Venezuelas Shadow Economy. The Government Financial Lifeline - PowerPoint PPT Presentation

Prepared for the conference “ The Size and Importance of Venezuela’s Illegal Economies” Latin American Program, Woodrow Wilson Center January 14, 2020 Venezuela’s Shadow Economy.

The Government Financial Lifeline • Prolonged recession and oil industry collapse have cut the government’s traditional revenue sources. • US Sanctions places Venezuela in political isolation, prompting approach to less transparent associates. • Sanction evasion prompts off-record transactions. • Need to maintain rent distribution mechanism puts pressure on to find alternative revenue flows. • Venezuela’s dollarization and services collapse pushes for unconventional transaction means. • A de-facto liberalization pushes both private and public sector into harder to trace channels.

An industry a century in the past Evolution of Venezuela's Oil Production 4.0 3.5 3.0 2.5 mb/d 2.0 1.5 1.0 1945 2019 0.5 0.0 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 Sources: Baptista (2002), Pdvsa and Ecoanalítica. Average increase 1943-1970: +118 kb/d Average increase 1986-1998: +112 kb/d Maximum increase 1947-1957: +159 kb/d

Depending more and more from Russia and China Oil exports composition 3.0 Cash generating barrels China debt service Rosneft debt service Petrocaribe & Cuba 2.5 2.0 mb/d 1.5 1.0 0.5 0.0 2012 2013 2014 2015 2016 2017 2018 2019* 2020* Sources: Pdvsa, Mefbp and Ecoanalítica. *Forecast.

Pressuring hard currency resrves IR vs . Extrabudgetary resources 49 International Reserves Extrabudgetary Resources 42 35 MMM USD 28 21 14 7 0 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Sources: BCV and Ecoanalítica

And the usual rent distribution mechanism dries up Exchange rate subsidy scheme 35,000 Public entities Cadivi/Cencoex/Dipro Sitme Preferential CADIVI Simadi/Dicom Sicad I and II 30,000 25,000 20,000 MM USD 15,000 10,000 5,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: BCV and Ecoanalítica.

The Venezuelan Political Marketplace Gold production The Government Oil imports controls key economic activity Hard foreign currency supply Political groups fight Non-oil imports access to rents Rent access through illegal paths Loyalty price Maintains The Government gives political cohesion up control to interest groups

The parallel economy Income from other activities in 2018 Activity USD MM Gold contraband 2,711.0 Gasoline contraband 1,860.3 - 2,790.5 Narcotic trafficking 2,650.0 Exchange rate subsidy 3,446.4 Overbilling 3,710.8 Total 14.378,5 - 15.308,6 Sources: OEA, UN Comtrade, TSI and Ecoanalitíca.

Government financial lifeline Black market economy vs other income sources in 2018 (USD MMM) Net oil income Non-oil income Black market economy 2.5 Billion USD 14.4 14.4 28.2 MMM MMM B Sources: BCV, OEA, UN Comtrade, TSI and Ecoanalítica The black market economy sources represented 31.9%of the income

Renewed focus on imports overbilling Imports overbilling 10,000 100.0 Overbilling Prop. of non-oil imports 8,000 80.0 6,000 60.0 MM USD % 4,000 40.0 2,000 20.0 0 0.0 2013 2014 2015 2016 2017 2018 Sources: TradeMap, BCV and Ecoanalítica.

Rising gold transaction costs Gold smuggling** (by destination) 3,500 Switzerland United Arab Emirates Turkey United States Other Reported by the BCV* 3,000 2,500 2,000 USD MM 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: UN Comtrade and Ecoanalítica *Gold purchases in the local market reported to the BCV. **After nationalizing gold (2011), export were higher that purchases done by the BCV. In 2018 they sold USD 3,280 MM at USD 2,710 MM (17.3% discount)

Effects in the real economy • Income from unorthodox sources finds its way to the real economy. • Deepening transactional dollarization in an environment of looser regulations. • Redirecting into Venezuela funds that cannot be taken to tax havens. • Cash euros used as foreign exchange market stabilizer. • Diffiulty to dicen dollars from criminal activities from legitimate ones.

Intervening in the currency exchange market Euros in cash sold to the fiancial system (2019) 140.0 120.0 100.0 MM EUR 80.0 60.0 40.0 20.0 0.0 Mar Apr May Jun Jul Aug Sep Feb Oct Nov Dec Sources: Ecoanalítica.

Imports become harder to track Imports by origin (Top 10) 1,400.0 USA China Brazil Colombia Mexico EU Canada Chile Turkey India 1,200.0 1,000.0 800.0 USD MM 600.0 400.0 200.0 0.0 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Sources: Official data reported by each country and Ecoanalítica.

Imports become harder to track Imports by origin (Top 10) 1,400.0 USA China Brazil Colombia Mexico EU Canada Chile Turkey India Not reported 1,200.0 1,000.0 800.0 USD MM 600.0 400.0 200.0 0.0 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Sources: Official data reported by each country and Ecoanalítica.

Getting tangled with other cash flows Remmittances to Venezuela (MM USD) 4,500.0 Ecoanalítica BCV 4,000.0 3,500.0 3,000.0 USD MM 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0 2015 2016 2017 2018 2019* 2020* Sources: Banco Mundial, Cemla, BCV and Ecoanalítica *Estimations. Note: Current transfers from BCV are valued as remittances.

What to expect this year? • Low chances of a political change. • Economy, firms and business reduction. • Illegal market expansion. • Almost irreversible degree of informal dollarization. • Continued pressure over external accounts.

The Executive will have to reduce expenses Hard Currency Cashflow Item 2018 2019 2020 Income 0 0 0 Oil Exports (mb/d) 1.35 1.0 0.7 Energy Agreements (mb/d) 0.1 0.1 0.1 Oil Imports (mb/d) 0.1 0.2 0.1 Effective Oil Exports (mb/d) 1 1.4 1.1 0.7 Brent Price (USD/bl)* 69.7 65.7 59.9 Venezuelan Oil Basket Price (USD/bl)* 61.9 59.6 51.5 Oil Income (Billion USD) 31.8 23.1 13.9 Oil imports (Billion USD) 3.5 3.7 2.1 Oil Imports (Diluents and Supply) 0.0 -1.0 -0.9 Other Oil Imports 28.2 18.4 10.9 Non-Oil Income (Billion USD) 2.5 6.3 6.6 Total income 30.7 24.7 17.5 Expenditure Other imports (Billion USD) 2 9.1 5.9 5.9 Net services 6.2 5.8 5.6 Net rents 8.0 7.9 7.6 Current Transfers -2.0 -2.7 -2.0 External Debt Service (Billion USD) 4.5 1.2 0.6 Private Capitals Outflow (Net) -2.3 -1.1 -1.0 Total Expenditure 23.4 16.9 16.7 Result 7.3 7.8 0.8 Financing (MM USD) 0.0 0.0 0.0 Oil income retained by the USA 0.0 -3.1 0.0 Net Flow with China -4.2 -3.2 -3.2 Net Flow with Russia (Rosneft) -3.2 -1.9 -0.5 Net Result -0.1 -0.3 -2.8 Sources: BCV, Menpet,Pdvsa and Ecoanalítica * Considers a 90 day lag due to the internal dynamics of the oil market 1 We take into account the reexported imports 2 Considers non-oil imports and other imports from the oil sector

ECOANALÍTICA, C.A. www.ecoanalitica.com asdrubalo@ecoanalitica.net (58-212) 266.9080 Twitter & Instagram: @aroliveros / @ecoanalitica