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Friday, January 21, 2011
Perspectives

Venezuela: Hell on Earth

The reckless tyranny of Hugo Chavez squandered away Venezuela's abundant natural resources, sound infrastructure and skilled labor.
The political and economic situation could degrade into civil unrest in Venezuela, the author argues. Here a protest in support of beleagured TV station Globovision. (Photo: Guillermo Ramos Flamerich)
Hugo Chavez will pull out the stops to make sure that he remains in power. In the process, he will convert the country into a living inferno, the author says.  (Photo: Minci)


BY WALTER T MOLANO

 

As Colombia transforms itself into an oasis of prosperity, Venezuela descends deeper into the dungeons of hell. Some academics propose that a country's leadership has a limited impact on a nation's trajectory. They argue that it is more dependent on its natural endowments, social structure as well as random exogenous factors.

However, this is not the case with
Venezuela. Under the reckless tyranny of Hugo Chavez, Venezuela's cornucopia of abundant natural resources, sound infrastructure and skilled labor was squandered away. In 2010, the Venezuelan economy shrank 1.9 percent y/y-making it the only major emerging market country to experience a decline in economic activity. The Venezuelan oil sector contracted 2.2 percent y/y, despite the recovery in oil prices. An endless wave of nationalizations and antagonistic policies scared away most investors. China, Russia and Iran were the only countries that continued to invest in Venezuela. However, their national companies were assured good treatment, given their governments close relationship with Chavez

Unfortunately, the situation is about to get worse. [On January 5], 63 opposition legislators were sworn into office, introducing a new level of political tension. This was the first time in five years that Chavez's United Social Party (PUSV) faced congressional opposition. The opposition boycotted the elections in 2004, thus allowing Chavez a free hand. This time, they won 52 percent of the vote but received only 40 percent of the congressional seats-due to gerrymandering and other electoral tactics. Furthermore, Chavez introduced new rules at the end of last year, which allowed him to rule by decree for the next 12 months. With next year's presidential elections close on the horizon, Chavez will pull out the stops to make sure that he remains in power. In the process, he will convert the country into a living inferno.

 

One of the government's first priorities is to stabilize the economy. The lack of foreign investment and the grossly over-valued exchange rate is putting a strain on Venezuela's balance of payments. The decline in international reserves was the main reason behind the recent devaluation of the bolivar. At the end of the year, the central bank announced it was unifying all of the exchange rates, signifying a 40 percent devaluation for the rate that was used to import food and medicine. Unfortunately, misclassification and abuses led to more than 60 percent of the country's imports arriving though the preferential rate. The devaluation will be particularly painful for the poor, who are struggling with the highest inflation rate in the world. In 2010, Venezuelan consumer prices rose 27 percent y/y. Most analysts expect consumer prices to increase more than 30 percent y/y this year. Given the lackluster economy and the misery of rising consumer prices and capital controls, it is little wonder that the opposition is gaining power. Food shortages will surely continue to rise, as will the rampant crime wave that is embroiling the major urban centers. The political and economic situation is unraveling in Venezuela, and it is likely that it could degrade into civil unrest.

 

The State Department cables that were released by Wikileaks indicated that Colombia's concerns about Venezuela's social stability were the main reason why President Uribe requested that the U.S. open a series of military bases. The proximity of U.S. military personnel and equipment would have served as a deterrent against a desperate unilateral move by President Chavez in an attempt to drum up nationalist support. Although the base initiative was derailed by the Colombian Supreme Court, President Juan Manuel Santos decided to extend an olive branch to his erratic neighbor. So far, the change in diplomacy worked. Bilateral trade is on the rise and the Venezuelan government is allowing companies to make payments to Colombian exporters. However, the situation will continue to be difficult. Given the high inflation rate, the government will most likely have to devalue again. It will also be forced to tap into the capital markets, paying huge premiums in the process. Both measures will significantly increase the country's debt to GDP ratio. Some investors welcome the volatility and high yields offered by Venezuelan bonds, but the country is a ticking time bomb that will explode. A future restructuring will be extremely painful, with a high degree of probability that the government will repudiate as much of its debt as possible.

Last of all,
Venezuela has few attachable foreign assets. The CITGO refineries were mortgaged last year, and bondholders were also subordinated by the Chinese. Their loans are payable in oil, giving them ownership before their vessels hit international waters. Therefore, there is no reason why anyone would recommend investing in Venezuela-other than to win future mandates and stuff investors with papers from a country that is on the road to perdition.

Walter Molano is head of research at BCP Securities.

 

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From: RossWild

Earth
Colombia is a Oasis? Maybe one with thousands of dead bodies down there. Your article is so biased.

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