Corporate Challenges

and Opportunities in

Venezuela & Argentina

Oscar Mazza

TTS Latam Regional Sales Head,

Corporate and Public Sector, Citi

oscar.a.mazza@citi.com

+1 (305) 347-1336

Treasury and Trade Solutions

Noraily Bello

Venezuela Treasury and Trade

Solutions Head

Noraily.bello@citi.com

+58 (212) 705-2228

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Venezuela

Overview—Venezuela

Growth Outlook: recession would continue during 2015 (-7.5%)

Venezuelan Basket Price 2014 Average US$88.6 p/b; 2015 last Price: $48.2 p/b; erratic outlook (avg. 2013: $101.2)

Oil prices have been the main variable boosting FCY inflows to the economy. While high, Venezuelan government took the opportunity to support expansionary public expenditures to support political capital. Sovereign savings have been mild during these times

Oil Production 2.4MM B/D (According to External services information)

Oil Exports fob 3Q2014 US$ 59.4Bn (98% of total exports); expected FY2014: $80Bn (Cashed Oil Exports $64.2Bn)

Inflation: Official inflation stood at 68% in 2014, and will continue accelerating this year to around 95%.

Exports : 3Q2014 ~US$ 60.5Bn (vs. 3Q2013: US$66.8Bn)

Imports 3Q2014 US$32.2Bn (vs. 3Q2013: US$39Bn); expected FY2014: US$42Bn

M2 Growth: YTD March 2015: 4.5%; YoY 63% (decelerating since December when YOY = 68%)

The correlation of Venezuelan performance after a drop in oil prices is material. Approximately, 90% of GDP is directly or indirectly

affected by the Oil industry (essentially managed by the Government)

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-8

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-2

0

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2008 2009 2010 2011 2012 2013 2014 2015 F

Real GDP (YOY avg)

Source: BCV and Citi Research

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Source: Citi Research

Overview—Venezuela

M2 Growth: YTD March 2015: 4.5%; YoY 63%.

Source: BCV and Citi Research

Things to watch:

Slowdown of economic activity

It is expected that that the government will increase

its importer role, using the 6.3 VEF/USD rate in

order to provide the benefit of regulated prices

through the public distribution chain

Complex FX mechanisms in place with reduced

supply affecting the economy (basic goods scarcity)

Price and margin controls in place for most of the

economy. Distribution of basic goods also under

strict control by the Government

Specific regulation towards prices and margins,

penalizes businesses with high level of intervention

Inflation and FX rate

National Assembly elections 2015

FX rate convergence

Upcoming debt maturity (PDVSA & Gov’t) 2015: $8.2Bn

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Citi’s Strengths and Commitment—Venezuela

Citibank Venezuela has been operating since 1917.

Pioneer developing financial services industry.

Role model for other institutions

Key presence for multinational Co’s in market.

Business: Full Corporate & Consumer

Today there are six Citibank branches throughout the country (main cities)

Only US bank with full banking operations.

Competitive differentiation: global product offering, clients profile, and talent pool / professional profile

Long term positive image and strong relationship with regulators

Strategy: Focus on local business, center in providing services to selected clients in corporate and consumer business. Capitalizing market opportunities while protecting the franchise and its profitability from external risks.

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Key Challenges - Update on the FX market- Venezuela

Until February 2015, Venezuela´s currency control system involved

three official FX Rates:

CENCOEX: 6.3 VEF/USD (former CADIVI, approximately

66% of FX approvals during 2014)

SICAD I: 12 VEF/USD (Balance Sheet Benchmark,

approximately 17% of FX supply)

SICAD II: 49.9 VEF/USD (17% of FCY flow)

As oil Revenues plunge, total FX supply reduces and as such, supply in each mechanism. It is not yet known the volume to be

assigned in each mechanism (New FX scheme trying to mitigate rising exchange rate pressures).

During February 15th 2015, President announced changes in

the FX market, maintaining a three tier FX regime (the

announcements stills yet to be applied):

6.3 VEF/USD for food and medicine

Merge between SICAD 1 and 2 for other goods (baseline

rate: SICAD 1 @12 VEF/USD. Since Oct’2014 auctions have

not resumed. This is the BL FX benchmark of Citi Venezuela

New market for free FCY trading (SIMADI) with low activity.

Parallel Market continues to exist: FX Rate >270 VEF/USD

(above M2 / International Reserves ~ 111.38 VEF/USD)

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Key Challenges- Venezuela

Government political approach provides incentives to restrict FX

supply. Currency distortions have reduced economic incentives to

produce locally. Such environment was accompanied with a rigid

regulatory framework in the private sector

Oil prices drop have drought the FX market. Government’s

reluctance to apply corrections have boosted inflation and scarcity

levels

Government institutions are the main importers in the country,

affecting private sector role.

