Corporate Challenges
and Opportunities in
Venezuela & Argentina
Oscar Mazza
TTS Latam Regional Sales Head,
Corporate and Public Sector, Citi
+1 (305) 347-1336
Treasury and Trade Solutions
Noraily Bello
Venezuela Treasury and Trade
Solutions Head
+58 (212) 705-2228
Overview—Venezuela
Growth Outlook: recession would continue during 2015 (-7.5%)
Venezuelan Basket Price 2014 Average US$88.6 p/b; 2015 last Price: $48.2 p/b; erratic outlook (avg. 2013: $101.2)
Oil prices have been the main variable boosting FCY inflows to the economy. While high, Venezuelan government took the opportunity to support expansionary public expenditures to support political capital. Sovereign savings have been mild during these times
Oil Production 2.4MM B/D (According to External services information)
Oil Exports fob 3Q2014 US$ 59.4Bn (98% of total exports); expected FY2014: $80Bn (Cashed Oil Exports $64.2Bn)
Inflation: Official inflation stood at 68% in 2014, and will continue accelerating this year to around 95%.
Exports : 3Q2014 ~US$ 60.5Bn (vs. 3Q2013: US$66.8Bn)
Imports 3Q2014 US$32.2Bn (vs. 3Q2013: US$39Bn); expected FY2014: US$42Bn
M2 Growth: YTD March 2015: 4.5%; YoY 63% (decelerating since December when YOY = 68%)
The correlation of Venezuelan performance after a drop in oil prices is material. Approximately, 90% of GDP is directly or indirectly
affected by the Oil industry (essentially managed by the Government)
-10
-8
-6
-4
-2
0
2
4
6
8
2008 2009 2010 2011 2012 2013 2014 2015 F
Real GDP (YOY avg)
Source: BCV and Citi Research
3
Source: Citi Research
Overview—Venezuela
M2 Growth: YTD March 2015: 4.5%; YoY 63%.
Source: BCV and Citi Research
Things to watch:
Slowdown of economic activity
It is expected that that the government will increase
its importer role, using the 6.3 VEF/USD rate in
order to provide the benefit of regulated prices
through the public distribution chain
Complex FX mechanisms in place with reduced
supply affecting the economy (basic goods scarcity)
Price and margin controls in place for most of the
economy. Distribution of basic goods also under
strict control by the Government
Specific regulation towards prices and margins,
penalizes businesses with high level of intervention
Inflation and FX rate
National Assembly elections 2015
FX rate convergence
Upcoming debt maturity (PDVSA & Gov’t) 2015: $8.2Bn
4
Citi’s Strengths and Commitment—Venezuela
Citibank Venezuela has been operating since 1917.
Pioneer developing financial services industry.
Role model for other institutions
Key presence for multinational Co’s in market.
Business: Full Corporate & Consumer
Today there are six Citibank branches throughout the country (main cities)
Only US bank with full banking operations.
Competitive differentiation: global product offering, clients profile, and talent pool / professional profile
Long term positive image and strong relationship with regulators
Strategy: Focus on local business, center in providing services to selected clients in corporate and consumer business. Capitalizing market opportunities while protecting the franchise and its profitability from external risks.
5
Key Challenges - Update on the FX market- Venezuela
Until February 2015, Venezuela´s currency control system involved
three official FX Rates:
CENCOEX: 6.3 VEF/USD (former CADIVI, approximately
66% of FX approvals during 2014)
SICAD I: 12 VEF/USD (Balance Sheet Benchmark,
approximately 17% of FX supply)
SICAD II: 49.9 VEF/USD (17% of FCY flow)
As oil Revenues plunge, total FX supply reduces and as such, supply in each mechanism. It is not yet known the volume to be
assigned in each mechanism (New FX scheme trying to mitigate rising exchange rate pressures).
During February 15th 2015, President announced changes in
the FX market, maintaining a three tier FX regime (the
announcements stills yet to be applied):
6.3 VEF/USD for food and medicine
Merge between SICAD 1 and 2 for other goods (baseline
rate: SICAD 1 @12 VEF/USD. Since Oct’2014 auctions have
not resumed. This is the BL FX benchmark of Citi Venezuela
New market for free FCY trading (SIMADI) with low activity.
Parallel Market continues to exist: FX Rate >270 VEF/USD
(above M2 / International Reserves ~ 111.38 VEF/USD)
6
Key Challenges- Venezuela
Government political approach provides incentives to restrict FX
supply. Currency distortions have reduced economic incentives to
produce locally. Such environment was accompanied with a rigid
regulatory framework in the private sector
Oil prices drop have drought the FX market. Government’s
reluctance to apply corrections have boosted inflation and scarcity
levels
Government institutions are the main importers in the country,
affecting private sector role.
Exporters would be forced to repatriate part of the export proceeds
within a set time frame depending of type of goods sold.
Convertibility constrains to import, repatriate dividends, to pay for
technical assistance and services, individual savings, among others,
have increased the liquidity concentration in local currency
Key challenges remains concentrated in the FX regime. We would expect changes in the FX market in order to improve liquidity.
