90 -0,50 -1,70 25,10 24,20 14,80 15,70 Banesco Banco Universal 0,90 1,00 1,60 2,40 1,80 3,00 8,60 - - - 38,60 25,80 15,20 15,00 BBVA Banco Provincial -2,50 0,60 0,10 1,60 -1,30 1,00 9,50 10,20 -4,10 -5,50 32,80 28,10 13,50 13,50 Ecoanalítica -1,30 2,50 -2,60 2,80 0,00 4,20 9,00 8,90 - - 33,50 31,70 14,00 15,00 Santander Investment 3,90 0,40 6,60 0,50 1,30 0,40 8,40 8,20 - - 25,10 21,60 - - BofA Merrill Lynch -1,00 2,40 -0,60 4,40 -0,30 0,60 9,40 9,50 -0,30 -2,20 32,90 23,00 - - Citigroup Global Markets Inc. -1,70 0,50 1,70 -1,10 -7,80 -1,50 5,70 5,80 0,40 0,10 36,00 32,00 16,20 20,00 Credit Suisse -2,00 0,00 - - -6,80 -0,80 7,50 7,50 - - 31,20 38,70 - - Deutsche Bank 0,20 1,80 - - - - 8,00 8,00 -2,50 -2,30 33,00 29,00 - - Goldman Sachs 0,70 2,40 - - - - - - -3,80 -4,00 29,80 24,00 11,00 10,00 HSBC -2,30 1,90 -3,80 1,80 -10,20 4,80 8,90 8,60 - - 37,10 30,00 - - JPMorgan -1,50 2,50 1,00 3,60 - - - - -1,50 -3,50 35,00 40,00 15,00 15,00 Morgan Stanley 0,30 3,50 - - - - - - -3,20 -2,00 45,00 38,50 20,00 20,00 Multus Consulting -3,70 - -4,30 - -13,00 - 8,20 - - - 40,30 - 14,00 - RBC Capital Markets 1,50 3,00 - - - - - - -4,20 -3,50 22,00 20,00 16,00 20,00 RG BS&E -4,20 - - - - - - - - - 33,00 - - - Scotiabank Group -0,50 - - - - - - - - - 30,00 - - - UBS -3,00 -5,00 - - - - 8,00 - -4,60 -1,00 35,00 50,00 - - Media -1,17 1,14 -0,11 2,07 -4,83 0,87 8,60 8,92 -2,21 -2,43 33,79 30,99 15,18 16,29 Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Forecast: The Venezuelan Consensus Tipo de Cambio Cuenta Corriente Balanza Comercial Exportaciones Importaciones Reservas Internacionales (VEF/USD) (USD MMM) (USD MMM) (USD MMM) (USD MMM) (USD MMM) Compañía 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 AGV 4,3 4,3 25,5 20,5 36,10 29,80 73,50 73,10 37,40 43,30 28,50 23,30 Banco Federal 4,3 5,2 - - - - - - - - 36,90 37,50 Banco Mercantil 4,3 4,3 26,2 31 36,40 39,80 70,50 73,70 34,10 33,90 35,80 35,10 Banesco Banco Universal 4,30 - 20,40 - 32,90 - 75,20 - 42,30 - 36,20 - BBVA Banco Provincial 4,3 4,3 14,9 20,2 24,10 29,20 66,80 73,70 42,70 44,50 21,60 21,20 Ecoanalítica 4,3 4,3 21,5 13,4 25,30 19,40 64,30 63,00 39,00 43,60 33,30 27,30 Santander Investment 4,3 4,3 8,7 10,8 15,40 19,10 64,10 67,00 48,70 47,90 - - BofA Merrill Lynch 4,3 4,3 19,1 18,5 - - - - - - 26,90 28,30 Citigroup Global Markets Inc. 4,3 4,3 17,2 16,5 27,70 27,10 68,30 68,20 40,60 41,10 35,40 35,00 Credit Suisse 4,3 4,3 22,6 20,5 - - - - - - 30,00 25,00 Deutsche Bank 4,3 5 6,2 7,3 - - - - - - 35,00 35,00 Goldman Sachs 4,3 5 9,6 6,3 20,20 16,70 65,80 67,30 45,70 50,60 29,00 27,50 HSBC 4,3 4,3 24,1 28,7 28,90 34,30 65,40 73,20 36,50 38,90 35,40 40,00 JPMorgan 4,3 5,5 24,7 25,1 34,40 36,30 77,50 84,90 43,10 48,60 - - Morgan Stanley 4,3 4,3 33,5 29,1 40,70 40,20 - - - - 28,00 28,00 Multus Consulting 4,3 - 22,9 - 29,90 - 64,00 - 34,10 - 32,00 - RBC Capital Markets 4,3 4,3 14,4 20,5 - - - - - - - - RG BS&E 4,3 - 10,5 - 15,90 - 56,20 - 40,40 - 37,50 - Scotiabank Group - - - - - - - - - - - - UBS - - 14,2 - - - - - - - - - Media 4,30 4,53 18,68 19,17 28,30 29,19 67,63 71,57 40,38 43,60 32,10 30,27 Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Forecast Concern: Why are we having so much trouble with oil at 72? Venezuela is experiencing a lot more trouble than what US$72 per barrel would imply With the information available (not considering the Bernie Madoff effect), GDP forecast would be negative 2%-3%, with consumption falling a bit less than that (without investment there is no room for long-term growth) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

