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

Venezuela’s Shadow Economy.

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

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

Average increase 1943-1970: +118 kb/d Average increase 1986-1998: +112 kb/d Maximum increase 1947-1957: +159 kb/d

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 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 2019

Evolution of Venezuela's Oil Production

mb/d

Sources: Baptista (2002), Pdvsa and Ecoanalítica. 1945

Depending more and more from Russia and China

0.0 0.5 1.0 1.5 2.0 2.5 3.0 2012 2013 2014 2015 2016 2017 2018 2019* 2020* Cash generating barrels China debt service Rosneft debt service Petrocaribe & Cuba

Oil exports composition

mb/d

Sources: Pdvsa, Mefbp and Ecoanalítica. *Forecast.

Pressuring hard currency resrves

7 14 21 28 35 42 49 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

MMM USD Sources: BCV and Ecoanalítica

IR vs. Extrabudgetary resources

International Reserves Extrabudgetary Resources

And the usual rent distribution mechanism dries up

5,000 10,000 15,000 20,000 25,000 30,000 35,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Public entities Cadivi/Cencoex/Dipro Sitme Preferential CADIVI Simadi/Dicom Sicad I and II

Exchange rate subsidy scheme

MM USD

Sources: BCV and Ecoanalítica.

The Venezuelan Political Marketplace

The Government gives up control to interest groups

The Government controls key economic activity

Hard foreign currency supply Oil imports Non-oil imports Gold production Rent access through illegal paths

Maintains political cohesion

Political groups fight access to rents Loyalty price

The parallel economy

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.

Income from other activities in 2018

Government financial lifeline

B

MMM MMM

The black market economy sources represented 31.9%of the income

28.2 2.5 14.4 14.4

Net oil income Non-oil income Black market economy

Black market economy vs other income sources in 2018 (USD MMM)

Billion USD

Sources: BCV, OEA, UN Comtrade, TSI and Ecoanalítica

Renewed focus on imports overbilling

0.0 20.0 40.0 60.0 80.0 100.0 2,000 4,000 6,000 8,000 10,000 2013 2014 2015 2016 2017 2018 Overbilling

• Prop. of non-oil imports

Imports overbilling

MM USD

Sources: TradeMap, BCV and Ecoanalítica.

%

Rising gold transaction costs

In 2018 they sold USD 3,280 MM at USD 2,710 MM (17.3% discount)

500 1,000 1,500 2,000 2,500 3,000 3,500 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Switzerland United Arab Emirates Turkey United States Other Reported by the BCV*

Gold smuggling** (by destination)

USD MM

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.

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
• nes.

Intervening in the currency exchange market

0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MM EUR

Euros in cash sold to the fiancial system (2019)

Sources: Ecoanalítica.

Imports become harder to track

0.0 200.0 400.0 600.0 800.0 1,000.0 1,200.0 1,400.0 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 USA China Brazil Colombia Mexico EU Canada Chile Turkey India

Imports by origin (Top 10)

USD MM

Sources: Official data reported by each country and Ecoanalítica.

Imports become harder to track

0.0 200.0 400.0 600.0 800.0 1,000.0 1,200.0 1,400.0 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 USA China Brazil Colombia Mexico EU Canada Chile Turkey India Not reported

Imports by origin (Top 10)

USD MM

Sources: Official data reported by each country and Ecoanalítica.

Getting tangled with other cash flows

0.0 500.0 1,000.0 1,500.0 2,000.0 2,500.0 3,000.0 3,500.0 4,000.0 4,500.0 2015 2016 2017 2018 2019* 2020* Ecoanalítica BCV

Remmittances to Venezuela (MM USD)

USD MM

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

Item 2018 2019 2020 Income 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

Hard Currency Cashflow

ECOANALÍTICA, C.A.

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