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15 October 2013
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Ramirez to play bigger role on economy
This week Venezuela President Nicolas Maduro surprised analysts by removing Minister of Finance Nelson Merentes from the post of Economic Vice President and replacing him with Minister of Energy and Oil Rafael Ramirez. Merentes will remain in his post as Minister of Finance, but will not participate in the coordination Cabinet which is composed of six Vice-Presidents. The move is a complex one to interpret. First of all, Minister of Energy and Oil Ramirez was already a member of this group, as Vice-President for Territorial Development, a position that will now be occupied by the Minister for Air and Water
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Transportation General Herbert Garca Plaza. But it is clear that Ramirez will play a bigger role in economic policy and Merentes will have a reduced role going forward. Moreover, Minister of Planning Jorge Giordani was already one of the six Vice Presidents in the Coordination Cabinet, thus Merentes is clearly the odd man out. Last week there had been rumors that Merentes was on his way out, after the removal of Temir Porras as President of the Development Bank Bandes. Merentes was put in charge of the Ministry of Finance in April, but had managed to accomplish little, particularly on the foreign exchange front, which he made the focus of his policy making. It was never clear whether the various groups in the Cabinet were fighting Merentes proposals or he was simply trying to please everyone by reaching a consensus. In the end Merentes, who is considered to be pragmatic, managed to implement a very inefficient auction system called Sicad, which in the end did little to provide foreign currency for importers. Merentes was clearly seen as a pragmatist and the hope was that he would push for a freer parallel exchange system and the decriminalization of foreign exchange transactions. Unfortunately, he seemed to only be paying attention to the foreign

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exchange problems and not to a wider range of problems and distortions in the economy. On the other hand, Rafael Ramirez is considered to be more of a radical and less of a pragmatist. However, as President of PDVSA, he has typically been more pragmatic when it came time to solving the companys problems. Moreover, since the April Presidential elections, it has been Ramirez from PDVSA that has shown more openness to change policies, such as the agreements with Chevron and Sinopec. He has also pushed for the auction of oil wells in Western Venezuela, which have been shut down for years. These auctions are still yet to take place, however. In some sense, Ramirez is known to want a more flexible policy in the foreign exchange front, since it is PDVSA that has suffered the most by the over-valuation of the currency as it is the main provider of foreign currency to the country and the Government has used it as a source of funds for its social programs. At the same time, Ramirez will likely approach the problem from the point of view of PDVSAs needs and not trying to implement the overall reforms that the economy requires. Postponing these reforms will simply exacerbate the current problems and lead to a more severe adjustment in the future. Ramirez will also resort to issuance of Bs./US$ bonds, which in practice have proven to be quite negative for the economy. The second important change is that now General Herbert Garcia will occupy a position as Vice-President for Territorial Development. With this position, the General now has three important positions as he is also in charge of the Mision Vivienda, as well as being President of the Organo Superior para la Defensa de la Economia, a body recently created by President Maduro to defend the economy

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from the supposed economic war coming from the opposition. In retrospect, the creation of this body was the first visible setback for Minister Merentes, as he was not included in it, despite what the organization is supposed to do. In the end, whatever the changes mean or imply, it is clear that almost six months after taking office President Maduro has yet to pull together an effective team to run the country. He has now pulled two surprising and significant changes in two weeks, suggesting that he is aware that the economy is floundering. Enabling Bill President Nicolas Maduro asked the Venezuelan National Assembly this week for an Enabling Bill, which would allow him to rule by decree without having to pass bills through Congress, in order to fight what he claims are the efforts by both the Opposition and foreigners to disrupt the countrys economy. The original reason he gave for the request was to fight corruption, but much like his predecessor Hugo Chavez, it is clear Maduro does not want to negotiate legislation and be bothered with an Opposition in the National Assembly. What remains a mystery is that in order to approve the special powers granted by an Enabling Bill, Maduro requires threefifths of the Deputies in the Venezuelan National Assembly -- a number that he is still one short of. The prosecutor has accused a Deputy of corruption, but her removal is in its early stages. The alternate member for this particular Deputy switched sides since the Legislative elections and could become the 99th vote that Maduro needs. However, there are suspicions that the Government may have managed to garner another Deputy and that Maduro does have the required 99 votes. Some fear that if the Enabling Bill is approved President Maduro will use it mainly to persecute the Opposition, control media

