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21 October 2013
If you would like to make sure that you receive this report by e-mail from us each week, please let us know with a message to Russ Dallen or Miguel Octavio at rdallen@bbo.com or call us on: Caracas (58) 212 335 1906 Miami 305 735 8280 New York 646 201 5843 London (44) 207 993 4557 Running in Place
After six months in power, the Maduro administration continues to run in place, making huge announcements, but not really changing much in terms of the seriously needed adjustments to economic policy. With the appointment of Rafael Ramirez as Vice-President for Economic Matters, there have been more announcements, but most of them remain hypothetical and well into the future, with few actual new policies in place. About the only accomplishment by Ramirez in the last week is regularizing the Sicad auctions, with the first one taking place last week. As promised, US$100 million was sold at Bs. 10.6 per dollars, but demand was reportedly eight times that amount. President Maduro had originally said that US$900 million would be sold weekly in the Sicad auctions, but misspoke, as this is the total amount available until the end of the year, which will conveniently be

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exhausted right before the Mayoral and local elections. The Government has made all sorts of promises about breaking the parallel market rate, but it is clear and quite obvious that US$100 million per week will not do it. This is half of what SITME was assigning a year ago, just when the parallel rate soared. At the same time, the Government is apparently ready to close CADIVI for travelers and create a special separate mechanism for this purpose in 2014. This will only put additional pressure on the parallel market if travelers are denied the only official window they have now, as suggested by the news. It is not clear when this will be implemented. In the end, Sicad remains a perverse mechanism, which assigns foreign currency sporadically and in insufficient amounts to variable areas of the economy. Those that benefit from the socalled “auction” are free to sell their goods at any price, which they do, as no one has any idea when the next burst of foreign currency will take place. Demand is so high, that the dollars are indeed used to import goods, with few of those dollars finding their way to the parallel market. Thus, Sicad in the end neither helps in reducing the parallel market rate nor in reducing inflation. Ramirez’s control on economic matters also seems to imply the return of bond issuance in the near future, which is unlikely to help already depressed bond prices. If PDVSA were to issue a 2025 bond now, it would have to pay a 13% yield, which is where the market is currently valuing Venezuelan debt. Additionally, part of the Sicad auctions are likely to be paid for with PDVSA bonds, as well as paying for food imports from Colombia, Uruguay and Argentina, which will only increase supply at a time of lower demand. Given the lack of a serious adjustment, the default of government-expropriated steel company Sidetur, and more issuance, bond prices are likely to continue their downturn.

For more information call: Russ Dallen, Miguel Octavio, or Diana Arreaza Phone: (787) 999-6537 Although the information in this report has been obtained from sources that bbo Financial Services believes to be reliable, we do not guarantee its accuracy and completeness. All opinions and estimates included in this report as of this date are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Bbo Financial Services

bbo Equity Research
Ramirez also gave statements indicating the Government would stop subsidizing dollar imports by the private sector and would instead subsidize local production of goods in Bolivars. He gave no indication as to what this exactly meant, but it is clear that the Government intends to continue its policy of importing directly basic goods and giving out smaller amounts of foreign currency to the private sector. While many believe that any adjustment is being postponed until after the local elections on December 8th, we do not believe that the Maduro administration will then go beyond a small devaluation of the official rate after Christmas, combined with the creation of a third foreign exchange mechanism, which is likely to be highly regulated (and not the free market that many hope and believe is being planned). Until someone new comes into Maduro’s economic team, we do not expect any significant adjustment to be made and the distortions should continue to get worse. Rotating figures within the Cabinet has just provided the same recycled ideas, most of which created the current situation in the first place.

Weekly Report
functions…impose both administrative and civil penal sanctions to avoid corrupt actions.” Venezuela’s anti-corruption laws are fairly modern and strong, thus it is unclear what would be modified, except to allow authorities to act in a more repressive and expedient fashion. In fact, it was the Chavez administration which subverted the power of the Comptroller’s office and the position has still not been filled since the death of the Comptroller three years ago. But more importantly, the Government has ignored blatant cases of corruption, including a number of cases which were detected abroad, creating an atmosphere of impunity, which only promoted even more corruption. However, it is this image of rampant corruption -- which shows up high in the polls -- that the Maduro Government is trying to use by making it the centerpiece of the Enabling Bill. It is accompanying this strategy with isolated detentions, such as the Chavista Mayor of the city of Valencia and administrators of the iron companies, where corruption has been quite evident for years. The Bill also plans to “Establish strategic mechanisms to fight against foreign powers that attempt to destroy the Fatherland…” It is unknown exactly how this will be done. The Enabling Bill also proposes to pass Organic Laws -- which is simply illegal -- but the Maduro administration is likely to have the Supreme Court, which they control, validate the procedure. Under Venezuelan law, an “organic law” is a law which takes precedence over all prior laws (including previous organic laws) and over all future conflicting non-organic laws or subsidiary legislation such as decrees, resolutions, and so on. Under Venezuelan law, “organic laws” hold more weight than ordinary laws and must be approved by a two-thirds vote of the National Assembly – which Maduro currently does not have. In the country’s legal system, organic laws are placed just below constitutional provisions and above ordinary laws. Organic laws establish basic principles to be regulated by other, narrower laws. The Government claims it has the 99 Deputies required to approve the Bill, but it is unclear who will be the last Deputy needed for this to happen, as the Government only controls 98 Deputies – just one short of the two-thirds it needs. The Prosecutor wants to remove one Deputy for corruption, knowing that the alternate would vote for the Bill, but the time to complete this may be longer than that of the Bill, which should come to a vote in the next two weeks. But clearly, the Maduro Government must have the votes locked up – or a plot to get them -- if it finally officially presented the request to the National Assembly.

