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VENEZUELA WEEKLY R EPORT 

Venezuela’s situation continues to unravel atincreasing speed as the bolivar tumbled 30% overust the last week, while the country’s international

reserves simultaneously hit a new 12 year low,closing at $17.526 billion. As much as we take pride at being correct in our analysis -- we had predicted the declines earlier this month in ourselect client email as well as in El Nuevo Heral  (available here in Espanol or here in English)  –   the

exponentially increasing falls in currency andreserves mean that Venezuela is now essentiallyrunning on fumes.

As the first graph indicates, Venezuela’s reserveshave now fallen 21% since the beginning of theyear, but more importantly $6.7 billion from theirhigh just 2 months ago  –   a high that not onlyincluded $2.8 billion from mortgaging Citgo (seeour article “Venezuela’s Citgo and the Revolution’s

Praying Mantis School of Business”  in the

F inancial Times ), $1.9 billion from the selling o$4 billion of oil receivables from the DominicanRepublic, and the transfer of previously unreportedChina Fonden funds into the reserves.

What makes all of this worse, is that Venezuela hasalso had to borrow roughly US$385 million from its

Venezuela: Running on Fumes?I f you would li ke to make sure that you

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each week, please let us know with a

message to Russ Dal len, Jorge

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Special Drawing Rights (SDR) at the InternationalMonetary Fund (IMF). According to the monthlyIMF report, Venezuela withdrew 276.6 millionSDRs sometime in April, its first withdrawal sincethe 1990s.

Aside from the irony and embarrassment oVenezuela stealthily turning to the IMF for help  –  especially after Chavez had consistently berated theIMF and “Washington Consensus” economics, even

going so far as saying he would withdrawVenezuela from the IMF (before his advisorsquietly informed him that withdrawal would triggerdefault clauses written into many of Venezuela’sinternational bond contracts)  –   Venezuela is now borrowing money from the IMF to pay its debts. A brief explanation of SDRs is necessary.

LATINVEST

 For more information call: Russ Dallen, Jorge Zighelboim, Nathalie Peterssen, Gloria Leon, Miguel Angel Villalba, Jonathan Leo or Yajaira Cana

 Phone: 305-735-8280

Although the information in this report has been obtained from sources that Latinvest Group Holdings, LLC; Caracas Capital Markets, C.A.; and Caracas CapitalAdvisory, 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.  

26 May 2015

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LATINVEST Venezuela Weekly Report Page 2

But, the situation is worse than that. TheBCV calculated that it had $14.62 billionin gold using a price of $1,257.80 perounce. (The BCV uses a trailing 9month average; see BCV Footnote 3.3).

The silver lining in this growing disasteris that the 9 month average has slippedslightly since December 31, so thatVenezuela may have less gold and thusmore “other” in its till.

The IMF created SDRs as an international reserve assetin 1969 to supplement all members’ reserves. Membersare allowed to count the SDRs as part of their reservesand Venezuela is able to borrow those assets at anextremely favorable rate of interest (currently 0.05%,

which frankly is much better than the over 30% thatVenezuela is paying on some of its bonds). In 2009 ascountries around the world were reeling from theworldwide economic crisis, the IMF decided to providemember nations a total of US$250 billion in SDRs toshore up international liquidity. At that time, the IMFgave Venezuela 2.543 billion SDRs, which works out toabout $3.578 billion in US dollars (The SDR valuefloats against a basket of the US dollar, the yen, theeuro, and the pound, with 1 US dollar currently worth0.710769 SDR). Thus, the 276.6 million in SDR chips

that Venezuela borrowed last month is worthapproximately US$385 million.

As chart 2 indicates, that leaves Venezuela with 1.982 billion SDRs which is approximately US$2.79 billion inspecial drawing rights at today’s exchange rate.(Rumors in financial circles began to swirl thatVenezuela was withdrawing more SDRs this month  –   but we have been unable to confirm that and barring anuncharacteristic revelation from Venezuela, we willhave to wait until the May IMF report to see i

Venezuela withdrew further funds). (Ed Note: You canfind out more about the IMF’s SDRs in the Latin

Ameri can H erald Tr ibune ’s (LAHT) document libraryhere.  And just to set the record straight, Venezuela,while withdrawing the money generously provided for it by the IMF, is still not on the best of terms with theorganization and has NOT submitted to what is knownas an Article IV consultation in over 9 years).

The remaining US$2.79 billion in SDRs is important because Venezuela includes that as part of its reservestotal of $17.526 billion. Subtracting those remainingSDRs from the reserves leaves Venezuela withapproximately $14.736 billion in reserves.

And here is why we start to get down to fumes. In itsAnnual Financial Statement, Venezuela’s Central Bank  (BCV) reports that the value of the gold it was holding

on 31 December 2014 was $14.620 billion (You can see

the original BCV Footnote 7  –   which is pictureabove –  as well as all the rest of the BCV Financiafootnotes here).

So, if we just used the BCV’s 31 December 201

gold calculations, Venezuela would have just $12million possibly liquid in its reserves, outside of thgold and SDRs.

But the situation is worse than that. The BCcalculated that it had $14.62 billion in gold using price of $1,257.80 per ounce. (The BCV uses

trailing 9 month average; see BCV Footnote 3.3The silver lining in this growing disaster is that th9 month average has slipped slightly sinDecember 31, so that Venezuela may have less goand thus a couple hundred other million in ireserves.

The bad news is that the price of gold has falleBacking the figures out means that Venezuela happroximately 11,624,019 ounces of gold. Gold hslipped since last year and closed yesterday

$1205.30, meaning that if Venezuela had to sell its

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Page 3LATINVEST Venezuela Weekly Report

gold today, it would theoretically realize just$14.010 billion, $600 million less than itsDecember valuation.