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even further and impose a tighter grip on the country as his popularity has been declining steadily since he was first elected in April. Not only does Maduro lack the charisma of Chavez, but there have been wider protests, increasing shortages and higher inflation ever since Maduro took charge in April. If he gets that 99th Deputy, what he decides to do with his ability to rule by decree is yet to be seen. SICAD to return President Nicolas Maduro announced that the Complementary System of Foreign Currency Administration (SICAD) will once again come into action for what is left of the year, by auctioning US$100 million weekly, for a total of US$900 million until the end of 2013. This was then confirmed on Friday by newlyappointed Economic Vice President Rafael Ramirez, who filled in some of the details. Ramirez explained that the currency given through the SICAD system was aimed to complement any needs the economy might have that the Commission for the Administration of Currency Exchange (CADIVI) was not able to satisfy. He stated that 95% of the currency provided by the Government is given by CADIVI with the rest being covered by these Central Bank auctions through SICAD. CADIVI is also meant to attend the needs of the higher priority sectors such as health and food, which represent an estimated 30% of the total of currency requests. He said that CADIVI has liquidated a total of US$ 33.143 billion so far this year. Sadly, that amount is insufficient in an economy of 29 million where inflation has increased over 50% and where 70% of products are imported.

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September Inflation soars Venezuela's Central Bank reported the latest inflation figures that reveal the official rate of inflation is 49.4%. Monthly inflation for September rose to 4.4% meaning that the accumulated rate of inflation for just the 9 months since January 1 is 38.7%. The biggest rise was in the food sector, with a 70% annual rise; the clothes sector came in at 38.2%; the health services sector was 22.9%; and transportation was 38.3%. The scarcity rate, which measures the availability of basic goods, went from 20% to 21.2%. Last year the shortage rate was of 13.2%. The Government blames these rising prices and the shortages on hoarding, speculation and an economic war by the Opposition and the United States Caracas Stocks rise Venezuela's stock market had another winning week, with the index rising 4.70% for the week ending October 11. The Venezuela Stock Market Index closed at 1,829,905 on Friday. The rise was due to a few stocks, specifically Mercantil Servicios Financieros A and B which closed at Bs. 610 a 5.17% rise for both of them. Banco Provincial also rose 1.83% and ended the week at Bs. 555. The only loser was Banco de Venezuela which dropped 1.25% and ended the week at Bs. 39.5. The Venezuela Stock Market is now up 288.15% for the year to date in bolivar terms, though only 164.94% in official rate dollar terms because of a February devaluation, but still making it the best performing stock market in the world.

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Caracas Stock Exchange for the last five days Emerging Markets Emerging markets seemed to maintain a positive note last week as expectations that an agreement would be reached ending the US Government shutdown; the MSCI Emerging Markets Index rallied 1.6% for the week. Venezuelan debt as well as PDVSA bonds recovered some of their losses from the previous week. The PDVSA 12.75% of 2022 ended the week near 97.55, a 13.23% yield, after having had its 52 week low last week at 94. The global Venezuela 12.75% of 2022 also closed close to 100, where it yields 12.75% to maturity. Upcoming economic measures that were announced will affect the countrys debt. Newly appointed Economic Vice President Rafael Ramirez is inclined to new issues, so the possibility is likely. PDVSA is likely to issue in the 2025 to 2035 range of maturities, with an effort to persuade shorter-term debt holders (2014-2017) to swap into these new longer bonds. PDVSA has one of its bonds -- the PDVSA 8% of 11/17/2013 -- maturing next month and then the US$3 billion PDVSA 4.9% of 10/28/14 maturing next year. After paying the maturing US$1.5 billion 10.75% of 9/19/2013 last month, Venezuelas next maturity is the US$1.5 billion Venezuela 8.5% of 10/8/2014.
Chart: Venezuelan Yield Curve, showing the Sovereign bonds as blue dots and some corporate bonds as red dots. EDC= Electricidad de Caracas and PDV=PDVSA.

Table of bond offer prices at the close of this report for booth PDVSA and Venezuelan issues

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