Economics

Latin America-Venezuela

Venezuela
Economics

Venezuela's FX regime is under severe

strain and we expect the recession to
worsen and inflation to surge

Growing strains: a gloomier macro

outlook with default more likely in 2016

The government may use short-term

measures to stem FX pressure

Table 1. Summary of Forecast Revisions

If there is no economic overhaul, a

default in early 2016 is possible
___ 2015 ____ ___ 2016 ____
New
Old
New
Old

Oil Assumptions (USD per barrel Brent Avg.)

GDP Growth(% y-o-y)
CPI, average (%y-o-y)
CPI, end year (% y-o-y)
Consolidated Government Balance (% GDP)
Current account balance (USD Bn)
Current account balance (%GDP)
International FX Reserves (USDbn)
VEF/USD (eop)
VEF/USD (avg)
Total Public Debt (%GDP)

63.9
-7.5
133.3
175.4
-20.0
-7.0
-4.8
20.1
56.6
56.4
91.2

60.8
-6.6
107.8
144.3
-20.0
-10.5
-4.7
14.5
49.0
37.8
63.4

70.5
-2.8
111.9
67.5
-7.5
1.3
1.3
19.1
167.5
158.1
99.5

64.5
-0.5
107.2
70.0
-7.1
-10.6
-4.6
17.5
75.0
62.0
62.9

Source: HSBC

Increasingly difficult to fix

Foreign exchange scarcity in Venezuela is reaching critical
levels after the late 2014 oil slump. The value of the VEF in
parallel currency markets has plunged. International reserves
have dropped to their lowest level in over a decade. We
think that recession will deepen in Venezuela and that GDP
will contract 7.5% in 2015 after a 4.0% recession in 2014.
We had previously expected a 6.6% recession. We believe
inflation could accelerate to 175% by year-end (up 31ppt
from our prior forecast), to the worst growth-inflation tradeoff in the countrys history.
The government may introduce short-term measures, such as
using its FX reserves to increase the supply of scarce goods,
ahead of elections later this year. However, without a
broader economic overhaul, we see the pressures in
Venezuela continuing to rise. We see its 4Q 2015 debt
servicing at USD5.3bn, which will be demanding. With a
weak external asset position, debt servicing of USD2.7bn
due in 1Q 2016 would also be challenging, we believe.
Unless external creditors make new funds available, we
cannot rule out a credit event at the outset of 2016.

2 June 2015
Ramiro Blazquez
North Andean Senior Economist
HSBC Bank Argentina S.A.
+54 11 4348 2616
ramiro.blazquez@hsbc.com.ar

View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report: HSBC Bank Argentina S.A.

Disclaimer & Disclosures

This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it

Our analysis suggests that a default could entail higher shortterm costs than benefits. Nevertheless, there are so far no signs
that the Maduro administration is seriously considering
reforms needed to bring long-term stability to Venezuela's
economy. Thus, we believe that the risk of policy paralysis
remains as the main factor that could ultimately place
Venezuela on the path to a credit event. We believe that
Venezuela will necessarily implement adjustments in 2016 and
we present two scenarios featuring a soft and a hard landing.

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Economics
Latin America-Venezuela
2 June 2015

Brace for impact

Venezuela's FX regime is under further strain
We expect the recession to deepen and inflation to keep surging
Unless significant economic reforms are implemented, we see

rising risks of a default on external debt in early 2016

An exhausted FX regime

Segmented FX market is a problem

Foreign exchange scarcity in Venezuela is

reaching critical levels after the late 2014 oil
slump. We estimate that official dollar supply to the
private sector sank 70% y-o-y to cUSD5bn in 1H
2015 (Chart 1), while traded volumes in the parallel
market remain virtually flat relative to the 2014
average (USD28mn per day compared to USD30mn
in 2014). According to the black market price of the
greenback in Ccuta (Colombian town bordering
Venezuela) supplied by the website DolarToday, the
parallel exchange rate has swelled north of 130%
YTD to an all-time high of cVEF400per dollar
(Chart 3). Demand is still outpacing supply and
expectations seem to be of further depreciation since
traded volumes have not reacted materially to the
meltdown of the black market VEF (Chart 2).