The worse news is that some of Venezuela’s gold

reserves may have already been mortgaged, soraising even that $14 billion may not be possible.Reports that Venezuela had completed a deal withsome Wall Street banks where it borrowed againstits gold have been circulating for the last fewmonths (and years), although there has been noofficial confirmation (nor denial) from Venezuelanor any of the banks reportedly involved. A similardeal was done by Ecuador with Goldman Sachs inJune of 2014 where President Correa acknowledged borrowing $600 million for 3 years againstEcuador’s gold holdings. 

But the worst news is that we do not know theexact make-up of the reserves. In an effort to shoreup the floundering reserves in December of 2014,Venezuela President Nicolas Maduro issued adecree that “diamonds, other  precious stones andmetals” would also  now be included in thecountry’s reserves, so Grandma’s silver may now be included (BCV note here).

Of course, the lack of transparency is not just a problem for figuring the real liquidity available, itis a problem for much of Venezuela’s economic

numbers. By law, the Central Bank is required to provide the numbers for inflation in the first 10days of every month. It has not done that all year.

In fact, the BCV has published neither totalinflation nor GDP figures for 2014. Nor hasVenezuela published scarcity of products figures inover a year under the maxim that it is better to be

thought horrible than to open the books and proveit.

Sadly, the numbers are indeed horrible  –   weestimate that inflation is now running at 165%, bestexemplified by the rocketing black marketexchange rate. That rate went from 300 to over 400in the span of the past week. On February 25, ittook 200 bolivars to buy one dollar. Yesterday ittook 423. The dollar doubled against the bolivar inust 3 months.

It previously took 5-1/2 months for the dollar to doublefrom 150 on November 28, 2014, to 300 on May 13.And before that, it took the dollar almost 11 months todouble against the bolivar from 75 in January 2014 tothat 150 in November 2014. The rate of decay in the

currency and the resulting pass-on of inflation isgathering speed exponentially, as revealed by theincreasingly parabolic nature of the currency graph below.

Two things are driving the increasingly rapiddeterioration in the currency. One is the shortage odollars brought on by the failure to increase oil production (and especially exports) and then the fall inoil prices; the country’s heavy dependence on importsfor almost everything as Chavez’s policies gutted and

then Maduro’s policies finished off most domestic

 production; and finally, Chavez’s doubling of thecountry’s foreign debt during the five years followingthe world economic crisis of 2008 to over $80 billion –  

often at usuriously high interest rates.

That debt is becoming a tremendous drag on thecountry’s resources and is increasingly responsible formuch of the foreign reserve drain. As we outlined in“Venezuela: The Emperor Has No Clothes”  inDecember in the F inancial Times , Venezuela has over$11 billion in foreign debt payments this year,including a $5 billion bulge in October and November.This month alone, Venezuela and PDVSA had to pay$1.234 billion in interest. In April, Venezuela had to

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LATINVEST Venezuela Weekly Report Page 4

 pay $755.7 million. What is exceptionally worryingis that even though Venezuela completed ALL itsMay bond payments by the 17th, the reserves havecontinued to tumble. The next interest payment isJune 1 for $35 million on the $1 billion o

Venezuela 7% bonds of 2018, but fortunately Juneand July are comparatively light months. Augustramps up to $750 million, however.

At the same time as the country is experiencing theincreasing unavailability of dollars, the governmentis also repeatedly doubling the supply of bolivarscirculating in the economy. As the chart aboveindicates, Venezuela M2 money supply is up 69% in12 months to 2.34 trillion bolivars from 1.385trillion bolivars in May of 2014. In 2008, M2 wasust 147.64 billion, meaning that the amount o

 bolivars in circulation is 16 times what it was 7years ago in 2008 when Venezuela’s oil basket hit ahigh of US$126.46 a barrel. In simple economicterms, Venezuela has too many bolivars chasing toofew dollars.

A Long Hot Summer

The net effect of these problems is manifesting itselthroughout Venezuela’s import dependent economyas shortages become rampant. Sadly, we outlinedthe beginnings of the shortages back in 2013 both before the Council of the Americas (we have thedubious distinction of being the first to point out thetoilet-paper shortage in January 2013, video here) and in “Venezuelans Wake Up to EconomicRealities”  in the F inancial Times   in April 2013.Since then, things have only gotten steadily worse.

As Venezuela enters what promises to be a long, hosummer, citizens are being forced to wait for 4-hours in lines to purchase the few consumer staplethat supermarkets may have. At the same time, thesalaries are increasingly worth nothing as spiralindevaluation continues to decimate any bolivaearnings.

Venezuela’s minimum salary -- which the majority othe population live on -- will be raised to 742 bolivars a month on July 1. At the black market ratof 400 bolivars to the dollar, that 7422 is just $18.56 month, putting Venezuela below even Cuba in averagwage. As a result,Venezuelans have no choice but twait in line to get price-controlled food.

But even those making a relatively great salary of foutimes the minimum are still making less than $75 month. At that wage, citizens can only buy what is fosale in Venezuela and travel outside of the country iessentially impossible  –   if you could find plantickets, which are both very expensive and in shosupply as airlines have drastically cut service tVenezuela because the government could not changincreasingly worthless bolivars into dollars.

Add to the widespread shortages and economideprivation the fact that there are now regula blackouts because of power shortages (electricitshortages so great that the government has had to cu

the workday to now end at 1:30!) and homes anapartments are regularly going without water for dayat a time because of municipal water shortages, anyou have a recipe for civil strife over a long, hot, dirtsummer.

Unlike the magical realism that allowed Hugo Chaveto create a reality distortion field in Venezuela for slong, Nicolas Maduro must be one of the few leaderto invent an economic war and go on to lose it.