Moody s Caa3 / S&P SD / Fitch RD 1 Economy: Agriculture 4%, Industry 35%, Services 61%

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1 Venezuela Summary Moody s Caa3 / S&P SD / Fitch RD 1 Economy: Agriculture 4%, Industry 35%, Services 61% Venezuela has been in a state of economic, political, and social crisis for several months, crippled by a heavy debt burden, low oil prices, and a severe recession. The economy contracted more than 30% from , inflation is over 1,000%, and the scarcity of basic goods is a major problem. The government s balance sheet is extremely weak and continues to deteriorate. Venezuela has historically exhibited a strong willingness to service its debt, but liquidity has continued to deteriorate and Venezuela is currently late on interest payments. Venezuelan President Nicolás Maduro has embraced ever more radical strategies to consolidate his authority 2 despite low approval ratings and international pressure. In August, the United States issued additional sanctions against Venezuela, which prohibited US persons from dealing in new debt issued by the Venezuelan government and PDVSA, the state-owned oil company. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 1,900 2,049 2,088 2,172 2,306 2,482 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of Imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Haver Analytics, IMF, 459

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BBB+ BBB BBB- B+ B B- CCC+ CCC CCC- CC C BB+ BB- B+ B B- CCC+ CCC CCC- CC C Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Venezuela 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 460

3 Venezuela Strengths Strong Willingness to Service Debt Venezuela has historically exhibited a strong willingness to pay its government debt, continually making the necessary adjustments. In the early 2000s, oil prices dipped below US$20 per barrel for more than six months and a major strike paralyzed the state-owned oil company, Petróleos de Venezuela S.A. (PDVSA), for weeks. The government avoided default by adopting various economic measures, such as tighter capital controls and expenditure cuts, in order to continue to service its debt. Similarly, in 2009, during another period of low oil prices, the government cut expenditures by 20% in real terms and increased the value-added tax (VAT) by 300 basis points bps. 3 More recently, Venezuela has survived a greater than 50% drop in oil prices from mid-2014 to early 2016 by making difficult adjustments, such as cutting imports which has resulted in shortages of food and goods. 4 In late 2016 and early 2017 the government used some creative financial engineering to service its debt. However, in the second half of 2017 the government began to face major liquidity problems and is currently late on some interest payments. The government has sought to avoid default because the costs would be high. In a default scenario, the government would risk losing foreign assets and face risks that bondholders block export transactions. Relationship with Russia and China Venezuela continues to strengthen ties with Russia and China. Venezuela has become extremely dependent on financing from these countries as it no longer has access to the capital markets and external financing from multilateral organizations. China s main interest is Venezuela s vast oil reserves. China is Venezuela s third-largest trade partner after the United States, accounting for 37.1% of Venezuela s total exports. 5 The two governments have reached a series of economic agreements, including the financing of infrastructure projects and the development of the energy and mining sectors. China has disbursed over US$30 billion to Venezuela, mainly for the purchase of Chinese-manufactured goods such as oil drills. However, since mid-2016 net new financing from China has been limited owing to political and economic concerns. As a result, Venezuela has become more dependent on financing from Russia, which is also interested in Venezuela s oil resources. For example, the Russian oil company Rosneft resells close to 15% of Venezuela s total oil exports while it has provided more than US$10 billion in credit lines since ,7 However, Russia also appears less willing to lend additional funds to Venezuela. Vast Oil Reserves Venezuela has the largest proven oil reserves in the world, estimated at 297 billion barrels, or roughly 20% of the world s oil reserves. 8 However, production is on a downward trend from a peak of around 3.5 million barrels per day (bpd) in the late 1990s to around 2.0 million bpd due to a number of factors including lack of investment in the oil sector. Weaknesses Political Uncertainty A presidential election is scheduled to take place in 2018, but there is a great deal of uncertainty as to whether the elections will take place and if they will be fair and transparent. The popularity of Maduro is close to historical low levels at around 20% and most of the population wants him removed from power. 9 The government has become more radicalized recently, opting to repress 461