What have the government’s policies done to put the country on a sustainable path towards growth, quality-employment and stability? Ranking (1 is the best) 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 Voice and accountability 85 91 114 128 145 145 144 148 145 146 Political Stability; no violence 142 126 131 164 175 183 180 184 184 184 Government Effectiveness 156 125 147 174 174 174 161 170 177 176 Regulatory Quality 113 114 131 135 168 168 183 188 197 198 Rule of law 119 135 147 170 184 184 191 199 204 204 Control of corruption 113 154 130 165 178 178 173 199 187 189 Number of countries in the study 194 199 200 201 201 208 208 209 209 209 # of countries in Period Insttution Ranking the study Country risk (mín = 0; máx =100) 2009 Economist Intelligence Unit 76 158 Competitivess 2009-2010 World Economic Forum 113 133 Hiring workers 2010 World Bank 181 183 Investment protection 2010 World Bank 178 209 Competitiveness 2009 IMD 57 57 Political stability 2009-2010 Economist Intelligence Unit 136 165 Economic freedom 2009 Heritage Foundation / Wall St. Journal 174 179 Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

The results: Net foreign investment has been significantly lower than the size of our economy would imply (even more: is negative!) Country 2001 2002 2003 2004 2005 2006 2007 2008 Argentina 2.005 2.776 878 3.449 3.954 3.099 4.969 7.502 Brazil 24.715 14.108 9.894 8.339 12.550 -9.380 27.518 24.601 Chile 2.590 2.207 2.701 5.610 4.801 4.556 9.568 9.896 Colombia 2.526 1.277 783 2.873 5.590 5.558 8.136 8.346 Costa Rica 451 625 548 733 904 1.371 1.634 2.015 El Salvador 289 496 123 366 398 268 1.408 719 Mexico 23.045 22.158 15.184 19.249 15.503 13.670 19.272 21.795 Panama 467 99 818 1.019 918 2.498 1.907 2.402 Peru 1.070 2.156 1.275 1.599 2.579 3.467 5.425 4.079 Dominican Republic 1.079 917 613 909 1.123 1.528 1.579 2.885 Trinidad and Tobago 685 684 583 973 599 513 830 1.638 Uruguay 291 180 401 315 811 1.495 1.139 2.049 Venezuela 3.479 -244 722 864 1.422 -2.666 978 -923 Latin America 66.122 50.504 37.806 49.725 54.741 30.874 88.960 92.849 Venezuela* 3.901 2.980 2.230 2.934 3.230 1.821 5.248 5.478 Source: UN Economic Commission for Latin America and the Caribbean (ECLAC) Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

Forecast Concern: Why are we having so much trouble with oil at 72? Venezuela is experiencing a lot more trouble than what US$72 per barrel would imply With the information available (not considering the Bernie Madoff effect), GDP forecast would be negative 2%-3%, with consumption falling a bit less than that (without investment there is no room for long-term growth) Liquidity will expand 30%-35% (2% up to April), fueling an inflation rate of 35%-40% Salaries (10%+15%) will lag inflation, affecting purchasing power of Venezuelan workers (social conflict?) Most forecasts rely on the assumption that common-sense prevails (not for long!) and the BCV-permuta market remains open to anyone who whishes to buy or sale Forecast also rely on the supply of energy: Any large energy break-down may have effects that is hard to quantify / impossible to forecast As the government steeps-up spending, the restriction will move from demand to supply: The production response will depend on the status of labor conflicts (pending a possible reduction of labor hours per week) and foreign currency available to import There seems to be a lot more downside than upside in this forecast Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

GRACIAS! www.miguelangelsantos.blogspot.com Twitter: @miguelsantos12 miguel.santos@iesa.edu.ve Venezuela Macroeconomic Outlook, May 2010 - © Miguel Ángel Santos

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Venezuelan Macroeconomic Outlook (Updated, May 2010)

by Miguel Santos on May 12, 2010

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Venezuelan Macroeconomic Outlook (Updated, May 2010) — Presentation Transcript