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Caracas Capital Markets, C.A.

VENEZUELA WEEKLY REPORT

Around this time last year, we sent a

Venezuela Weekly Report titled “It’s all about the

Benjamins” about the shortage of US dollars that

is devastating Venezuela. In short, since then the

situation has continued to deteriorate. What

makes the situation worse is that every time there

appears to be a reform on the horizon that might

slightly begin the process of taking steps to begin

to deal with the problems, the government of

Nicolas Maduro manages to take the wrong fork in

the road. This week was no exception to that

hobgobliny consistency of failure.

First, the Government announced that

Maduro was re-shuffling the cabinet – made up of

an amazing 27 to 32 ministers, depending on how

you count them (Chavez had started with 13,

saying that was too many!) – and that all ministers

had submitted their resignations. Sadly, Maduro

had already done this exercise just a few months

ago back in January. He had only announced his

first cabinet 7 months before that. Optimism in

this latest change is not high.

The second big event of the week came

from an interview with super-minister Rafael

Ramirez – currently holding the trifecta positions

of President of PDVSA, Minister of Oil & Mines,

AND Vice President for the Economy. Ramirez

has been promising that Venezuela would get its

financial house in order and he was going to unify

exchange rates. In Venezuela, there are basically

4 foreign exchange rates at the moment: Official

Rate (Cencoex, formerly Cadivi) at 6.3 bolivars to

the dollar; Sicad 1 at 11 bolivars to the dollar;

Sicad 2 at 50 bolivars to the dollar; and the black

market at a whopping 84 bolivars to the dollar.

Venezuela’s Currency Woes If you would like to make sure that you

receive this report by e-mail from us

each week, please let us know with a

message to Russ Dallen

or Miguel Villalba at

RMDallen@CaracasCapital.com

or call us on:

Caracas (58) 212 335 1906

Miami 305 735 8280

New York 646 201 5843

London (44) 207 993 4557

You can imagine the confusion that

engenders and the accounting bombs that lie in wait

for most foreign companies (think Ford, GM,

BBVA, Procter & Gamble, Colgate-Palmolive,

Clorox, American Airlines, United, Delta, etc.)

trying to report their Venezuela earnings in dollars

but not actually getting the dollars (the problem

being that most companies are using the wrong low

rates when in reality they have little or no chance of

getting their bolivars exchanged into dollars there).

With all his apparent power, Ramirez was

forced to backtrack on his unifying rates plan and

announced that Venezuela would instead have 2

rates (plus the unmentioned black market rate).

When asked for further specifics as to whether this

would take place this year, Ramirez responded with

a non-committal “maybe.” We are estimating that

the Cencoex and Sicad 1 will be unified at the 20 to

30 bolivars per dollar level (with the bias to the

low-middle side) and that the government will keep

the Sicad 2 rate at around 50. We do not believe

that the rate change will happen this year so that the

government can honor Maduro’s January promise

that the rate would remain at 6.3 all year.

CCM

For more information call: Russ Dallen, Miguel Angel Villalba, Jonathan Leo or Yajaira Cana

Phone: (305) 735-8280

Although the information in this report has been obtained from sources that Caracas Capital Markets, C.A. and Caracas Capital Advisory, C.A. believe to be

reliable, we do not guarantee its accuracy and completeness. All opinions and estimates included in this report are subject to change without notice. This report is

for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

25 August 2014

CCM Venezuela Weekly Report

Page 2

Related to the shortage of dollars and its

affect on companies, this week the US warned

travelers about shortages of airline capacity into and

out of Venezuela:

“The U.S. Embassy in Caracas would like to

advise U.S. citizens about the reduced availability of

regularly scheduled direct commercial flights

between the United States and Venezuela. According

to media reporting and announcements from major

airlines, the number of available seats per week on

direct flights between the United States and

Venezuela has been cut by at least 50 percent since

January 2014. “

Major world airlines have drastically cut

flights to Venezuela because they have been unable

to get their bolivars exchanged into dollars at the

rate promised by the government. The International

Air Transport Association (IATA) says that airlines

have over $4 billion in unexchanged bolivars

trapped in Venezuela, some of which have not been

exchanged since 2012.

American Airlines, which was one of the

largest foreign carriers into Venezuela with almost

Venezuela’s Bolivar Becomes a

Major Problem for Companies –

Airline Edition

Dollar Shortages – Latest Figures

"In the third quarter of last year,

Venezuela was only 0.5% of AA system

capacity, but would have been 2% of our

total combined consolidated revenue.

