Venezuela remains mired in a dire economic crisis due to a decade of mismanagement under socialist governments. Hyperinflation has taken hold as the government prints money to fund spending, exacerbating shortages of basic goods. While the official exchange rate remains fixed, the true market rate values the currency over 130 times lower, revealing the country's heavy reliance on imports. Unemployment is rising and a default on bonds appears increasingly likely as options run out to finance spending and repay debts.

1. VENEZUELA
Quarterly Economics Update – Q3 2015
Christian von Canstein, MSc

2. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Venezuela remains in a dire economic crisis. A decade of economic mismanagement by the Socialist governments of the late Hugo Chavez
and his successor Nicolas Maduro are the structural cause for the current downturn. While the unsustainability of the country’s economic
model had initially been concealed by high oil prices, the situation changed drastically over the past year, when oil prices tumbled by
almost 60%. As an undiversified economy, Venezuela relies disproportionally on high oil prices to fund public spending; therefore, massive
current account and fiscal budget imbalances have been revealed.
A decade of nationalizations, expropriations and onerous regulations such as price controls combined with high levels of government
intervention have taken a toll on private business and severely damaged the country’s productive capacity. In the era of high oil prices, the
gap between domestic demand and supply could still be plugged via exports, as the country received sufficient US-dollar -denominated
revenues to pay for them. In spite of this, long queues at government-owned supermarkets to buy basic goods had already become
common. Central planning’s inability to match demand with supply has led to massive shortages. This trend has been exacerbated even
more over the last year with soaring inflation as a result.
One of the main factors that prevent a rebalancing of the current account is a chronically overvalued currency which is also tightly
controlled by its government. Even though the currency has been officially devalued by almost 50% over the last five years, it still remains
completely overvalued. Estimates of its actual fair price per US Dollar fluctuate around VEF 800, 130 times the official exchange rate. This
has led to a persistent shortage in US Dollars which makes it impossible for producers to import material or capital goods that are needed
to kick-start domestic production and thus tackle the chronic supply shortages.
The security situation has deteriorated significantly, both in terms of political unrest and street crime, turning Caracas in the city with the
highest homicide rate on the entire continent (the first is San Pedro Sula, Honduras). This is likely to have a negative impact on
consumption, consumer confidence and business confidence.
2
Overview*
30/09/10 30/09/14 30/06/15 30/09/151 Year Change Estimated 2015
Real GDP Growth -0.22% -2.30% -2.30% -2.30% 0.00% -10.00%
CPI Inflation 27.92% 64.01% 68.54% 68.54% 4.53% >100%
Policy Rate 15.87% 16.97% 18.50% 19.68% 2.71%N/A
Unemployment 8.40% 7.00% 7.90% 7.90% 0.90% 14.00%
10 Year Yield 16.12% 17.54% 15.91% 15.91% -1.63%N/A
Business Loan Rate 16.36% 17.37% 19.31% 20.40% 3.03%N/A
IBVC Index 65.28 2908.99 12857.25 11872.87 8963.88N/A
Exchange Rate (VEF/USD) 4.2947 6.2921 6.2921 6.2921 0.00 800
* Reflects the latest data available as at 30/09/2015; Venezuela’s Central Bank has selectively stopped publishing
macroeconomic statistics. 2015 estimates from the IMF (GDP Growth and Inflation), The Economist (Unemployment) and
Dolar Today (Exchange Rate VEF/USD).

3. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Real GDP Growth (annualized)*
With at least three quarters of negative economic growth, the
country’s economy is expected to contract by up to 10% this year,
based on recent IMF estimates.
This would make it by far the weakest performing economy in the
whole of Latin America. Other countries in the region that are also
going through slowdown such as Argentina and Chile are still
expected to see some moderate growth this year.
Oil prices obviously play an important role, as 96% of export
revenues come from oil which also constitutes 40% of government
revenues and 11% of GDP.
Still, most Latin American countries rely disproportionately on
commodity exports without going through such a severe
recession. Neighboring Colombia, another major oil exporter, is
even expected to grow by 2.5% - 3% this year.
Venezuela’s economy is mainly suffering from the impact of
increasing state control and interventionism in form of price
controls, profit caps and labor market regulations that have been
crowding out the private sector. Compared to Colombia, where a
free floating currency offset the fall in oil prices and created
opportunities for exporters, the Bolivar Fuerte remains overvalued
at official rates, making it hard for exporters to compete
internationally, especially when pretty much all free floating Latin
American currencies have seen double digit depreciations. At the
same time, dollar shortages have hurt all companies that rely on
imports.
In essence, Venezuela is equally affected by falling commodity
prices as its regional peers, but the bulk of its poor economic
performance can be explained by a decade of accumulated
economic mismanagement.
Venezuela remains in recession
3
*Venezuela has not published GDP growth data since Q3 2014
-0.22%
-2.30% -2.30% -2.30%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
Real GDP Growth
30/09/10
30/09/14
30/06/15
30/09/15

4. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
CPI Inflation (year on year basis)*
Venezuela has undoubtedly entered into hyperinflation, whose
threshold is often defined as more than 50% inflation in a given
year. However, the government has stopped providing inflation
data at the end of 2014. Estimates from the IMF put consumer
price inflation at 190% for this year and 210% for 2016.
There are two main causes behind the current astronomical
inflation levels.
Even when oil prices remained high, Venezuela imported twice as
much as it received in export revenues as price controls, arbitrary
expropriations and other socialist policies had gradually eroded
domestic production, making the country increasingly reliant on
imports. To fund the gap, its government compelled the central
bank to print money. As increasing amounts of money started
chasing a limited amount of goods, inflation started to pick up
steadily.
After the introduction of capital controls by the late Hugo Chavez,
US Dollars are officially only available through the government
(which receives most of the oil revenues) at heavily subsidized
rates. A net of corruption and cronyism has led to US Dollars being
allocated mainly to regime friends who tend to sell them at black
market rates at a large profit instead of expanding their inventory
and alleviating massive supply shortages. As a consequence, many
truly private companies have been unable to manage their
working capital. The result of these shortages is hyperinflation,
misallocation of capital and a severe disruption of the country’s
economy as even the most basic goods become hard to obtain and
a large part of the population has to spend long hours in queues to
do their daily grocery shopping.
A country mired in hyperinflation
4
*Venezuela has not published inflation data since Q4 2014.
27.92%
64.01%
68.54% 68.54%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
CPI Inflation
30/09/10
30/09/14
30/06/15
30/09/15

5. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Unemployment*
Unemployment remains below double digit levels based on official
figures last published in January 2015 but IMF estimates put the
actual figures as high as 14%, expected to increase to 18% next
year and 21% in 2017.
According to Venezuela’s Chamber of Commerce (Fedecameras),
an estimated 600,000 jobs have been lost over the last five years,
as capital controls, hyperinflation and government policies have
driven an estimated 7,000 companies out of business during this
period.
Even in the era of relative prosperity when oil prices were above
$100 per barrel, unemployment remained worryingly high, given
the state of the country’s economy and the performance of
regional peers.
Venezuela is gradually moving towards the soaring unemployment
rates of Southern Europe.
As the current downturn is likely to continue, one could expect
that unemployment continues its upwards trend in line with IMF
forecasts which would further exacerbate the country’s severe
social crisis.
Venezuela’s unemployment rate holds steady for now
5
*Venezuela has not published unemployment data since January 2015.
8.40%
7.00%
7.90% 7.90%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
Unemployment
30/09/10
30/09/14
30/06/15
30/09/15

6. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
10 Year Yield Government Bond Yield*
The recent rally of Venezuelan debt is not due to any
improvement in its outlook but merely reflected investors betting
on Venezuela’s willingness to meet its obligations for as long as
possible even though its ability remains questionable.
A slight recovery in oil prices raised hopes that the country might
make it into 2016 at least. With a yield of almost 16% and
assuming a coupon of 7.625%, Venezuelan bonds are priced at
around $27 to the par value, meaning that investors are clearly
pricing in a default at some stage. Implied default probability in
derivative markets are consistent with this view, suggesting a
default probability of above 70% within the next year and almost
100% within the next five years.
Given the situation Venezuela has gotten itself into, the trade-off
between using future US Dollar revenues to honor its debt or to
pay for basic goods and medicine becomes increasingly evident.
With the private sector almost destroyed, the country completely
relies on imports to feed itself. With violent crime already soaring,
the government cannot afford to see the food shortages
deteriorate even more. The estimated $15 billion left in foreign
reserves would hardly cover this year’s and next year’s maturing
bonds.
Venezuela has not been willing to enter into default so far, as its
global oil assets could be seized by foreign courts. A possible
solution to the situation would be to seek a bailout from the
International Monetary Fund (IMF). Whether the Socialist
government would be willing to implement any of the economic
reforms that would come as a condition is another question,
however.
Right now, the only certainty seems to be that bondholders are
unlikely to be repaid in par and bar an IMF program or sudden
rally in oil prices, a default in 2016 might still be on the table.
A default in 2016 remains a risk
6
*Based on IMF Data.
16.12%
17.54%
15.91% 15.91%
15.00%
15.50%
16.00%
16.50%
17.00%
17.50%
18.00%
10 Year Yield
30/09/10
30/09/14
30/06/15
30/09/15

7. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Policy Rate
Monetary conditions seem tight in Venezuela with the the policy
rate at 20.7%. In inflation-adjusted terms, however, the policy rate
remains deep in negative territory. Its impact for the real economy
seems trivial. Current hyperinflation suggests that monetary
authorities have lost control over inflation a long time ago. Given
governing Party’s track record on systematically weakening
institutions and eroding all checks and balances on executive
power, it is unlikely that its central bank can still be considered
independent. Instead it is being used to print any amount of
money the government asks for to keep it afloat, which is the
main cause of the current astronomical levels of inflation.
For a normal economy, business loan rates at these levels would
be considered fairly high but in a hyperinflationary environment,
nominal rates do not mean much, as pointed out in the paragraph
above. Credit spreads (the difference between the yield on
corporate debt and government debt which constitutes the risk
premium) should increase in theory, as many companies rely on
oil. As oil prices have been falling drastically over the last year,
their revenues can be expected to have fallen which also reduces
cash flows and net income in the sector. This would naturally
deteriorate the credit standing of such companies with exposure
to oil markets and therefore warrant a higher risk premium.
Nominal rates do certainly not compensate the investor for
inflation. This might explain the capital flight into equities which
will be further discussed on slide 9.
Interest rates in hyperinflation become meaningless
7
Business Loan Rate
15.87%
16.97%
18.50%
19.68%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Policy Rate
30/09/10
30/09/14
30/06/15
30/09/15
V
16.36%
17.37%
19.31%
20.40%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Business Loan Rate
30/09/10
30/09/14
30/06/15
30/09/15

8. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Exchange Rate (VEF/USD) – Official Rate
Venezuela currently has three fixed exchange rate systems that all
overvalue the Bolivar Fuerte to varying degrees. The only rate that
reflects reality, however, is the black market rate. According to the
Miami-based website Dolar Today which estimates the market
value of the Bolivar Fuerte through transactions in the Colombian
border town Cucuta, the implied market exchange rate is over
VEF800 per USD, or more than 130 times the controlled exchange
rate. At that rate, the current monthly minimum wage of around
VEF 7,422 would be worth only USD 9.2.
Based on these calculations, the highest denominated banknote is
worth only 13 US cents. This has made daily transactions
challenging and shortages in banknotes have started to emerge.
If liberalized, the exchange rate could on one hand help
rebalancing the economy as exports would become very
competitive at a global level. On the other hand, a massive capital
flight would likely ensue and hyperinflation would even accelerate
more if basic goods were immediately priced at actual market
rates. Due to Venezuela’s heavy reliance on imports, such a
sudden change could also lead to a complete breakdown in public
order. The recently introduced third tier SIMADI might be an
attempt to gradually move the official exchange rate closer to
market.
If hyperinflation continues at its current pace, the Bolivar Fuerte
might lose its relevance as legal tender, as people turn to parallel
currencies such as the US Dollar or the more readily available
Colombian Peso and the economy would become dollarized, as
happened in Ecuador.
The expected move of the government to introduce bills of higher
denomination instead of tackling the underlying causes of inflation
will only add more fuel to the flame. It seems that history of
hyperinflation as lived in the Weimar Republic or Zimbabwe is
about to be repeated.
The official exchange rate could not be farther from reality
8
4.2947
6.2921 6.2921 6.2921
0
1
2
3
4
5
6
7
Exchange Rate (VEF/USD)
30/09/10
30/09/14
30/06/15
30/09/15

9. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Equity Market
The IBVC Index includes the 15 most liquid and highest capitalized
stocks, trading on the Caracas stock exchange but is heavily
weighted towards two components (Banco Provincial and
Mercantil Servicios Financieros) that constitute 90% of the index.
When savers face a hyperinflationary environment, the only way
to somehow preserve capital is to either deposit holdings in a
more stable foreign currency or to invest in inflation-linked
financial assets or real assets of any kind.
As capital controls make the former option close to impossible,
Venezuelan investors’ only option left is the stock market; as
companies are assumed to have some pricing power, stocks are
expected to provide partial inflation-linkage through dividends
and exposure to the real assets of the underlying companies.
Venezuela’s apparent stock market rally (in spite of a slowdown
over the third quarter) is thus not a reflection of a strong economy
but rather the fact that equities are the only divisible asset that
can be easily bought by investors; other assets with inflation
protection such as property or land require far higher cash outlays
and are more at risk of arbitrary expropriation by Venezuela’s
government.
Capital flight into real asset boosts stock performance
9
65.28
2908.99
12857.25
11872.87
0
2000
4000
6000
8000
10000
12000
14000
IBVC Index
30/09/10
30/09/14
30/06/15
30/09/15

10. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Relevant events over the quarter
10
In an apparent move to distract from domestic problems, President Maduro had the border between Venezuela and Colombia
closed and had thousands of Colombians deported. President Maduro made unfounded claims that Colombian paramilitary forces
were de-stabilizing his country when the problem is large scale smuggling due to price controls in Venezuela that have distorted
large parts of its economy by imposing below market prices on goods such as gas. The real reason for the border closure was,
however, Venezuela’s attempt to put pressure on Colombia not to extradite two Colombian drug traffickers to the United States who
have information on the activity of Venezuela’s Cartel de los Soles which is said to include high-ranked members of Venezuela’s
military and government. Venezuela has been accused of human right violations against Colombians in the country as many who
were expelled were not given the opportunity to collect their belongings. The border closure led to a diplomatic standoff between
both countries with Colombia’s President Santos pointing out that Venezuela’s “revolution” is self-destructive and its self-inflicted
economic problems should not be blamed on Colombia.
In its most recent October global economic update, the IMF warned that Venezuela could face a contraction of up to 10% for this
year and 6% next year, making it the worst performing economy in the world. Inflation is estimated to go above 200% in the coming
year. At the same time, the IMF confirmed that over the last 15 years, Venezuela has turned from Latin America’s fourth largest
economy into its seventh largest economy after it was overtaken by Peru this year.
In the meantime, shortages for basic goods are getting worse. According to a leaked government document, there are at least 15
food items and 26 hygiene products are hardly available with 70% of the visited store being out of stock. Examples are wheat flour,
beef, milk powder and chicken as well as soap, diapers, shavers and toilet paper. At 67% of the stores visited, there were queues.
After the dramatic sentencing of opposition leader Léopoldo Lopez on politically motivated charges, Manuel Rosales, another
opposition leader, was arrested on similar dubious charges when returning from exile. Venezuela’s government was embarrassed
when one of its state attorneys, Franklin Nieves who was involved in the Lopez case fled to the United States and declared that all
the evidence against Lopez was fabricated and that Lopez was innocent.
Concerning signs that Venezuela’s government will not hold a fair and free election in December emerged when its government
refused to let observers from the Organization of American States (OAS) establish their election observation mission there. Nicolas
Maduro also stated that the “revolution” will not be surrendered and that he would win at all costs, implying that the government
might try to maintain its power by all means.

11. APPENDIX: LONG-TERM STATISTICS*
11
*Data as at 31/10/2015 but in some cases, the last data release was before then. The
actual data is always the data that was made available for the last data release.

12. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Venezuela needs high oil prices to achieve sustained economic growth
12
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
0
20
40
60
80
100
120
140
160
10/1/01
4/1/02
10/1/02
4/1/03
10/1/03
4/1/04
10/1/04
4/1/05
10/1/05
4/1/06
10/1/06
4/1/07
10/1/07
4/1/08
10/1/08
4/1/09
10/1/09
4/1/10
10/1/10
4/1/11
10/1/11
4/1/12
10/1/12
4/1/13
10/1/13
4/1/14
10/1/14
4/1/15
10/1/15
Oil Prices and GDP Growth
Oil Price (LHS)
GDP Growth (RHS)

13. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Unemployment holds steady but inflation has spiraled out of control
13
0
5
10
15
20
25
15
20
25
30
35
40
45
50
55
60
65
70
10/1/01
4/1/02
10/1/02
4/1/03
10/1/03
4/1/04
10/1/04
4/1/05
10/1/05
4/1/06
10/1/06
4/1/07
10/1/07
4/1/08
10/1/08
4/1/09
10/1/09
4/1/10
10/1/10
4/1/11
10/1/11
4/1/12
10/1/12
4/1/13
10/1/13
4/1/14
10/1/14
4/1/15
10/1/15
Inflation and Unemployment
CPI Inflation (LHS)
Unemployment (RHS)

14. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
The official exchange rate is far away from its fair market value
14
0
1
2
3
4
5
6
7
8
9
10
10/1/01
4/1/02
10/1/02
4/1/03
10/1/03
4/1/04
10/1/04
4/1/05
10/1/05
4/1/06
10/1/06
4/1/07
10/1/07
4/1/08
10/1/08
4/1/09
10/1/09
4/1/10
10/1/10
4/1/11
10/1/11
4/1/12
10/1/12
4/1/13
10/1/13
4/1/14
10/1/14
4/1/15
10/1/15
Exchange Rate (VEF/USD)
Exchange Rate (VEF/USD)

15. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
An alternative approach to calculate the exchange rate shows how weak the Bolivar Fuerte has really become
15
50
70
90
110
130
150
170
190
210
230
250
270
290
310
330
350
370
390
410
430
450
470
490
510
530
550
570
590
610
630
650
670
690
710
10/1/01
4/1/02
10/1/02
4/1/03
10/1/03
4/1/04
10/1/04
4/1/05
10/1/05
4/1/06
10/1/06
4/1/07
10/1/07
4/1/08
10/1/08
4/1/09
10/1/09
4/1/10
10/1/10
4/1/11
10/1/11
4/1/12
10/1/12
4/1/13
10/1/13
4/1/14
10/1/14
4/1/15
10/1/15
Exchange Rate (Broad Basket vs VEF)
Exchange Rate Broad Basket

16. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Markets are positioned for a possible sovereign default of Venezuela
16
11
12
13
14
15
16
17
18
19
10/1/10 4/1/11 10/1/11 4/1/12 10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15
10 Year Government Yield
10 Year Government Yield

17. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Hunt for investable assets in a hyperinflationary environment pushes Venezuelan equity markets to astronomical levels
17
0
1000
2000
3000
4000
5000
6000
10/1/02
4/1/03
10/1/03
4/1/04
10/1/04
4/1/05
10/1/05
4/1/06
10/1/06
4/1/07
10/1/07
4/1/08
10/1/08
4/1/09
10/1/09
4/1/10
10/1/10
4/1/11
10/1/11
4/1/12
10/1/12
4/1/13
10/1/13
4/1/14
10/1/14
4/1/15
10/1/15
IBVC Equity Index
IBVC Equity Index

18. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Industry is negatively affected by government intervention and exchange controls
18
-50
-30
-10
10
30
50
70
90
110
130
150
10/1/03
4/1/04
10/1/04
4/1/05
10/1/05
4/1/06
10/1/06
4/1/07
10/1/07
4/1/08
10/1/08
4/1/09
10/1/09
4/1/10
10/1/10
4/1/11
10/1/11
4/1/12
10/1/12
4/1/13
10/1/13
4/1/14
10/1/14
4/1/15
10/1/15
Industrial Production
Industrial Production

19. VENEZUELA–QUARTERLYECONOMICSUPDATE–Q32015
Contact & Disclaimer
19
In preparing this report, I have relied upon publicly available data supplied by third parties. Although reasonable care has been taken to gauge the
reliability of this data, this report carries no guarantee of the accuracy or completeness and I cannot be held accountable for misrepresentation of
data by third parties involved. This report is an opinion piece and for private information and is for discussion purpose only. This report does not
constitute financial advice and should therefore not be used as a basis to make any decisions. This report is based on data and information
available at the date of the report and takes no account of subsequent developments after that date. It may not be modified without my prior
written permission. Under no circumstances do I accept responsibility for any consequences arising from any third party relying on this report or
the opinions expressed therein. This report is not intended to form a basis of any decision by a third party to do or omit to do anything.
This report has been written in private capacity and any opinions expressed therein should not be associated in any way with my current or
previous employers or any professional organizations I belong to.
If you have any questions or comments on this report, please feel free to contact me.
Third Party sources that have been used are Banco de Venezuela and Bloomberg.
Christian von Canstein, MSc
Email: chris_canstein@hotmail.com