Exporters would be forced to repatriate part of the export proceeds

within a set time frame depending of type of goods sold.

Convertibility constrains to import, repatriate dividends, to pay for

technical assistance and services, individual savings, among others,

have increased the liquidity concentration in local currency

Key challenges remains concentrated in the FX regime. We would expect changes in the FX market in order to improve liquidity.

Dividends remittances

Import Payments

Export Payments

Capital Injections

FX losses – Hedging options are limited (Real

Estate is the most popular)

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Product Solutions- Venezuela

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Argentina

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Main Challenges

Inflation

Recession

– A long period of low growth in Brazil (and strong depreciation of the Real)

– Drop in soybean price (below USD 300 per ton)

FX Controls

– Over USD 5 billion overdue payments on imports

– Almost no dividends and royalties remittances to home office allowed

Unpredictability: Highly regulated business environment

Fiscal Deficit deterioration

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International reserves dropped USD 16 Bn since the FX controls were put into place

The spread between the official and the parallel dollar stands around 40%

The economy is stagnated and does not create new jobs

Inflation still at high levels (Econviews 2015F: 28%; Citi Research: 33%)

The 2015 presidential elections should be a turning point for policies and economic

performance; potential candidates perceived as more market friendly

Why are the current policies unsustainable?

Source: Econviews

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What can we expect for the rest of year?

Preserve international reserves

Accept a low level of economic activity

Strong controls of imports

Keep FX restriction

Swap with China and issuance of new bonds

Control inflation

Avoid a strong devaluation but control exchange rate spread

Keep “precios cuidados” policy

Continue with freezed tariffs

The Government’s objective is to stay the course

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EBITDA: In general terms companies are still delivering positive results, despite falling EBITDA margins and volumes

Low leverage: Argentina’s banking system remains with an excess of liquidity

Low currency mismatch: low or no debt in foreign currency

Fixed assets: Buying real estate

Capital expenditures anticipation

Buying inventories as much as they can: taking advantage of the cheap import dollar at the official rate and

hoarding consumables goods or supplies at current prices (particularly in Consumer & Retail industries)

Hedging strategy: to soften impact of a possible new steep ARS devaluation

Investment instruments: looking for alternatives to protect the value of their money in dollar terms trapped in the

local market, against inflation and currency depreciation

Reduce business size in some sectors: e.g. Airlines, Automotive

Capitalize intercompany current debt into equity

What are Corporates doing in Argentina? Looking for alternatives to preserve trapped funds in the local market against inflation & devaluation:

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Expectactions of a PRO-Business President

2015 will be a transition year

Activity will continue stagnated due to the shortage of dollars

Inflation will be lower than in 2014, because of price agreements, lower depreciation and

freezed tariffs

Exchange rate will continue anchored and the overvaluing of the currency will increase

Foreign exchange and import controls will continue

Fiscal deficit (without CB transfers) will increase again and could be above 6% of GDP

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Expectactions of a PRO-Business President

Main policies that might be expected after 2015:

The elimination of FX restrictions (“cepo”)

The unification of the exchange rate

Reduction of the fiscal deficit

Increases in utility rates

Changes in energy and other sector policies

Address inflation

The return to international markets

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Opportunities

Argentina still has low debt levels

– Lending in LCY (almost no currency mismatch)

Local Assets are undervalued in general terms vs. the rest of the region

A change in macroeconomic policies can quickly lead to an improvement in key variables such as:

– Capital inflows (infrastructure, ‘Vaca Muerta’ shale reservoir)

– GDP growth and investment

– International reserves increase

– Employment level recovery

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Conclusions

Risks in the short term… many opportunities in the medium term

Current crisis has a political and ideological backbone, although certain restructures and

reforms should be addressed

More certain political landscape may lead to a quick improvement in key variables

Labor unrest and complex wage negotiations expected in the next 2 months

Politics in 2015 will be dominated by Presidential election campaign

The banking system is healthy: very liquid, with low currency mismatch and not a source of

macroeconomic vulnerability

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Channel

Services

Liquidity

Management

International

Cash

Payables &

Receivables

Investment

Banking

Loans

Citi Argentina – Bank Capabilities

International Cash

International and US Demand

Deposit Account

Citi Online Investments (OLI)

Liquidity Management

Citibank Zero Balance Account

Investments (TDs and MMF)

FX and Trade Solutions

CitiFX Pulse—Online Trading

for FX Processing

Trade Services &Trade Finance

Advisory & Solutions

Supply Chain Finance Solutions

(Supplier & Distribution Finance)

FX and Trade

Solutions

Loans

LCY: Short / Long term

Fixed / Variable rate

Investment Banking

DCM

ECM

M&A

Channel Services

CitiDirect BE

CitiDirect BE Mobile

CitiDirect BE Tablet

CitiConnect for Files

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