Dividends remittances
Import Payments
Export Payments
Capital Injections
FX losses – Hedging options are limited (Real
Estate is the most popular)
7
10
Main Challenges
Inflation
Recession
– A long period of low growth in Brazil (and strong depreciation of the Real)
– Drop in soybean price (below USD 300 per ton)
FX Controls
– Over USD 5 billion overdue payments on imports
– Almost no dividends and royalties remittances to home office allowed
Unpredictability: Highly regulated business environment
Fiscal Deficit deterioration
11
International reserves dropped USD 16 Bn since the FX controls were put into place
The spread between the official and the parallel dollar stands around 40%
The economy is stagnated and does not create new jobs
Inflation still at high levels (Econviews 2015F: 28%; Citi Research: 33%)
The 2015 presidential elections should be a turning point for policies and economic
performance; potential candidates perceived as more market friendly
Why are the current policies unsustainable?
Source: Econviews
12
What can we expect for the rest of year?
Preserve international reserves
Accept a low level of economic activity
Strong controls of imports
Keep FX restriction
Swap with China and issuance of new bonds
Control inflation
Avoid a strong devaluation but control exchange rate spread
Keep “precios cuidados” policy
Continue with freezed tariffs
The Government’s objective is to stay the course
13
EBITDA: In general terms companies are still delivering positive results, despite falling EBITDA margins and volumes
Low leverage: Argentina’s banking system remains with an excess of liquidity
Low currency mismatch: low or no debt in foreign currency
Fixed assets: Buying real estate
Capital expenditures anticipation
Buying inventories as much as they can: taking advantage of the cheap import dollar at the official rate and
hoarding consumables goods or supplies at current prices (particularly in Consumer & Retail industries)
Hedging strategy: to soften impact of a possible new steep ARS devaluation
Investment instruments: looking for alternatives to protect the value of their money in dollar terms trapped in the
local market, against inflation and currency depreciation
Reduce business size in some sectors: e.g. Airlines, Automotive
Capitalize intercompany current debt into equity
What are Corporates doing in Argentina? Looking for alternatives to preserve trapped funds in the local market against inflation & devaluation:
14
Expectactions of a PRO-Business President
2015 will be a transition year
Activity will continue stagnated due to the shortage of dollars
Inflation will be lower than in 2014, because of price agreements, lower depreciation and
freezed tariffs
Exchange rate will continue anchored and the overvaluing of the currency will increase
Foreign exchange and import controls will continue
Fiscal deficit (without CB transfers) will increase again and could be above 6% of GDP
15
Expectactions of a PRO-Business President
Main policies that might be expected after 2015:
The elimination of FX restrictions (“cepo”)
The unification of the exchange rate
Reduction of the fiscal deficit
Increases in utility rates
Changes in energy and other sector policies
Address inflation
The return to international markets
16
Opportunities
Argentina still has low debt levels
– Lending in LCY (almost no currency mismatch)
Local Assets are undervalued in general terms vs. the rest of the region
A change in macroeconomic policies can quickly lead to an improvement in key variables such as:
– Capital inflows (infrastructure, ‘Vaca Muerta’ shale reservoir)
– GDP growth and investment
– International reserves increase
– Employment level recovery
17
Conclusions
Risks in the short term… many opportunities in the medium term
Current crisis has a political and ideological backbone, although certain restructures and
reforms should be addressed
More certain political landscape may lead to a quick improvement in key variables
Labor unrest and complex wage negotiations expected in the next 2 months
Politics in 2015 will be dominated by Presidential election campaign
The banking system is healthy: very liquid, with low currency mismatch and not a source of
macroeconomic vulnerability
18
Channel
Services
Liquidity
Management
International
Cash
Payables &
Receivables
Investment
Banking
Loans
Citi Argentina – Bank Capabilities
International Cash
International and US Demand
Deposit Account
Citi Online Investments (OLI)
Liquidity Management
Citibank Zero Balance Account
Investments (TDs and MMF)
FX and Trade Solutions
CitiFX Pulse—Online Trading
for FX Processing
Trade Services &Trade Finance
Advisory & Solutions
Supply Chain Finance Solutions
(Supplier & Distribution Finance)
FX and Trade
Solutions
Loans
LCY: Short / Long term
Fixed / Variable rate
Investment Banking
DCM
ECM
M&A
Channel Services
CitiDirect BE
CitiDirect BE Mobile
CitiDirect BE Tablet
CitiConnect for Files
19
Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards, reduce our own
environmental footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citi’s unique role in promoting sustainability include: (a) releasing in 2007 a Climate Change Position Statement, the
first US financial institution to do so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewable energy, clean technology, and other carbon-
emission reduction activities; (c) committing to an absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d) purchasing more than 234,000 MWh of carbon neutral power for
our operations over the last three years; (e) establishing in 2008 the Carbon Principles; a framework for banks and their U.S. power clients to evaluate and address carbon risks in the financing of electric power projects; (f)
producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help
advance understanding and solutions.
Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.
efficiency, renewable energy and mitigation
© 2015 Citibank, N.A. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.
IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or
relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of any transaction contemplated hereby ("Transaction").
Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.
In any instance where distribution of this communication is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering
into a derivatives transaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument.
Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a
financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or
regulation, you agree to keep confidential the information contained herein and the existence of and proposed terms for any Transaction.
Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal,
tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us
for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you
should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials,
you and we hereby agree that from the commencement of discussions with respect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction
shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction.
We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number.
We may also request corporate formation documents, or other forms of identification, to verify information provided.
Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time
without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which
represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof
and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at
any time.
Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly,
a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific
recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to
limit communications between its investment banking and research personnel to specifically prescribed circumstances.
Top Related