Venezuela, in his own image

| Mar. 18, 2012 | Caracas, Venezuela

Published by Emerging Markets

The Hotel Alba in Caracas’ city centre used to be a five-star Hilton until the government expropriated it in 2007, part of a policy that also hit the assets of some of the world’s biggest companies.

Now it’s a state-run hotel inside which you can buy memorabilia of Hugo Chávez, Venezuela’s president, including a foot-high inflatable doll of the maverick leader known as an intumbable; no matter how much you try to push it over, it will always return to its feet, ready for another battering.

This year that doll will undoubtedly receive its toughest battering yet.

Chávez faces a united opposition for the first time in his 13-year tenure, fronted by Henrique Capriles Radonski, smart enough not to tackle the president head on but manoeuvre around the immense state machinery and burrow deep into the president’s immense popularity.

On top of this, Chávez is battling a cancer that last year left his top-heavy government in disarray. For the first time, El Comandante is talking of his own mortality. The doll will one day deflate.

Economic woe

Despite an oil price of $120 a barrel and, according to Opec (Organization of the Petroleum Exporting Countries), the world’s largest reserves, Venezuela’s economy is in tatters. Inflation stood at 26% in the year to mid-January, the highest among 78 economies tracked by Bloomberg. That is fuelled by a difficulty in importing foreign goods – thanks to the government’s strict currency regulation – coupled with a lack of domestic production.

Chávez introduced currency controls nearly a decade ago to prevent capital flight. Since then, there have been four effective devaluations leaving the official rate of bolívares fuertes at BF4.3/$. The scarcity of foreign currency has spawned a black market where the dollar is worth between BF8/$ and BF9/$.

Because official individual exchange through the government’s CADIVI (Commission for the Administration of Currency Exchange) is limited to $3,000 per year, with companies allowed $50,000 a day, some Venezuelans are happy to lose half the value of their local cash to obtain the hard currency. The government attempted to clamp down on this black market in June 2009 by introducing a bond-mechanized exchange with an average rate of BF5.3/$ known as the SITME.

That is one reason total bond issuance in Venezuela last year beat the rest of Latin America combined. Another is a requirement for cash to fund the election campaign. Bond sales last year totalled $17.5 billion, shared between the state ($7.2 billion) and state oil company Petróleos de Venezuela (PDVSA) ($10.3 billion). Much of the cash funds social projects, which critics claim are simply a means of buying votes.

Government spending is budgeted at 46% higher this year than last. PDVSA is the cash cow.

“This election is all or nothing,” says Boris Segura, a senior economist at Nomura. “They’re going to make use of that cash abroad, bond issuances later in the year – whatever is necessary to win.”

Russ Dallen, head trader at Caracas’ BBO Financial Services, expects between $12 billion and $15 billion of bond sales in 2012. He says that there are “smart people” in the central bank who, while focusing primarily on Chávez’s re-election, can still make “fiscally responsible” decisions.

Give and take

Chávez is famous for the vitriol he spews at Washington, and this is reflected in many of PDVSA’s initiatives. Cuba is by far the greatest benefactor, taking in $5 billion in annual Venezuelan aid – around a quarter of the island’s GDP. Reuters recently revealed that Syria is receiving Venezuelan oil shipments, amid a popular uprising there, while Russia and China also benefit in exchange for loans.

China has now lent Venezuela more than $30 billion, making it the country’s biggest foreign source of financing. In exchange, the Chinese government is meant to receive 430,000 barrels of crude every day, though there are doubts as to whether this is the case.

Russia meanwhile has also been lending heavily. In return, Venezuela has spent at least $5 billion on Russian Sukhoi fighter jets, Mi-17 combat helicopters and Kalashnikov assault rifles since 2005.

Rafael Ramírez, the minister for oil and also head of the PDVSA, defends this: “No one pays for an investment plan with proceeds,” he says. “One has to ask for loans, and that’s what we’re doing.”

The company has an investment plan worth $236 billion between 2013 and 2015 as well as an additional $15 billion this year. Though, if last year is anything to go by, the plans are unlikely to materialize.

The company hoped to invest more than $18 billion in 2011 and managed just over half that. PDVSA plans to produce 3.5 million barrels per day by the end of this year, 40% up on 2011.

In a highly politicized move, Chávez last year brought gold reserves back to Venezuela in part to end what he called the “dictatorship” of the US dollar. Around 160 tons of gold bullion arrived in Caracas – roughly three-quarters of the 211 tons held across the US, Europe and Canada. Crowds danced and cheered in the streets as armed soldiers rode in on pallets of ingots.

“Chávez can say, ‘The gold is now in Venezuela, so we’ve recovered our dignity and our sovereignty’,” says José Guerra, a former central bank official, now working as an economist in Caracas.