In addition, the FX reforms introduced by the

government at the outset of 2015 (see Venezuela
Economics: FX measures do not bolster capacity to
pay, 12 February 2015) have not stimulated private
dollar supply despite the 300% depreciation of the
SIMADI rate vs. the FX mechanism that preceded it
(Sicad2), to almost VEF200 per dollar. We estimate
that SIMADI is only trading at a meagre USD1.8mn
per day. We believe that the main reason why
private supply remains shy at SIMADI is because
this new market remains heavily managed by the
government that does not allow the exchange rate to
reach a market-clearing level.

Chart 1. USD volumes by FX market

Chart 2. Parallel FX market and traded volumes

USD bn.
14
12
10
8
6
4
2
0
2Q08 2Q09 2Q10 2Q11 2Q12

USDmn.
120

300

100

250

80

200

60

150

40

100

20

2Q13

2Q14 2Q15f

Cencoex

Sitme

Sicad I

Sicad II

Simadi

Total

Source: HSBC, Econanaltica

VEF/USD
350

50
0

0
2008 2009 2010 2011 2012 2013 2014 1Q15 2Q15
Est. daily traded vols. in parallel mkt.
Parallel FX rate e-o-p
Source: HSBC, Dolartoday

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Economics
Latin America-Venezuela
2 June 2015

Chart 3. Parallel FX Rate

International reserves fall further

VEF/USD
450
400
350
300
250
200
150
100
50
0
5/27/13 9/27/13 1/27/14 5/27/14 9/27/14 1/27/15 5/27/15

International reserves dropped to USD17.5bn by

end-May, the lowest level since the turbulent
times of the oil strike of 2003 (Chart 4). The hard
currency backing of the monetary aggregates
continued to deteriorate in 1Q-2015 and stood in
the range of VEF40-100 alternatively using M0 or
M1 divided by the level of international reserves,
from VEF22-60 in 1Q 2014 (Chart 5). Moreover,
monetary expansion continues to run
unchecked since the public sector continues to
cash in most of its FX inflows linked to oil
exports at the largely overvalued VEF6.30 rate,
thus creating the need to monetize a deficit that
we estimate could reach 20% of GDP in 2015.

Source: Dolartoday

In our view, the root of the problem lies in the

segmentation of the FX market which the
government chose to maintain in the February
overhaul of the FX system. This segmentation
propels an infinite demand for USD to profit from
huge arbitrage opportunities that arise from the
different values for the same good (the USD) in a
clear violation of the one price law. The oil shock
has only compounded already existing FX
pressures that had already started to drain
international reserves.
The spread between the priority VEF6.30 per dollar
rate applying to public imports, debt servicing
outflows and essential private imports (basic
foodstuffs and medicines) and the parallel USD is
around 6,250%. The arbitrage is to a large extent
influenced by smuggling goods imported at the
official exchange rates out of the country and then
re-selling the proceeds in the black market.
Chart 4. International Reserves
USD bn.
31
29
27
25
23
21
19
17
15
05/01/2012 02/11/2012 06/09/2013 07/07/2014 05/05/2015

Chart 5. Coverage Ratios and FX Rates

VEF/USD
250

VEF/USD
250

200

200

150

150

100

100

50

50

0
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
M0/Res.
M1/Res.
HSBC Weighted Avg. FX

Parallel

Source: BCV, HSBC

Our new FX estimates

We present new weighted average FX estimates
starting back in 2008 (Appendix 1). We base this
calculation on estimates of the volumes traded in
both the official and unofficial FX markets.
Estimated volumes in the official markets have been
supplied by Caracas-based consulting firm
Ecoanalitica, while we have estimated public
imports and parallel market flows from balance of
payments components. We exclude from the
calculation public debt servicing outflows. We
compare the current weighted average FX estimates
with the previous ones in Chart 6. Also, Table 2
depicts changes in important variables (i.e. nominal

Source: BCV

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Economics
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2 June 2015

3Q-14, despite inflation rising to 128% y-o-y by

end 2-Q (Chart 8).

