When former paratrooper and failed coup leader Hugo Chávez was elected president of Venezuela in December promising to do whatever was necessary to improve the lot of the bulk of the population, the country’s bankers weren’t sure what kind of treatment they could expect. They are beginning to find out.
Venezuela is in deep recession. Its GDP was 9.9% lower in the first half of this year than in the same period last year. The president has repeatedly blamed the banks for making the recession worse.
Chávez says they are overcharging for credit and wants interest rates reduced to no more than 35% – compared with an average of around 38% early last month. The message to Venezuela’s bankers was clear: reduce interest rates voluntarily or a cap on rates will be introduced.
“The government is sending out all the wrong signals on interest rates,” says ING Barings’ analyst Michael Henry. “It says it wants rates brought down into line with inflation. But, first, that is just the government’s inflation forecast, it’s not where the market thinks inflation will be. And second, the government is assuming there will be a rapid recovery from recession. Nobody else is forecasting that.”
The banks grumble that Chávez is confusing cause and effect. The recession is not being caused by high interest rates; they are a consequence of Venezuela’s economic problems. Part of the reason that interest rates are not lower is that Venezuela’s banks have to cover the increase in bad loans caused by the recession. Non-performing loans rose from just over 4% in December 1998 to 7% in July. And bank profits have been falling sharply as banks provision for bad loans. Profits were 51% lower in July 1999 than in the previous July for example.
Bankers complain that the government’s own actions contribute to the high level of interest rates. Central bank reserve requirements are high, at 17%, and only a small proportion of deposited reserves are yield bearing.
Most analysts believe the Venezuelan banking system is not in any serious danger. Fabian Ramos a bank analyst at Duff & Phelps points out that the system is well capitalized. BIS ratios for the system as a whole stand at 16% and the banks remain profitable in spite of the recession.
But Henry at ING Barings points out that the authorities are pursuing a misguided interest-rate policy in other areas. The yield on central bank deposits, which sets the interest rates for the banking system as a whole, is negative in real terms. Unless that changes there could be a continual bleeding of capital from the country.
After several weeks of tension, the stand-off between the banks and the president was eventually diffused. Late last month Chávez admitted that the economy would not, after all, recover from recession by the end of the year and signed a pact with the banks under which they commit to work towards lowering interest rates.
The details of the agreement remain murky. The banks had suggested that they would be able to lower interest rates quicker if the central bank reduced its reserve requirements or lowered the amount of premiums they have to pay to Fogade, the deposit insurance scheme. The central bank, in turn, has agreed to increase the proportion of reserves on which interest is paid.
But the banks could still face the imposition of another worrying measure. They may soon be forced to increase lending to the agricultural sector. In this respect Venezuela is moving in the opposite direction to the rest of Latin America which has gradually phased out policies directing which sectors the banks must lend to.
The government wants to revive a law which was scrapped in Venezuela in 1996. Banks could be fined up to B930 million ($1.5 million) if they fail to make a certain proportion of their loans to the agricultural sector.
Under the old system, 15% of all banks’ loans had to go to the agricultural sector and had to carry preferential interest rates. Since this law was abolished, the banking sector’s credit exposure to agriculture has fallen to around 9%.
Ramos at Duff & Phelps believes that when the measures finally come into force, perhaps later this year or early in 2000, they will not have a dramatic impact on the balance sheets of Venezuelan banks.
That is because the definition of the agricultural sector used is wide, including large food companies, and the sector is not riddled with bad loans as is the case in other Latin American countries.
But Venezuela’s banks are clearly on the defensive. As the agreement between the banks and the authorities on interest rates was being announced, the national constituent assembly, the body created by Chávez to draw up a new constitution, was discussing the creation of a permanent mechanism to regulate interest rates. If that happens, how long will Venezuela’s banks remain healthy? Michael Peterson
