Latin America Advisor
Venezuelan President Hugo Chavez on Monday announced sweeping plans to establish greater government control over the economy, including the nationalization of telecom and power companies, and stripping the Central Bank of its autonomy. What is the future of private investment in Venezuela in the wake of Chavez's speech? With US firms being the major investors in the companies targeted for nationalization, do you see an escalation of US-Venezuela tensions? How will the US respond to Chavez's moves?
Robert C. Helander, Managing Partner at InterConsult LLP in New York: Starting with his 'Bolivarian' constituent assembly to draft a new constitution, Chavez has consistently followed the recipe for boiling a frog: gradually raise the temperature by degrees, so that the frog relaxes until it is too late to jump out of the water. The only moderating force that can stop him is the price of oil. If prices stay at or near present levels, he has a gusher of money to fund his ambition. If he decides to nationalize foreign investments, he could take part of the money we pay him for oil to pay compensation and avoid an unnecessary confrontation. After all, he needs to sell us oil as much as we need to buy it. Meanwhile, his march toward 'socialism' sounds like the '60s and '70s in Latin America. 'Socialism' and fascism are but two ends of a political horseshoe, they are always closer to each other than either is to the democratic center. The difference this time is that Chavez has learned to manipulate the electoral process to maintain the appearance of democracy and he has the money to grease his way. A poor Chavez would have long since been laughed off the stage. Stay tuned.
Richard Francis, Associate Director of Sovereign Ratings at Standard & Poor's: The overall investment climate in Venezuela has clearly deteriorated in the last six years with increased government intervention in the private sector. As a result, foreign direct investment, including the all-important oil and gas sector, has plummeted to an average of $2 billion per annum over the last five years from over $4.7 billion in 2000. Furthermore, although private investment has picked up locally, anecdotally it appears to be short-term and more speculative in nature. It is not clear the terms under which the government will take steps to nationalize the telecom and power companies; certainly an expropriation of assets would be the most radical measure. However, the government has built an impressive amount of liquid assets that is estimated at $45 billion and could, therefore, choose to buy out the private investors in EDC and CANTV. This route would be negative in terms of creating a more bloated public sector and likely impair the overall quality of services, but is unlikely to have much of an impact on the already deteriorated US-Venezuela relations. However, ultimately, the most important factor for Venezuela is the outlook for the oil and gas sector. This year will be pivotal for the direction the government takes with this sector as well. Clearly, major investments are needed to expand production and, without it, oil production will remain stagnant at best.
Beatrice Rangel, President of AMLA Consulting in Miami: The decision to nationalize CANTV and the electric power providers is the logical step to take by any autocratic regime. Once the institutional framework is safely under control, the next logical step is to seize the economic blood vessels. In the case of Venezuela, these are oil (which is state owned), foreign exchange (which is also under state control), telecommunications, and power. Telecoms and power are key to market economics, as wealth creation is nowadays a function of information and energy availability. Telecoms bear the highest strategic significance, as they confer control over electronic media while facilitating early suppression of dissent. After having enjoyed a landslide electoral victory, President Chavez needs to control these strategic services to secure long term control of Venezuela. From the foreign investor's perspective, this is dire news except for those investors that are expert riders in risky markets. Energy companies that have invested in Venezuela will have to learn to swim these waters at least until they recoup their investments. Over the long run, however, the country runs the risk of isolation from the world economy and technological change.
Rodolfo Magallanes, Professor at the Institute of Political Studies of the Universidad Central de Venezuela: This year, [Venezuela's] government could be characterized by its exercise of greater state control over the political apparatus and by a more ideological management of that apparatus. What stands out is the scant political and managerial experience possessed by the majority of the appointed officials, a situation juxtaposed with the departure of veteran members and experienced political operators from the government. In the near-term, the government’s action will be focused on adjusting the legal and institutional structure of the country, an issue related to the building of a new ‘socialist’ institutionality. The immediate result of such actions would be a likely halt to medium- and long-term private capital investment plans, especially in areas said to be subject to government nationalizations: electricity, communications, other basic services, oil projects in the Faja, etc. To this situation of uncertainty created by the government’s announcements one would have to add the likely reactions from Venezuela’s political opposition and from representatives of social interests that are affected. The whole situation would combine to produce political, social, and economic instability in Venezuela, at least for as long as this special situation lasts.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.