USD GDP, Current Account as a % of GDP, etc.)

following from our new calculations.
Chart 6. Previous estimates and New HSBC wAvg. FX
VEF/USD
55
50
45
40
35
30
25
20
15
10
5
0
1Q11

1Q12

1Q13

Previous estimates FX rate

1Q14

Chart 8. Bilateral Real Exchange Rate

VEF/USD
55
50
45
40
35
30
25
20
15
10
5
0
1Q15

200
150
100
50
0
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

HSBC Weighted Avg. FX

Source: HSBC

Bilateral RER w/USA (avg.2009=100)

Source: HSBC

Based on our estimates of flows in the different

FX markets, we believe that the average
exchange rate (excluding debt servicing
outflows) depreciated 103% in 4Q 2014 to
VEF40 per dollar in the wake of the oil price
drop of last year. We had previously forecasted a
year-end level of VEF24per dollar. Interestingly,
our FX estimates closely resemble the
dollarization ratio of the monetary base
(M0/Reserves), as is illustrated by Chart 7. We
find that the average FX rate depreciated further
in 1Q 2015, to VEF48.5 per dollar. The
M0/Reserves ratio stood at VEF42.5. By end-2Q
2015 we estimate that the weighted average FX
could reach VEF61.5 per dollar. In real terms,
the currency would have weakened 58.5% since
Chart 7. M0/Reserves & Estimated FX Rate
55
50
45
40
35
30
25
20
15
10
5
0

55
50
45
40
35
30
25
20
15
10
5
0
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
M0/Res.

Source: HSBC, BCV

250

HSBC Weighted Avg. FX

An inflation puzzle?
The sharp real depreciation (way above that of
the 2008-09 crisis) could be hiding an
underestimation of underlying inflation by the
official figures supplied by the government.
According to the official National CPI figures,
inflation in 2014 ended at 68.5%. Since this
release, Venezuela has stopped publishing
inflation statistics. To us, it is puzzling that real
money demand continued rising in 2014 (albeit at
a more moderate pace) despite GDP contracting
around 4% (Chart 9), the strongly negative real
interest rates and the steep depreciation of the
VEF in the parallel market. In the current setting
of financial repression and recession, the excess
VEF liquidity is likely to fully impact on higher
prices (thus reducing real money balances) and
put pressure on the black market FX since activity
is on the downside and there are no investment
vehicles that offer positive real rates in VEF.
Therefore, we think that there is evidence
pointing to inflation being underestimated by
the official price surveys that do not sample
prices in the black market and only take into
account prices at official distribution channels.

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Economics
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2 June 2015

%.

Jan 08 VEF bn.

250

200

4
2

150

100

-2

50

-4
-6
2008 2009 2010 2011
GDP Growth (% y-o-y)

2012

0
2013 2014
Real Money Demand

Source: HSBC, BCV

Stagflation reloaded
Anecdotal evidence suggests that lower dollar
supply related to the depressed oil prices coupled
with smuggling is boosting the scarcities of goods
and production inputs, thus intensifying the
stagflation trends. Given that the government has
also stopped publishing activity statistics since 4Q
2014, there are no reliable indicators to gauge the
true scope of the recession. Private construction
dipped 25% y-o-y in the first three months of the
year according to the Venezuelan Construction
Chamber (CVC). Imports contracted 80% in April
compared to November 2014 according to the
Commerce Chamber. Revealing anecdotal
evidence is that back in 2006 La Guaira port had 8
ships operating and another 17 waiting to unload,
while now, one single ship arrives every 15 days.

Chart 10. Growth- Inflation Trade-off

200%
2015
180%
160%
140%
120%
100%
80% 2014

CPI %y-o-y

Chart 9. Real Money Demand & GDP Growth

60%
40%
20%
0%
-10.0% -5.0%

2013

0.0% 5.0% 10.0% 15.0% 20.0%

GDP %y-o-y

Source: BCV, HSBC

Elections loom
The Chairman of the Electoral Council, Tibisay
Lucena, recently confirmed that legislative
elections will take place in 4Q 2015, although the
exact date is still to be determined. In February,
the opposition was ahead in the polls with a 13ppt
advantage in voting preferences over the ruling
party. According to the most recent polls, the
oppositions edge could have increased north of
20ppt with the deterioration of the economic
situation since February (see Charts 11 and 12). A
landslide defeat in the legislative elections not
only could pose governability issues for the
Maduro administration but could also pave the
way for a recall referendum in 2016 (for more
on this, please see LatAm Election Guide: Mexico,
Argentina, Venezuela and Uruguay, 6 April 2015).

