Elizabeth Stephens, head of credit & political risk analysis and Adam Nash, analyst at JLT Specialty, investigate the factors affecting Venezuela’s business climate following President Chavez’s fourth term win.
Companies operating in Venezuela face another six years of ‘Bolivarian’ politics after Hugo Chavez secured a convincing fourth presidential term in the October 7 election. With a victory of 10% or 1.58 million votes over his rival Henrique Capriles Radonski of the opposition Democratic Unity Table (MUD), Chavez is likely to take this as an endorsement of 21st century socialist politics.
Speculation over Chavez’s health accompanied the election campaign and a deterioration in his condition could alter the medium to long-term political outlook and affect his ability to govern until 2019. His remarkable electoral strength creates the opportunity for him to manage the succession and were he to step down and a new election be held, which should happen if he leaves office within the first four years, his appointed successor would stand a strong chance. Any sign of succession planning and his vice-presidential appointee could provide an indication of how life-threatening his cancer is.
Chavez’s economic policies set the country on an alternative economic course that has often been criticised as populist and anti-business. Since his landslide election victories culminated in the adoption of a new constitution, Chavez has centralised political power in himself and his closest allies in Caracas; replacing the country’s bicameral legislature with the unicameral national assembly and packing the supreme court with his political cronies.
Pre-election pledges to expand his ideas for a communal system of government indicate that major political reforms are possible, which will reinforce Chavez’s position and have an adverse effect on the business environment. Since coming to power in 1999, Chavez has pursued a populist agenda even as he has drifted towards authoritarianism.
Despite Capriles’ strong showing in the poll, Chavez’s victory in all but two states does not bode well for the opposition in December’s gubernatorial and regional assembly elections. It is likely that the ruling United Socialist Party of Venezuela (PSUV) will consolidate its position, creating the environment in which Chavez can launch the next phase of his political project.
Nationalisation and expropriation
Chavez has presided over the nationalisation of more than 1,000 companies during his presidential tenure. The regime’s policy of nationalisation began in earnest in 2007 when the government took a controlling stake in four oil projects based in the Orinoco river basin, forcing Exxon Mobil and ConocoPhillips to leave the country and file for international arbitration. All sectors, from tourism to finance, have been affected, leading to falling output and economic stagnation. Pressure on foreign oil companies has led to declining oil production which has a detrimental effect on the Venezuelan economy which in 2011 counted on oil revenue to generate 95% of export earnings and 30% of GDP.
While some companies have been compensated for the seizure of their assets, others are seeking redress through international arbitration. At present 36 cases are lodged with the international court for the settlement of disputes (ICSID) against Venezuela. Around one quarter have been concluded and about three quarters are still pending. The cases are evenly distributed in terms of industry.
Elsewhere in the economy, the government’s insistence on price controls as a mechanism to cope with inflation and the setting of the highest minimum wage in the region has dented companies’ profits in a wide range of sectors causing regular shortages, increased imports and impacting detrimentally on the country’s balance of payments. The government’s interventionist approach has been driven by Chavez’s aspirations for Venezuelan self-sufficiency which is married to his rejection of, and hostility towards, America’s neo-imperialist interpretation of capitalism.
Currency inconvertibility & transfer risk
Operational difficulties have also been imposed upon foreign companies since 2003 by the Venezuelan commission for the administration of currency exchange (Cadivi). The foreign exchange controls administered by the Cadivi require foreign companies to sell all corporate foreign exchange back to the country’s central bank at the official exchange rate. Any company or individual wishing to buy foreign currency must apply to do so through the Cadivi. At times of falling currency reserves or bureaucratic procrastination, foreign exchange payments slow and foreign companies’ balance sheets are impacted by payment delays. As such, the currency inconvertibility and transfer risk for foreign companies operating in Venezuela has been persistently high.
The difficulties faced by foreign companies in dealing with the Cadivi are only compounded by President Chavez’s foreign policy decisions. His left-wing tendencies and his aforementioned rejection of US hegemony has seen Chavez align Venezuela with like-minded regimes in Iran, Cuba, Russia and China, as well as put significant resources into strengthening pan-Latin American relations through organisations such as the Bolivarian Alliance for the Americas. Although frustrating for the US, its demand for oil and wider commercial interests has sustained open, but at times tense, bilateral relations with Venezuela. Nonetheless, the uneasy relationship has remained as an ominous shadow over the trading and investment environment. Also, despite Chavez’s pan-Latin Americanism, relations with Colombia have been consistently confrontational. Chavez has accused the Colombian authorities of supporting anti-government groups within Venezuela and in turn, Columbia has repeatedly alleged that the Revolutionary Armed Forces of Columbia (FARC) are offered a ‘safe haven’ by the Chavez regime. Hence, Venezuela’s foreign policy position poses a small, but underlying risk for foreign investors.
Chavez’s specific brand of socialism has proved extremely divisive and has polarised Venezuela’s 29 million people. A number of headline strikes, rallies, protests and even a failed coup d’état since he took power in 1999, have punctuated his presidency. Although the SRCC risk has declined since its peak between 2002 and 2004 – when the general strike occurred and a referendum was held on whether Chavez should be recalled from office – economic pressure, combined with Chavez’s controversial and confrontational policies means that civil unrest is likely to continue. Widespread protests are most likely to accompany significant political events and controversial government decisions. While foreign companies are not the target of protests, business operations can be disrupted and there is a risk of incidental damage and exposure to violence.
Risks & indicators
The government and State-owned Petroleos de Venezuela (PDVSA) are expected to continue debt issuance as the main way to satisfy dollar demand in the domestic market. The cost of accessing financial markets will increase, creating market doubts about sustainability.
Chavez has indicated his intention steps to withdraw Venezuela from the World Bank’s international arbitration body (ICSID). This will act as further deterrent to companies operating in the country by increasing uncertainty over its willingness and capacity to compensate firms for seized assets.
The country is heavily dependent on oil revenue and a significant decline in prices could have a debilitating effect on the economy and the government’s fiscal accounts. This will put downward pressure on the currency and raise questions about the government’s ability to serve its escalating debt.
Kidnap rates and crime rates have risen significantly in the last few years, with the threat to foreign personnel very real in major cities and around industrial projects.