ECR Forum: What Hugo Chavez’s recent election victory means for Venezuela’s economy


Matthew Turner
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Two experts give their views on the implications of another round of Chávismo on Latin America’s biggest oil producer

Chávez’s anti-market stance and isolationist policies have deterred investors from Venezuela in recent years, despite the country’s status as Latin America’s largest oil producer. Prices on Venezuela’s credit default spreads widened in the days after Chávez’s election victory to 800 basis points, equivalent to a 50% probability of default.

However, some argue that revenues generated from the country’s vast oil reserves could be enough to offset the inefficiencies of Chávez’s polices. Indeed, the widening of Venezuelan bonds after the election was less than what many analysts expected.

Euromoney asked two members of Euromoney Country Risk’s panel of expert economists for their opinions on the outlook for Venezuela’s economy.

Do you expect the government to initiate a new set of monetary and fiscal policies, following the election result? If so, what do you expect these changes will be and how will this affect investment and the country’s risk outlook?

Pascaline della Faille, country risk analyst at ONDD, the Belgian Export Credit Agency: In the coming months, Chávez is likely to carry out a major devaluation. Indeed, foreign exchange reserves have fallen sharply despite high oil prices and exchange controls. Moreover, tighter foreign exchange controls are likely to be imposed to protect foreign exchange reserves. After all, given the surplus on the current account, the depletion of reserves reflects the high level of capital flight and the transfer of exceeding FX reserves to the development fund Fonden.

Public debt has more than doubled between 2008 and 2011. As public spending surges in 2012, the budget deficit is likely to deteriorate further and public debt to increase further, despite the high oil prices.

On the positive side, Venezuela’s external debt remains at a moderate level, as well as the external debt service, which mitigate somewhat the high country risk. Nevertheless, if Venezuela continues to rely on [state oil company] PDVSA as a source of external funding, external debt is likely to increase, deteriorating the ability of the country to pay off its external debt.

Miguel Rojas, associate professor, University of Moncton: I do not expect the government to change course concerning its economic policy. Broadly speaking, economic policy has not gone through major changes since 2003, when strong oil prices started going up very rapidly, allowing Chávez to set up the institutional framework needed to implement his economic policy: state interventionism and food subsidies, financed by oil revenue. Although this policy has been extremely profitable for Chávez in political terms, it is very unlikely that it can reversed, or even fined tuned, unless there is a substantial drop in oil prices.

What effect will Venezuela’s recent election result have on the country’s risk outlook? How will this affect investment into the country?

Pascaline della Faille: In the short term, as Capriles conceded defeat, no major disruption is expected. Nevertheless, uncertainty surrounding Chávez’s health and succession continues as nobody inside his party is likely to replace him due to internal division within the ruling party [PSUV] between moderate socialism and Cuban-style socialism. If Chávez dies in the first four years of his term, election will be called according to constitution.

Since 1999, Chávez has gradually taken steps to transform the Venezuelan economy to match his vision of 21st-century socialism, meaning that he has increased government intervention in the economy, eroded private property rights and nationalized companies in various sectors such as oil, steel, telecom, electricity, financial, food and construction. Any improvement in the above mentioned criteria would improve business confidence in the country.

Miguel Rojas: After 14 years of a strong anti-capitalist stand, it is very unlikely that Chávez could be able to modify perceptions of foreign or domestic investors. It is possible that currency overvaluation that penalizes exports and subsidizes imports will continue, because it seems to profit the operation of the Venezuelan government. 

This article was originally published by Euromoney Country Risk.