4 Lazard Emerging Markets Debt and intimidate the opposition. The opposition tried to remove Maduro from power in October 2016 via a referendum which he blocked. In mid-2017, the government ended a six-month long protest by force which resulted in hundreds of arrests and over 100 deaths. 10 In July, Maduro pushed ahead with plans to rewrite the country s constitution and effectively invalidated the National Assembly, which was controlled by the rival political party. 11 Meanwhile, the opposition is fragmented and suffers from very low morale as reflected by the defeat and low participation in the regional elections in October Relationship with the United States Venezuela s relationship with the United States is poor and deteriorating rapidly. The United States had sanctioned a number of key government officials and in August 2017, issued additional sanctions against Venezuela, which prohibited US persons from dealing in new debt issued by the Venezuelan government and PDVSA, the state-owned oil company. The latest sanctions were in response to the more radicalized and authoritarian actions of the Venezuelan government. The US government may consider further sanctions, potentially on oil exports, which would be catastrophic for the economy. European countries might follow the US and impose sanctions unless Venezuela makes progress in improving fairness in the electoral process. 13, 14, 15 Institutions Institutions are extremely weak and market-unfriendly. Venezuela ranks very low across multiple governance indicators as measured by the World Bank. Corruption is a major problem, and respect for contracts is very poor. The government has nationalized or expropriated over 200 companies in the past 15 years and faces more than 10 cases brought against it in international courts for not paying appropriate prices for seized assets. 16 The government decided to exit the International Center for the Settlement of Investment Disputes (ICSID) to prevent new cases from going to international courts. 17 There are still some pending cases, and in one of the most recent, ICSID ruled in favor of Canadian miner Crystallex, which is aggressively seeking enforcement of an award totaling US$1.2 billion. The government still has some legal means to further delay some payments, but the risk of having assets frozen is increasing. Economic Imbalances Venezuela s poor economic policies are not sustainable. Price and exchange-rate controls have caused significant economic distortions. Meanwhile, unfriendly business conditions have taken a significant toll on growth. In particular, investment has suffered, declining from 22% of GDP in 2010 to below 10% in Potential economic growth continues to decline, given the lack of investment, the emigration of skilled labor, and the increased inefficiencies caused by expansion of the public sector. Inflation Inflation is an ongoing problem and is the highest in the world. It has been on an upward trend since 2012 and is currently over 1000% according to IMF estimates. 18 This is unlikely to improve due to goods shortages and a surge in money supply, with M2 growing above 150%. In the past, the government adopted unorthodox measures to control inflation, such as price controls, which have only exacerbated goods shortages. 462

5 Venezuela Overvalued Exchange Rate The exchange rate is overvalued by more than 100%, according to our estimates. Venezuela has a complicated exchange-rate system that includes three official exchange-rates and a blackmarket rate that trades in parallel. Over the years, the government has made minor adjustments to the exchange rate regime, but these efforts have been unsuccessful due to its failure to address the country s underlying macroeconomic imbalances. The government controls the majority of dollar inflows, as the main source of exports is oil, which is controlled by the public sector. The private sector obtains most of its dollars from the black market, which explains why the exchange-rate difference between the black-market and official rate is so extreme. Fiscal Deficit and Debt Levels The government balance sheet is weak and has deteriorated substantially over the past couple of years. Measuring fiscal performance is a challenge as a large share of the revenues and expenditures are reported outside the budget and the government s fiscal data is very unreliable. In addition, the government has stopped publishing the public sector data and only publishes the central government data. 19 The best way to track fiscal performance is to analyze the debt performance, and the latest data are similarly weak. The external debt stock, including PDVSA and Chinese loans, has increased from US$74 billion in 2010 to an estimated US$105 billion in December Lack of Transparency Transparency is a major problem in Venezuela, making it difficult to track economic performance. The government reports fiscal and economic data, including fiscal, balance of payments, inflation, and national accounts data, with an 18- to 24-month lag. Thus, it is difficult to track economic performance. Export numbers also suffer from a lack of transparency and reliability as there are discrepancies between what authorities and various independent sources report. Additionally, the details of Venezuela s loans from China and Russia are very limited. China and Russia have lent several billion dollars to Venezuela and the terms of these loans are unclear. Lastly, the liquidity of the government s assets is unclear. 463