Another reason for the gold’s repatriation from foreign vaults – some of the world’s safest – is that there is likely to be fear in government that, following the seizure of billions of dollars of foreign assets by Venezuela in recent years, international arbitration courts may seize its own assets as compensation.

Around 20 cases have been filed against Venezuela at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) and also at various other arbitration bodies. The government announced that it would withdraw Venezuela from the ICSID, where it faces billions of dollars of claims – the largest of which is ConocoPhillips’ demand for $30 billion in compensation for projects nationalized in 2007.

Oil minister Ramírez described ExxonMobil – recently awarded just $908 million of more than $10 billion it had claimed for the seizure of an oil project nationalized the same year – and ConocoPhillips as “arrogant” and “typical of US imperialism”. The move away from the ICSID will do nothing to ease pending claims, rendering it little more than a PR stunt.


Capriles, a 39-year-old state governor, was chosen this February as the opposition’s candidate to take on Chávez in October’s presidential election. The primary vote surpassed all analysts’ expectations, with Capriles winning 64% of a turnout of some 3 million – around half of those in Venezuela who associate themselves with the opposition.

“The high turnout should provide momentum to Capriles, increasing the possibility of a democratic transition,” says Alejandro Grisanti, a senior economist of Barclays Capital. “The victory represents the emergence of a new generation of political leaders in the Venezuelan opposition, making it more competitive among key independent voters and ‘light Chavistas’.”

Capriles has a tough year ahead but, for the first time during Chávez’s tenure, offers the opposition a hope of victory. He never attacks Chávez head on, a mistake made by countless opposition leaders over the years. The young governor is fighting a calculated campaign, knowing that he must not take the president on to sway some 36% of the undecided voters, as well as the ‘light Chavistas’ to vote for him.

He must also fight the huge state machinery Chávez has at his disposal. Not only has a smear campaign against his Jewish roots and sexuality begun, but Capriles has to contend with that huge rise in public expenditure directed to social programmes that include $100-a-month stipends for poor children, $350-a-month pensions for low-income senior citizens and many others. “It’s an unequal fight... an abuse of power,” Capriles tells Emerging Markets.

If he wins, Capriles has a gargantuan task ahead, though he is keen not to make the changes overnight. “With all the distortions right now, if we try a big bang approach, first it might backfire as it did with the Caracazo,” says Nomura’s Segura, referring to the deadly riots of 1989 when the then president attempted to introduce neoliberal measures.

“Capriles needs to get on with the reform agenda,” says David Rees, Latin America analyst at Capital Economics. “It’s a pretty long list. He’s steering clear of shock therapy, which is the right thing to do. It would cause a lot of disruption in the economy in the meantime.”

Capriles knows this although his rhetoric on the economy lacks precision – which is likely to be intended as part of a broad net to catch as many voters as possible. “For a country to progress requires everyone, including the private sector,” Capriles says. “This is a joint effort. We will generate the confidence so investors do not hesitate to choose Venezuela.”

The first task would be to undo the currency controls and allow the bolívar fuerte to float at market rates. This would be dangerous if done too quickly, so Grisanti suggests a “crawling peg” to the US dollar.

Capriles would then need to take a look at the running of PDVSA. He says he would like to increase production though does not want to privatize the company and feels it needs to be de-politicized. He would also like to diversify the country’s economy away from oil: “My plan is that oil can be a springboard for the country’s progress to true diversification of our economy.”

The state governor says he would look at Chávez’s numerous expropriations on a case-by-case basis as well as reverse the intention to remove Venezuela from the ICSID to boost foreign confidence.


And then there is Chávez’s battle with cancer. It began last June, when the president left for bouts of treatment in Cuba. He returned and declared himself cancer-free, to the surprise of many oncologists. The recurrence was treated last month, though there is much speculation, especially as very little information has been released by the government – in contrast to those of Chávez’s counterparts across Latin America who have also suffered from cancer.

The maverick president has styled himself as the face of Venezuelan politics over his long tenure. Venezuelans don’t support the party; they support Chávez. While that may have been politically beneficial in the past, now it leaves no realistic heir.

“Let’s be clear,” says Segura. “There is no Chavismo without Chávez. If Chávez doesn’t run, or if Chávez is running in a diminished state and he cannot campaign 24/7, he’s going to have a tough time getting re-elected.”

Even Chávez’s own language has changed. “Independent of my personal destiny, this revolution already has its own momentum and will not be stopped by anybody or anything,” he says.

Bonds are, of course, rallying on the news; yields have dropped this year as investors look towards the prospect of a more market-friendly government.

However, it must be remembered that while the doll may be taking a battering, there is a good chance it will bounce straight back up.