We think that recession will deepen in

Venezuela and that GDP will contract 7.5% in
2015 after a 4.0% recession in 2014. We had
previously expected a 6.6% recession. Inflation
factoring in prices in the unofficial distribution
points could accelerate to 175% by year-end (up
31ppt from our prior forecast), to the worst
growth-inflation trade-off in the countrys
history (Chart 10).

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Economics
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2 June 2015

Chart 11. Latest Legislative Elections Polls (2015)

Chart 12. Legislative Elections Polls Average (2015)

%
60

Avg. %
60

50

50

40

Polls average

40

30

30

20

20

10

10

0
Datincorp Datanlisis Keller
(Mar)
(Mar)
(Mar)

PSUV

Varianzas Ucab (Abr) Hercon

(Abr)
(May)

MUD

Average

0
Sep

Undecided

Oct

PSUV

Source: Datincorp, Datanalisis, Keller, Varianzas, Hercon

Jan

Feb

Mar

MUD

Apr

May

Undecided

Source: Datincorp, Datanalisis, Keller, Varianzas, Hercon

Table 2. Previous vs. Current Estimates

Previous

2008

2009

2010

2011

2012

2013

2014

2015f

2016f

VEF/USD average
VEF/USD end-year
Nominal GDP (USDbn.)
Current account bal. (% GDP)
Total Public Debt (%GDP)
Intl. FX reserves (USDbn)

2.2
2.2
315.2
10.2
22.9
43.1

2.2
2.2
329.0
0.7
39.9
35.8

2.6/4.3
2.6/4.3
391.1
2.3
29.9
30.3

4.3
4.3
315.7
7.7
38.8
27.5

4.3
4.3
380.3
2.9
36.9
26.3

8.1
8.1
311.8
4.6
44.2
21.5

15.3
24.0
268.6
2.0
51.7
22.1

37.8
49.0
221.9
-4.7
63.4
14.5

62.0
75.0
228.5
-4.6
62.9
17.5

Current

2008

2009

2010

2011

2012

2013

2014

2015f

2016f

VEF/USD average

2.5

3.7

3.8

5.0

5.2

10.7

21.3

56.4

158.1

VEF/USD end-year

2.8

4.0

3.9

5.0

5.8

11.1

40.0

56.6

167.5

Nominal GDP (USDbn.)

267.8

197.5

268.3

272.2

316.4

244.9

178.4

145.3

140.7

Current account bal. (% GDP)

12.0

1.1

3.3

9.0

3.5

2.2

2.9

-4.8

1.3

Total Public Debt ( %GDP)

22.2

38.5

35.4

48.0

49.0

59.9

78.2

91.2

99.5

Intl. FX reserves (USDbn)

43.1

35.8

30.3

29.9

29.9

21.5

22.1

20.1

19.1

Source: HSBC estimates

We think that in the following weeks the

government could take measures to stabilize
FX dynamics ahead of the elections to prevent
exchange rate volatility and depreciation from
further damaging its electoral prospects.

Short-term options
Broadly speaking, we believe the government has
two options:
1. Strengthen FX controls and use reserves to
increase imports (particularly public imports)
and alleviate scarcities.
2.

FX simplification by eliminating one of the

three exchange rates (presumably the priority

VEF6.30 rate) or by setting up a single

exchange rate regime
Option 1) has the advantage of minimizing political
costs for the incumbent but it would produce no
improvement on fiscal accounts and would preserve
arbitrage opportunities that would ultimately lead to
the depletion of reserves. In turn, option 2) would
lower the inflationary financing of the deficit and
would also cut short smuggling, but at the cost of
inflicting a sharp blow to the power base of the
Maduro administration (i.e. the military and the
lower income segments).
Given those implications, we believe it is more
likely that Maduro will seek to ease pressures by

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Economics
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2 June 2015

Table 3. EOP Exchange Rates

Public
Private
SITME
SICAD
SICAD II /
SIMADI
Cencoex/
Cadivi
Parallel
VEF/USD
Devaluation

2008

weight
(%)

2009

weight
(%)

2010

weight
(%)

2011

weight
(%)

