When Hugo Chavez announced on January 8 that his government intended to nationalise the Venezuelan CANTV phone company and the Caracas electricity system, a little hell broke loose among investors. Venezuelan stocks of all types fell rapidly on world bourses. Phone companies, oil stocks, mining and steel companies with Venezuelan exposure – it mattered not; Mr Chavez would steal from all and sundry, investors felt, and only a fool would invest there.
Visions of Cubanesque asset seizures are easy to conjure up in the minds of the average investor, and those with a penchant to flavour analysis with their political agenda were quick to attack. However, this controversial figure has been misrepresented in English-speaking media and the case for uncompensated confiscation seems flimsy under closer examination. Expropriation invites retaliation from injured parties, and Venezuela has too much international exposure to imagine itself in a socialist vacuum.
It is not in Mr Chávez’s interests to block US oil sales, which consume 60% of Venezuelan production. Soon afterwards, Venezuela made it crystal clear that any nationalisation would involve “tough but fair” negotiations with shareholders. Nationalising Caracas Electricity, majority owned by AES, and Verizon’s 28.5% of CANTV would cost around U$260m, which is not a real worry for a Treasury that received oil revenues to the tune of U$75Bn last year.
Macroeconomics indicate that Venezuela is enjoying a boom without equal. Oil is the motor, certainly, but the money is not stopping in government coffers because the rank-and-file are also reaping benefits. In January, the government allotted $7bn to local councils for their needs and wants, representing U$260 per capita – an astounding figure for an emerging nation. Poverty levels have dropped: in 2002 the World Bank reported 47% of the population was below the poverty line; in 2005, it was 34%. GDP growth of 17% in 2004, 11% in 2005 and 10% in 2006 speaks for itself. There are plenty more statistics to choose from, but the picture is clear.
Away from Chavez, his mouth and his oil, the Caracas financial community has been making serious money. Banks have jumped on the bandwagon and the credit they offer is being snapped up by consumers. New car sales – always a good barometer in South America – averaged 8,000 units per month in Venezuela between 2001 and 2004; and climbed steadily to the 30,000 units last November. Independent consultants Softline reported that nearly $29bn is being lent in Venezuela, a rise of 62.9% in 2006. The Venezuela Central Bank M2 figures show a 43.7% rise in FY06, compounded on the back of the 33.5% hike in FY05. Liquidity abounds, and financiers are making the most of it.
Venezuelan banks’ results that are the envy of the banking world, with returns on equity (RoE) of 33% the norm and 40%-plus RoE posted by pack leaders. International concerns are welcome to the party, too: Spain’s Banco Santander, which enjoys 15% of total market share, is a shining example.
Román Mayorga, the Venezuelan representative of the Inter-American Development Bank, told The Banker in December 2005: “The banks have been making tons of money.” Local bankers have commented on the good relationship they have with government, and there have been innumerable assurances from the state that the banking sector will not be nationalised in any way, shape or form.
Last September, the International Monetary Fund (IMF) reported that the Venezuelan banking sector, although in sound shape, remained vulnerable to cyclical downturns; as close as the IMF ever gets to saying “blue skies”. In other words, if world oil drops to $30 a barrel, it will hurt the Venezuelan financial community, but Mr Chávez’s latest speech is unlikely to cause ripples in earnings forecasts.
Do not expect Venezuela’s president to stop making political waves. But strip away the rhetoric and the prospects look good for Venezuela’s bankers, no matter what Hugo might say.
Mark Turner is Latin America equities analyst at Hallgarten.