Enabling Bill
The Head of the National Assembly released the formal proposal for the Enabling Bill to the Deputies of the National Assembly. The Enabling Bill is to allow President Maduro to pass laws and rule by decree, without the legislature, where he faces an Opposition minority with just enough votes to prevent total hegemony. As proposed, there are no details of which Laws will be proposed or modified during the twelve months that the Enabling Bill would be in place. On economic matters the Enabling Law is supposed to “Dictate and/or reform norms and measures destined to plan, rationalize and regulate the economy…and defend economic stability, as well as watching over monetary and price stability”. Clearly, what the Maduro Government wants to do is embark on a policy of tightening controls on the economy even more, by increasing its ability to penalize the private sector and regulate and control both the production and import of goods. Obviously, it has been the Government that is destabilizing prices and monetary stability by continuously printing money, extracting international reserves and lending to State companies. On the corruption front, the proposal is equally vague, proposing to create regulations which “promote the essential values of public

bbo Equity Research
Caracas Stocks rise 6.3%
Venezuela’s stock market rose sharply during the week ending October 18, with the Caracas Stock Index gaining 6.3% to close at Bs. 1,940,221 on low volume. The rise was due to a few stocks, specifically land developer and papermaker Manpa, which was the leading stock, gaining 14.2% at Bs. 12. It was followed by Banco Provincial, up 8.2% at Bs. 600.25, and commercial property developer Fondo de Valores Inmobiliarios B gained 6.6% at Bs. 18.65. Mercantil Servicios Financieros A and B were up 3.3% and 1.64%, closing at Bs. 630 and 620 respectively. The Venezuela Stock Market is now up 312.62% for the year to date in bolivar terms, though only 181.63% in official rate dollar terms because of a February devaluation, but still making it the best performing stock market in the world. Real returns in the unofficial dollar market are less. On January 1, one US dollar could buy approximately 20 bolivars in the unofficial black market. On Friday in Cucuta, Colombia, across the Venezuelan border -- where the unofficial market in bolivar/dollars is not illegal -- one US dollar could be sold for 46 bolivars.

Weekly Report
Ecuador was upgraded by Fitch to B with a stable outlook. Venezuela and PDVSA bonds gyrated this week, as Barclays downgraded the country’s debt to neutral on Wednesday, but bonds bounced back to close the week higher. The Venezuela 9.25% of 2027 rose 0.75 points for the week, closing at 81 where it yields 12.10%, while the PDVSA 12.75% of 2022 rose 0.35 points to close at 98.5, where it yields 13.06% to maturity.

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.

Issuer Petrobono '14 Petrobono '15 Petrobono '16 PDV '17 PDV '17N PDVSA '21 PDVSA '22 PDV '27 PDV´35 PDV '37 EDC 18 VE '14 VE '16 VE '18 VE' 18 N VE' 19 VE' 20 VE' 22 VE' 23 VE' 24 VE' 25 VE' 26 VE '27 VE' 28 VE'31 VE '34 VE'38

YTM 10.49% 12.18% 12.70% 12.22% 11.56% 12.56% 12.96% 10.99% 12.89% 10.18% 15.09% 7.94% 10.29% 10.89% 11.42% 12.00% 11.75% 12.65% 12.70% 12.39% 12.20% 13.00% 11.86% 12.40% 13.04% 12.11% 10.84%

Due Date 10/28/14 10/28/15 10/28/16 12/04/17 02/11/17 11/17/21 02/17/22 12/04/27 05/17/35 12/04/37 10/04/18 10/08/14 02-26-16 08/15/18 01/12/18 10/13/19 09/12/20 10/08/22 05/07/23 10/13/24 04/21/25 10/31/26 09/15/27 05/07/28 05/08/31 04/09/34 01/03/38

Price 94.75% 87.50% 81.50% 80.75% 90.35% 82.25% 98.90% 61.00% 77.25% 58.50% 79.13% 100.50% 90.75% 110.00% 83.25% 82.25% 72.75% 100.50% 79.85% 75.50% 72.25% 92.25% 82.40% 79.00% 92.50% 79.50% 67.25%

Coupon 4.90% 5.00% 5.13% 5.25% 8.50% 9.00% 12.75% 5.38% 9.75% 5.50% 8.50% 8.50% 5.75% 13.63% 7.00% 7.75% 6.00% 12.75% 9.00% 8.25% 7.65% 11.75% 9.25% 9.25% 11.95% 9.38% 7.00%

Caracas Stock Exchange for the last five days

Emerging Markets bonds strong
Emerging market and corporate bonds in general ended the week with a bang after US politicians reached an agreement on extending that country’s debt ceiling. Bonds drifted lower at the beginning of the week, but once an agreement came out, prices strengthened across the board. The 10year US Treasury bond reached a twelve-week high after the agreement was reached. The new issue market was slowed down by the drama in Washington with few new issues and none in size coming to market.

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