2012

weight
(%)

2013

weight
(%)

2.2

23

2.2

17

2.6

30

4.3

33

4.3

3.0

77

4.4

83

4.5
5.3

70
20

5.4
5.3

67
19

7.1
5.3

2014

weight
(%)

45

6.3

55
13

14.9

2015f

weight
(%)

45

6.3

55

63.9

41

6.3

45

59

97.8

55

11.0

12.0
50.0

6
13

20.0
200.0

14
5

2.2

73

2.2

36

2.9

61

4.3

61

4.3

64

6.3

76

6.3

43

6.3

63

5.4
2.8

27

5.7
4.0
42%

64

8.6
3.9
-2%

19

9.0
5.0
29%

19

15.9
5.8
16%

23

60.2
11.1
90%

15

138.5
40.0
261%

39

450.0
56.6
42%

18

Source: HSBC estimates

Chart 13. M0/ Reserves vs. Expected FX Rate

following the first option. Our base case is that

by end 2015 the bolivar will once again become
over-valued. We estimate that the average
exchange rate will end 2015 at VEF57 per dollar
compared to an M0/Reserves ratio that we

VEF/USD
VEF/USD
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

forecast at 85 (see Chart 13). We depict a detailed

set of forecasts of traded volumes and FX rates of
the different markets in Tables 3 and 4.

Difficult choices not far away

M0/Res.

HSBC Weighted Avg. FX

Source: HSBC, BCV

Considering the already executed financing and

the likely funding options in the remainder of the
2015, Venezuela would only need to draw
USD2.0bn from its international reserves stock
compared to the closing level of 2014, to fund an
FX gap of cUSD23bn in 2015 (Table 5). So far,
Venezuela has obtained USD10.8bn by scraping
the bottom of the barrel, including CITGO
dividend payments with the proceeds of a debt

issuance, discounting receivable accounts

generated by oil loans to Petrocaribe countries and
even by using SDRs deposited at the IMF. We
think that by year-end Venezuela will have almost
fully tapped these alternative sources, including
almost all of its remainder of liquid holdings in
off-budget funds (USD4bn).

Table 4. Average Exchange Rates

2008
Public
Private
SITME
SICAD
SICAD II /
SIMADI
Cencoex/
Cadivi
Parallel
VEF/USD
Devaluation

2.2
2.6

weight
(%)
23
77

2009
2.2
4.1

weight
(%)
23
77

2010
2.6
4.4
5.3

weight
(%)
32
68
10

2011
4.3
5.4
5.3

weight
(%)
35
65
18

2012
4.3
5.8
5.3

weight
(%)
41
59
19

2013

weight
(%)

6.1
14.1
1.3
10.5

43
57
1
4

2014

weight
(%)

2015f

weight
(%)

6.3
32.2

42
58

6.3
101.5

47
53

11.2
49.8

13
15

20.0
160.6

13
13

2.2

79

2.2

51

2.8

64

4.3

61

4.3

62

6.1

69

6.3

50

6.3

54

4.4
2.5

21

6.1
3.7
45%

49

7.9
3.8
5%

26

8.6
5.0
30%

21

11.3
5.2
4%

19

37.1
10.7
105%

25

92.9
21.3
100%

22

373.5
56.4
165%

20

Source: HSBC estimates

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Table 5. Uses & Sources of FX

debt servicing at USD5.3bn will be demanding

while with a weak external asset position debt
servicing of USD2.7bn in 1Q 2016 would also be
challenging, we believe (Chart 14).

2014e

2015f

2016f

Venz Basket Oil Price

FX Demand (1)
Imports
Interest
Principal
Other
o/w: Services
o/w: Current Transfers

89.0
78.8
44
6.5
12.1
16.0
15.4
0.5

54.9
68.0
37.1
6.7
11.7
12.5
12.1
0.4

61.5
67.5
37.6
6.1
10
13.8
13.3
0.5

Exports
Cash Exports (2)

76.0
69.4

47.7
45.1

52.1
48.5

FX Gap (4 = 1-2)

9.4

22.9

19.0

Executed Financing (5)

Off-budget funds
China
Others
Discounted Receivable Accounts
CITGO bond issuance
Gold Swap
Others