This year, we've canceled most of our

Venezuela flying ... which means that our

system PRASM in Q3 is negatively

affected by almost a full 1.5%

...." American Airlines President Scott

Kirby

7 flights daily from Miami, Dallas and New

York, cut its flights to virtually 1 a day in July

because of unexchanged currency. As of March

31, American says that it had $750 million in

bolivars that the Venezuelan government has

refused to exchange for US dollars.

The problem for American and other

airlines and companies is that the difference

between paying 6.3 bolivars per dollar from the

government and going into the (somewhat

illegal) black market at 84 bolivars to buy a

dollar to exchange is so great that all of those

profits will be wiped out and become a huge

loss. So, all airlines have cut capacity to

Venezuela. Delta, which flew daily from its

Atlanta hub to Caracas, cut service this month to

just once a week.

Maduro warned that any airline that left

would not be allowed to return to the country, so

those that are staying are just running the

lightest schedule possible hoping to get paid.

Venezuela’s oil price has been falling along

with its oil production (see below), and the

falls are showing in the country’s reserves. In

2010, Venezuela had $35 billion in reserves.

On August 15, the Venezuela Central Bank

reports that it currently has just $20.41 billion

in reserves. Worse, the amount of liquid

reserves had fallen 44% since last year, from

$3.1 billion to just $1.75 billion.

Page 3 CCM Venezuela Weekly Report

Venezuela Oil Price Falls to Lowest Since January 2011

Venezuela's weekly oil basket continued its

fall to its lowest since January of 2011 (just before

the Arab Spring hit Egypt) as international oil

markets seemed well-supplied even as crises in

Ukraine, Syria, Libya, Iraq and Israel boiled over.

According to figures released by the

Venezuela Ministry of Energy and Petroleum, the

average price of Venezuelan crude sold by

Petroleos de Venezuela S.A. (PDVSA) during the

week ending August 22 was $90.89, down $1.06

from the previous week's $91.95.

The average price in 2014 for Venezuela's

mix of heavy and medium crude is now $96.40. In

2013, it was $99.49, down from 2012's $103.42 and

2011's $101.06, but higher than 2010's $72.43, and

much higher than 2009’s average price of $57.01.

At $90.89, Venezuela's oil price this week

was well below the low for Venezuela's oil basket

in 2013 of $93.98, which was set during the week

ending November 22. The low in 2012 was set

during the week ending June 8 at $94.05.

Venezuela's basket set its highest weekly

average on July 18, 2008, when it hit $126.46

before economies around the world began crashing

under the weight of expensive oil and crashing sub-

prime debt. By January of 2009, Venezuela's oil

basket had fallen to a low of $27.10 a barrel.

The United States remains the largest

importer of Venezuela’s oil exports. According to

the US Department of Energy, Venezuela was the

fourth-largest supplier of imported crude oil and

petroleum products to the United States behind

Canada, Saudi Arabia, and Mexico. U.S. imports

from Venezuela have been on an overall decline in

recent years. In 2013, the United States imported

797,000 barrels per day of crude oil and petroleum

products from Venezuela, a decline of 49% from a

decade ago.

Venezuela sends a large share of its oil

exports to the United States because of the

proximity and the operation of sophisticated U.S.

Gulf Coast refineries specifically designed to handle

heavy Venezuelan crude.

While U.S. imports of primarily crude oil

from Venezuela have been on the decline, U.S.

exports of petroleum products to Venezuela have

increased largely because of Venezuela’s tight

finances that leave it unable to invest and maintain

its own domestic refineries. A decade ago, the

United States exported 7,000 barrels per day to

Venezuela. In 2013, the United States sent

Venezuela 84,000 barrel per day of petroleum

products, primarily methyl tertiary butyl ether

(MTBE), intended for blending in gasoline, motor

gasoline, and distillate fuel oil.

Oil is the main export of Venezuela and

provides most of the country's foreign currency.

The U.S. Energy Information Administration

estimates that in 2013 net exports from Venezuela

totaled nearly 1.7 million barrels per day of crude

oil and petroleum products, a significant decrease

since the peak of 3.1 million barrels per day in

1997.

If you would like to make sure that you

receive this report by e-mail from us each

week, please let us know with a message

to Russ Dallen

or Miguel Villalba at

RMDallen@CaracasCapital.com

or call us on:

Caracas (58) 212 335 1906

Miami 305 735 8280

New York 646 201 5843

London (44) 207 993 4557