6 Lazard Emerging Markets Debt Country Background Size Capital Population 912,050 KM 2 (34th) Caracas 31.3 Million Religion Roman Catholic 96.0%, Protestant 2.0%, Other 2.0% Median Age 28.3 Years Literacy Rate 97.1% Independence 5 July 1811 Political System Government Leadership Next Election 2018 Legislative Branch Federal Presidential Republic President Nicolás Maduro Unicameral National Assembly Economy Agriculture 4.0%, Industry 35.5%, Services 60.6% Labor Force Agriculture 7.3%, Industry 21.8%, Services 70.9% Merchandise Exports Petroleum and Petroleum Products, Bauxite and Aluminum, Minerals, Chemicals, Agricultural Products Export Partners United States 35.1%, India 17.2%, China 14.1%, Netherlands Antilles 8%, Singapore 5.3%, Cuba 4.1% Currency Bolivar (VEF) As of November 2017 Source: CIA 464

7 Venezuela Country Timeline 1810 Venezuela benefits from oil boom and its currency peaks against the US dollar; oil and steel industries nationalized Fall in world oil prices generates unrest and cuts in welfare spending; Dr Jaime Lusinchi (AD) elected president and signs pact involving government, trade unions and business Carlos Andres Perez (AD) elected president against the background of economic depression, which necessitates an austerity programe and an IMF loan. Social and political upheaval includes riots, in which between 300 and 2,000 people are killed, martial law and a general strike Some 120 people are killed in two attempted coups, the first led by future president Colonel Hugo Chávez, and the second carried out by his supporters. Chávez is jailed for two years before being pardoned Ramon José Velasquez becomes interim president after Perez is ousted on charges of corruption; Rafael Caldera elected president Perez imprisoned after being found guilty of embezzlement and corruption Hugo Chávez elected president Severe floods and mudslides hit the north, killing tens of thousands of people. Foreign Minister José Vicente Rangel discloses plot to kill Chávez. Chávez wins another six years in office and a mandate to pursue political reforms. Chávez becomes the first foreign head of state to visit Iraq since the 1991 Gulf war, in defiance of strong opposition from the United States. President Chávez appears on TV to hail 49 reform laws which his government has introduced, including land and oil industry reforms, under powers which did not require them to be approved by the National Assembly National currency, the bolivar, plummets 25% against the US dollar after the government scraps exchange rate controls. Chávez appoints new board of directors to state oil monopoly Petroleos de Venezuela in move opposed by executives Trade unions and the Fedecamaras business association declare general strike to support Petroleos de Venezuela dissidents Some 150,000 people rally in support of strike and oil protest. National Guard and pro-chávez gunmen clash with protesters more than 10 are killed and 110 injured. Military high command rebels and demands that Chávez resign. Armed forces head announces Chávez has resigned, a claim later denied by Chávez. Chávez is taken into military custody. Military names Pedro Carmona, one of the strike organizers, as head of transitional government Chávez returns to office after the collapse of the interim government Opposition strike cripples the oil industry. Organizers demand that Chávez resign. The nineweek stoppage leads to fuel shortages. Government takes control of oil projects in the Orinoco Delta as part of the nationalization drive. Thousands gather in Caracas to mourn, or celebrate, the government's closure of the RCTV channel which has been critical of President Chávez. Mr. Chávez suffers his first defeat at the ballot box, when voters in a referendum narrowly reject proposals to extend his powers and accelerate his socialist revolution After President Chávez s mediation with the Farc, the Colombian rebel group releases six hostages. Relations with Colombia deteriorate after Colombian President Alvaro Uribe rejects Mr. Chávez s call for left-wing rebels to be treated as insurgents instead of terrorists. Diplomatic crisis after Colombian armed forces make cross-border raid into Ecuador, a Venezuelan ally, killing senior Farc rebel Raul Reyes. Mr. Chávez mobilises troops along Venezuelan-Colombian border. Government approves nationalization of household fuel distributors and petrol stations. Venezuela and Russia sign oil and gas cooperation accord. Russian warplanes visit Venezuela, with Russian warships heading there for November joint exercises first return of Russian navy to Americas since Cold War. Venezuela expels US ambassador in solidarity with similar Bolivian move. US reciprocates. 465