10.0
5.7
4.0

10.8

5.0

4
3

0.3

1.9
2.5
1.0
0.4

FX Gap after executed financing (6 = 4 5)

-0.6

12.1

Possible additional funding (7)

Off-budget funds
Gold Swap
Discounted Receivable Accounts
Special Drawing Rights IMF
International reserves drawdown (8 = 6 - 7)

10.1
4.0
0.8
2.6
2.7
2.0

Source: BCV, HSBC

Factoring in a slight recovery in the price of the

Venezuelan oil basket in 2016, next year
Venezuela could face an FX gap of USD19bn.
Further, although Maduro has convened investment
plans in Venezuela with his Chinese and Russian
counterparts, there is no data on the nature of this
financing or indications that this will help bridge the
financing gap in the near future.
Thus, in 2016, Venezuela will face an FX gap of
a size equal to its end-2015 international
reserves, while FX savings in off-budget funds
are likely to be depleted. Further, we believe that
Venezuela will start next year with a currency
overvaluation of at least 33%. Political tension
between the government and the opposition could
also fuel uncertainty and dollar demand, thus
compounding overvaluation. In addition, 4Q 2015

Unless external creditors make funds available

we cannot rule out a credit event at the outset
of 2016.
Chart 14. Sovereign and PdVSA Debt Profile 2015-16
USD bn.
6

2
1
2Q15

3Q15

4Q15
Capital

1Q16

2Q16 3Q16
Interest

4Q16

Source: Bloomberg

Scenarios for 2016

Scenario 1: No default
To avert a credit episode in 2016, Venezuela will
have to implement thorough and credible monetary
and fiscal reforms. Deterioration of political
variables could put additional pressure on money
demand and exacerbate price dynamics. A
stabilization plan featuring a currency board or full
dollarization of the economy cannot be dismissed. A
credible stabilization plan would also hinge on
addressing the sharp fiscal deficit and would allow
USD nominal GDP to bounce back after free falling
for three years in a row, even though real GDP
growth could still remain in negative terrain due to
the fiscal and monetary retrenchment. We think
inflation would decelerate sharply while debt metrics
would improve; a market-friendly debt restructuring
whereby creditors would be willing to extend
maturities and lower interest rates without affecting
the present value of its investments would probably

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Economics
Latin America-Venezuela
2 June 2015

Scenario 2: Default

take place. Table 6 shows estimates of the main

macro variables in such scenario.

In a default scenario, we see political tension

heating up and the risk of social unrest.

However, we believe the necessary adjustments to

reach this scenario could prove too much of a
political burden since it will necessarily rely on a
180 degree turn in economic policies so as to find
external funding for the transition to a more
orderly economy. We think Venezuela will need
to return to debt markets since in our base case
we assume China and Russia will also restrict
future additional loans. This is because in the past
few years Venezuela has made little progress in
completing the bilateral infrastructure and oil
projects agreed with these governments in the past.

Economic depression would likely ensue as

inflation could peak at 250% while real GDP
could drop by an additional 4.5% (see Table 6)
In this scenario, the likelihood of dollarization
coupled with political change at some point after
the credit episode seems higher.
In this scenario, we think that dollarization
could be implemented at an exchange rate of
VEF250 per dollar and that the real exchange
rate could depreciate by 50%.

Table 6. Default vs. Non Default Scenarios

Real GDP
% y-o-y

Nominal Fiscal
___ Inflation ___
GDP Deficit
USD bn. % GDP %eop
%avg.

__ FX Rate ___
eop

Avg.

Current Account Trade Balance (USD International Total Public

Balance
bn.) Reserves
Debt
USD bn. % GDP
Exports Imports
USD bn.
%GDP

Bilateral RER _
Avg.

%chg.

