Venezuela's affluent class revs up spending. Despite risks, they represent a tremendous opportunity for vendors.
BY EVETTE TREEWATER
It’s no secret that Venezuela is awash in oil revenues and public spending. Yet, out of the limelight of high gas prices and Chavista politics, the private sector silently grew faster than any Latin American economy at 8.2 percent last year. Even with a slight contraction in the oil sector, the overall economy expanded 8.4 percent in 2007 due to a 9.7 percent growth in the non-oil sector.
Despite socialist policies, the country’s Gini coefficient rose from 44.1 in 2000 to 48 in 2005, indicating that Venezuela’s wealthiest class has seen the greatest increases in income during the economic expansion. Private consumption increased by 19 percent last year - its fourth year of double-digit growth. Spending on this scale represents a tremendous opportunity for companies that have remained in Venezuela despite the inherent risk, or capture their spending abroad. Affluent Venezuelans, whether they have ties to the government or the private sector, are once again finding creative ways to spend and shelter their growing wealth in uncertain conditions.
The affluent consumer segment is now composed of two main groups that share many qualities but differ in other consumer habits. The first group is Venezuela’s traditional elite, with accumulated wealth from generations of inheritances. They are mainly private business owners or investors, and many fear government expropriation of their assets. Beverage giant Lorenzo Mendoza, worth approximately $6 billion, is head of Empresas Polar and grandson of its founder. One of the Polar factories was temporarily taken over by the government in 2005, and the threat remains.
Chavez’s consolidation of power and high global oil prices prompted a new breed of affluents known as the “boli-bourgeios.” This group consists of high-ranking government officials, military officers and favored businessmen. These nouveau riche seek to display their newly acquired wealth by accumulating luxury items. Unafraid of government intervention, they are the largest purchasers of cars, yachts and private jets in recent years.
Investing in real assets, including cars and homes, is also a way that consumers have battled Venezuela’s high inflation rates. In 2007, Venezuela once again registered the highest inflation rate in Latin America at 22.5 percent. Food and beverage prices rose 33 percent despite price controls on hundreds of items. Shortages of consumer staples are commonplace. With inflation rates well over the maximum interest offered by banks, capital sitting idle in savings accounts loses value. Middle class consumers are left with few savings and investments options. Imports rose 36 percent over 2007 as consumers bought up durable goods and found foreign solutions to domestic shortages.
A REVOLUTION OF HUMMERS
Negative real interest loans (interest rates below inflation) were available in Venezuela in 2006 and 2007 thanks to a banking system that is awash in petrodollars. Cheap capital help fuel a 68 percent increase in consumer lending, unleashing consumer spending, particularly on higher priced durables. Qualifying consumers financed everything from refrigerators to breast implants. Vehicle sales reached 491,000 units in 2007, a 43 percent increase over 2006. Foreign brands like BMW, Mercedes-Benz and Hummer have wait lists as long as eight months for a vehicle.
SUVs are in high demand, since gas prices remain unchanged. A mammoth subsidy – estimated at $9 billion annually – has kept gas at the lowest price on the planet: around $.07 per gallon. The Hummer has become known as the unofficial car of the boli-bourgeios. General Motors announced in late 2007 that they would import 3,000 Hummers to meet the current demand. In response to the report, even Chavez asked, “What kind of a revolution is this? One of Hummers?”
All affluents, both the traditional elite and nouveau riche, view international real estate as the best haven for their wealth and have invested heavily in homes abroad. Real estate in Venezuela boomed as wealthy investors bought second homes and rental properties in Caracas, Maracaibo and their surrounding coastal areas, but investors now fear they could be usurped by squatters under Chavez’s mandate to allow unoccupied properties to be appropriated by those without homes.
Those politically opposed to Chavez are even more eager to buy homes abroad. During the U.S. real estate boom, Venezuelans were the second largest foreign group buying homes in Florida, tied with Canadians and Germans. The number of Venezuelans living abroad in the United States doubled from 2000 to 2005, with half residing in Florida. Panama is now the prime destination for purchasing an international home. The current real estate boom in Panama City sets itself apart from the U.S. boom because of the amount of new construction that has been purchased outright. Developers continue to receive significant financing from liquid investors in Venezuela.
Traditional elites aim to send their children to top undergraduate and graduate schools in the United States, both for the educational experience and the chance to earn American residence status. Although Venezuelan universities retain autonomy from the government’s socialist educational initiatives, an average 5,000 Venezuelan students study abroad in the United States each year. The percentage of total tertiary students going abroad in Venezuela is about twice that of Brazil. After tuition and living expenses are factored in, the capital leaving Venezuela for their educational support could total $80 million per year to the United States alone. With the top European destinations included, the number is closer to $100 million.
PRICES RISE AGAIN
Chavez has started to address the issue of inflation and other distortions caused by his economic policies, but prices will be on the rise again this year. The central bank raised inter-bank loan rates in December, and lending dropped 43 percent within one month. The new bolívar fuerte, essentially removing three zeros from the old currency, was introduced at the beginning of the year. In late January it was trading 5.2 to the dollar on the black market, compared to official rate locked at 2.15. Chavez started inching price controls towards market reality late in 2007. The price of milk was increased by 36 percent, and he offered low-interest loans to dairies in mid-January to help stimulate production. At the same time, Chavez publicly claimed that milk producers intentionally brought on the production shortages as a political weapon and threatened to expropriate them if the shortages continued. Sugar prices were raised 49 percent in December, in spite of an 8 percent increase in production in the last year. Still, he has not devised a way to reduce the gas subsidy without creating a political uproar, as gas is the only commodity as cheap and available as ever.
In such political and economic conditions, Venezuela’s wealthiest consumers show a preference for investing their additional income in tangible assets or abroad. Moneys have made their way to the US, Central America and Europe even under capital controls. In total, the capital that has left Venezuela since Chavez took office is estimated at $75-100 billion.
Early predictions for Venezuela’s 2008 GDP growth were among the worst in the region, but the picture is changing. With economic expansion now estimated at 6.0 percent (IMF), Venezuela will likely be one of the region’s growth leaders yet again in 2008, defying most forecasters and frustrating Chavez’s numerous critics. Through it all, Venezuela’s affluent will continue their impressive appetite for costly goods at home and safe investments abroad.
This article is republished with permission from Tendencias, the magazine of Kroll InfoAmericas.