8 Lazard Emerging Markets Debt 2010 President Chávez devalues the bolivar, by 17% against the US dollar for priority imports and by 50% for items considered non-essential, to boost revenue from oil exports. Six TV channels taken off air for breaking rules on transmitting government material. Mr. Chávez visits Iran, where he and the Iranian president promise to deepen their strategic alliance against US imperialism. Parliament grants Mr Chávez special powers to deal with the aftermath of devastating floods, which critics say will turn the country into a near-dictatorship Mr. Chávez begins a year-long course of cancer treatment in Cuba, which includes several extended stays there and a reduced workload. Government introduces price controls on many basic goods in an attempt to curb the 27% annual inflation rate, one of the highest in the world. Initial price controls on a few basic goods were imposed in Government extends price controls on more basic goods in the battle against inflation. President Chavez threatens to expropriate companies that do not comply with the price controls. President Chávez wins a fourth term in office, with 54% of the vote on an official turnout at about 81%. Opposition leader Henrique Capriles concedes President Hugo Chávez dies at age 58 after a battle with cancer. Nicolas Maduro, Hugo Chávez 's chosen successor, is elected president by a narrow margin. The opposition contests the result. With inflation running at more than 50% a year, the National Assembly gives President Maduro emergency powers for a year, prompting protests by opposition supporters. Maduro uses the powers to sign orders limiting companies' profit margins Government announces cuts in public spending as oil prices reach a four-year low. US introduces sanctions against former and current officials over suppression of protests earlier in year. Economy enters recession after contracting for the third consecutive quarter Diplomatic tension with the United States rises. Venezuela orders US embassy to cut 80 staff, accusing it of interference in internal affairs. United States declares national emergency over Venezuela, accusing it of threatening national security and foreign policy, imposes sanctions on seven officials. Opposition Democratic Unity coalition wins two-thirds majority in Congressional elections, ending 16 years of Socialist Party control and allowing it to block legislation proposed by President Maduro President Maduro announces measures aimed at fighting economic crisis, including currency devaluation and the first petrol price rise in 20 years. September Hundreds of thousands of people take part in a protest in Caracas calling for the removal of President Maduro, accusing him of being responsible for the economic crisis Several people die in clashes with security forces during mass protests demanding early presidential elections and the revoking of a planned constituent assembly to replace the National Assembly. The opposition holds an unofficial referendum in which a reported seven million people reject President Maduro s proposal to convene a new constituent assembly. The election of the controversial constituent assembly takes place in the face of an opposition boycott and international condemnation. Source: BBC 466

9 Venezuela Notes 1 As of December Maduro s hollow victory, The Economist, 14 December 2013, americas/ new-president-has-strengthened-his-grip-power-undermined-both-democracy-and. 3 VAT Raised by 3% in Venezuela, Tax News, 25 March 2009, Raised_By_3_In_Venezuela html. 4 Godfrey, Mike, Venezuela Is Running Out of Toilet Paper, Bloomberg, accessed on 27 September 2013, 5 As of October 2017, Source: Haver Analytics. 6 Vladimir s Venezual- Leveraging loans to Caracas, Moscow snaps up oil assets Reuters, 11 August Maduro Now Owns Venezuela s Economy and Its Collapse, Bloomberg 29 August bloomberg.com/news/articles/ /defying-logic-and-sanctions-venezuela-s-economy-slumps-along 8 Annual Statistics Bulletin 2012, OPEC, Ibid Vyas, Kejal and Angel Gonzalez, Panel Deals a Setback to Exxon in Venezuela, The Wall Street Journal, January 2013, and Timeline of Expropriations, What s Next Venezuela, accessed on 14 December 2013, whatsnextvenezuela.com/media-kit/timeline-of-expropriations/. 17 Ripinsky, Sergey, Venezuela s Withdrawal From ICSID: What it Does and Does Not Achieve, International Institute for Sustainable Development, 13 April 2012, 18 Indicadores, Central Bank Statistics, accessed 14 December 2013, asp. 19 Sector Público Restringido, Ministry of Finance, accessed on 14 December 2013, ve/index.php?option=com_content&view=article&id=226&itemid=

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