2009
2010
2011
2012
2013
2014
2015f

-1.7
-1.6
4.5
5.8
1.8
-4.0
-7.5

197.5
268.3
272.2
316.4
244.9
178.4
145.3

-8.8
-10.4
-11.6
-15.5
-11.5
-15.1
-20.0

25
27
28
20
56
69
175

27
28
26
21
41
62
133

4.0
3.9
5.0
5.8
11.1
40.0
56.6

3.7
3.8
5.0
5.2
10.7
21.3
56.4

2.3 1.1%
8.8 3.3%
24.4 9.0%
11.0 3.5%
5.3 2.2%
5.2 2.9%
(7.0) -4.8%

57.6
65.7
92.8
97.3
89.0
75.6
47.7

41.2
38.5
46.8
59.3
53.0
44.2
37.1

35.8
30.3
29.9
29.9
21.5
22.1
20.1

38.5
35.4
48.0
49.0
59.9
78.2
91.2

100.0
84.2
90.7
78.9
113.7
154.9
175.5

10.7
-15.8
7.7
-13.0
44.1
36.3
13.3

2016 No
Default f

-1.0

167.2

-5.0

35

49

85.0

85.0

(1.3) -0.8%

52.1

37.6

23.4

81.4 181.0

3.1

2016
Default f

-4.5

114.2

-10.0

100

175

250.0

231.3

52.1

33.7

14.8

117.5 264.8

50.9

3.8

3.4%

Source: BCV, INE, HSBC estimates

abc

Economics
Latin America-Venezuela
2 June 2015

Conclusions

Chart 15. CPI Inflation in Both Scenarios

In both scenarios, we see Venezuela

implementing a stabilization plan with inflation
converging by two-digit figures, more slowly in
the case of default (Chart 15). As could be
expected, the real exchange rate ends up being
much weaker in the default case (Chart 16) as
well as the dollar size of the economy, while debt
ratios as a percentage of GDP edge higher in the
default case.

% y-o-y
300

Rational policy making should therefore

preclude the default possibility since it could
entail even higher short-term costs than benefits
(for more on this see Venezuela Economics and FI
strategy: Is a default inevitable?, 9 January 2015).
Moreover, a credit episode does not mean that
Venezuela will avert the implementation of a deep
economic adjustment at some point ahead.
In our view, President Maduro is at a crossroad. Applying adjustments could severely
undermine his political footing. The main problem
for Maduro to implement reforms is the lack of
political capital to neutralize the rent-seeking
groups that are currently benefiting from
economic distortions. Thus, we believe that this
risk of policy paralysis remains the main factor
that could ultimately place Venezuela on the path
to a credit event.

10

250
200
150
100
50
0
4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15f 4Q16f
Inflation EOP (% y-o-y)
Default Scenario
No Default Scenario
Source: BCV, HSBC estimates

Chart 16. Bilateral RER in Both Scenarios

300
250
200
150
100
50
4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15f 4Q16f
Bilateral RER w/USA (avg.2009=100)
Default Scenario
No Default Scenario
Source: HSBC estimates

abc

Economics
Latin America-Venezuela
2 June 2015

Appendix 1. HSBC Weighted Avg. FX

HSBC Weighted Avg. FX
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15f
3Q15f
4Q15f
1Q16f
2Q16f
3Q16f
4Q16f

Default Scenario

2.6
2.4
2.2
2.8
3.3
3.6
3.4
4.0
3.8
3.8
3.7
3.9
5.0
5.0
4.9
5.0
4.6
5.5
4.7
5.8
7.5
10.8
11.9
11.1
18.5
14.1
19.7
40.0
48.5
61.5
59.0
56.6

No Default Scenario

150
250
250
250

85
85
85
85

Source: HSBC estimates

Basic Forecasts Table

GDP growth (% y-o-y)

CPI (% y-o-y)
Current account bal. (% GDP)
Consolidated Government
Balance (% GDP)
Intl. FX reserves (USDbn)
VEF/USD end-year

2008

2009

2010

2011

2012

2013

2014

2015f

2016f

5.7
30.9
12.0
-3.5

-1.7
25.1
1.1
-8.8

-1.6
27.2
3.3
-10.4

4.5
27.6
9.0
-11.6

5.8
20.1
3.5
-15.5

1.8
56.2
2.2
-11.5

-4.0
68.5
2.9
-15.1

-7.5
175.4
-4.8
-20.0

-2.8
67.5
1.3
-7.5

43.1
2.8

35.8
4.0

30.3
3.9

29.9
5.0

29.9
5.8

21.5
11.1

22.1
40.0

20.1
56.6

19.1
167.5

Source: HSBC estimates

11

Economics
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2 June 2015

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Disclosure appendix
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