Venezuela: Still Negative Outlook

BY CHRONICLE STAFF

First the good news: Venezuelans rejected a constitutional reform that would further radicalize the country's economy. Then the bad news: It really won't make much of a difference. Venezuelan president Hugo Chavez can bypass the results through decrees, local business leaders say.

"He has the enabling law [so] he can do whatever he feels like," says Ian Stein, general manager of the British-Venezuelan Chamber of Commerce. In February, the Chavez-controlled national assembly passed the Enabling Law, which gives the president the authority to issue decrees in economic and other matters. The law gave Chavez an initial period of 18 months. "After the 18 months, it's anybody's guess, but judging from [past] results, he will perhaps extend it for another year," Stein says.

"Despite this defeat, he will continue to exercise significant power over Venezuelan institutions and the economy," Credit Suisse analyst Alonso Cervera said in a commentary today. "Mainly for this reason we do not expect major changes from an economic policy standpoint in the near term."

MORE TAXES AND INFLATION

Price controls will remain and taxes will increase, Stein predicts. The price controls are aimed at reducing inflation, but have only made the problem worse, experts say. Venezuela is likely to reach an inflation rate of 18.0 percent this year and another 19.0 percent next year, according to the International Monetary Fund. Both will be the highest in Latin America and among the highest worldwide.

Even the question of Chavez' mandate - one of the most controversial parts of the reforms that were rejected Sunday - could be bypassed, experts say. One of the reforms would have made Chavez eligible for re-election indefinitely. Chavez's current mandate ends in 2013. "Still, he could seek to change this restriction via a constituent assembly before the end of his term," Cervera says.

Chavez himself vowed to continue his reforms. "I won't change a comma in the reforms," he said after the referendum results, according to local newspaper El Universal. He also said the rejection was a defeat - for now.

"While President Chávez is in power, his leftist revolution is set to continue—albeit at a slower pace than his constitutional changes would have permitted," U.S.-based consultancy Global Insight said in an analysis today.

CENTRAL BANK AUTONOMY

The referendum over 69 changes to the constitution included reforms that would formally lift the central bank's autonomy (and control over international reserves), reduce the work day from eight to six hours and give the government greater discretion in expropriating private property. One proposal included taking out references to the guarantees for private property (article 112 of the constitution) and instead create a "Socialist Economy."

Last week, Chavez threatened to expropriate companies that belonged to the largest business chamber in Venezuela, Fedecamaras, after the group urged Venezuelans to vote against the reform.

"When I saw and heard the president of Fedecamaras practically threatening us, that they'd do everything they have to do to avoid the reform's approval - well buddy, if you want to, go ahead, because I'm going to take away every business you have," Chavez said in a televised speech, according to the Canadian Press.

Despite the rejection, the central bank has already lost its autonomy, Stein argues. "There's no autonomy," he says. "That's already decreed, it's already a fait accompli." One effect is that economic information from the bank is now restricted, Stein points out. "We cannot access information from the central bank as far as economic results [are concerned and] monetary information is being curtailed."

BANK PROFITS FALL

The move against the central bank comes as Chavez has implemented a new business tax on all bank transactions, while the banks have to go through more hurdles to access overnight funds, Stein says. Last week, Chavez also threatened to nationalize Spanish banks in Venezuela.

"Government intervention on the banking system is intensifying, seriously affecting banking activity," David Olivares-Villagomez, vice president for Latin America banking at U.S. credit ratings agency Moody's, said in a report last week.  

Venezuelan banks are subject to a number of controls, including floors and caps on interest rates, mandatory lending buckets, controls on commissions and fees, and a high cash reserve requirement -- all factors, that when combined, constrain the banks' activities, he points out.

The constitutional reform would not have had a fundamental effect on the country's monetary policy, nor even have any immediate effect on the banking system, because the negative effects of the interventionist  government have already been felt system wide for a while, Olivares-Villagomez argues.

Although they continue to see profits, the rates are falling, Moody's points out.  Core profitability (measured as pre-provision profits as a percentage of average risk assets) has fallen from 9.2 percent in 2004 to 4 percent this year,  particularly because low interest rates have lead to margin compression, Moody's says.

BOOMING ECONOMY

Meanwhile, Venezuela continues to see an economic boom, thanks to its growing oil revenues.  The country's GDP is expected to expand by 8.0 percent this year, according to the International Monetary Fund. That's the second-highest growth rate anywhere in Latin America.

"Venezuelan consumers are in a frenzy [and] banks, retailers and many private firms are posting record profits," Walter Molano, chief of research at BCP Securities, said in a recent commentary. "Gasoline prices are only a few cents per gallon, and Venezuelans are buying the largest imported cars that they can get their hands on. The backlog for automobiles is growing, and consumers are taking whatever they can get. "

Retail sales grew by  43.8 percent  in July compared to a year earlier, while automobile sales jumped 44.5 percent in August, he points out.

The boom is helping push Venezuela  to replace Chile as the richest country in Latin America, according to a Latin Business Chronicle analysis of new IMF.  Venezuela's GDP per capita will likely reach $10,169 next year. By comparison, Chile's will be $7,310, the IMF said in its latest World Economic Outlook database.

FOREIGN TRADE

Venezuela's trade with neighboring Colombia is under threat thanks to Chavez' clash with his Colombian counterpart, Alvaro Uribe. "There is a risk of trade disruption in the next year, particularly in the food, textiles and automotive sectors; bi-national energy projects may also be affected," UK-based risk consultancy Exclusive Analysis said last week. "Both countries' economies would suffer if President Chavez follows through on his threats."

Chavez was asked by Uribe to help mediate a hostage deal with Colombian terrorist group FARC, but when Uribe withdrew his request due to lack of progress, Chavez threatened to retaliate by freezing all relations with its neighbor.

Colombian-Venezuelan trade last year reached $4 billion and could reach $5.5 billion this year, Exclusive Analysis  points out. "Colombian exports to Venezuela have been booming, with the fastest growing exports being food, textiles, leather goods and cars," the consultancy says. "Venezuela would also suffer. Colombia is an important market for fuel and petrochemicals, but more importantly a key supplier of meat and dairy products, in addition to a range of manufactured goods."

A trade spat with Colombia would further worsen the shortages of basic food products, Exclusive Analysis says. However, it deems it unlikely that all imports from Colombia will be blocked, since a worsening of these shortages would foster significant animosity amongst Venezuelans.

The problems with Colombia come as Venezuela is still no closer to joining Mercosur, the South American trade pact that includes Brazil, Argentina, Paraguay and Uruguay. Brazilian business leaders last week asked their lawmakers to stop the approval process for Venezuela thanks to Chavez' threat to expropriate companies that belonged to Fedecamaras.

Despite the consumer boom, many small- and medium-sized companies in Venezuela are struggling to survive, thanks to growing taxes and restrictions. "I envision hard times for the local business in general," Stein says.

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