By Walter Molano, BCP Securities, LLC | As Colombia evolves into an oasis of prosperity, Venezuela sinks deeper into the dungeons of despair. Some scholars suggest that a country’s leadership has a limited impact on its trajectory. They argue that it largely relies on natural endowments, social structures, and random external factors. However, this is not the case with Venezuela. Under the reckless tyranny of Hugo Chávez, Venezuela’s cornucopia of abundant natural resources, solid infrastructure, and skilled labor was squandered. In 2010, the Venezuelan economy contracted by 1.9% year-on-year, making it the only major emerging market country to experience a decline in economic activity. The Venezuelan oil sector shrank by 2.2% year-on-year, despite the recovery in oil prices. An endless wave of nationalizations and antagonistic policies drove away most investors. China, Russia, and Iran were the only countries that continued to invest in Venezuela. However, their national companies were assured favorable deals, given their governments’ close ties with Chávez. Unfortunately, the situation is set to worsen. Last week, 63 opposition lawmakers took their oaths, introducing a new level of political tension. This was the first time in five years that Chávez’s United Socialist Party faced opposition in Congress. The opposition boycotted the 2004 elections, effectively paving the way for Chávez. This time, they won 52% of the votes but received only 40% of Congressional seats, due to manipulation and other electoral tactics. Additionally, Chávez introduced new rules late last year, allowing him to govern by decree for the next 12 months. With presidential elections approaching next year, Chávez will do everything possible to maintain his grip on power. In the process, he will turn the country into a living hell.
One of the government’s top priorities is stabilizing the economy. The lack of foreign investment and the massively overvalued exchange rate are putting pressure on Venezuela’s balance of payments. The fall in international reserves was the main reason behind the recent devaluation of the bolívar. By the end of the year, the central bank announced the unification of all exchange rates, resulting in a 40% devaluation of the rate used for importing food and medicines. Unfortunately, misclassification and abuses led to over 60% of the country’s imports arriving via the preferential rate. This devaluation will be particularly painful for the poor, who are already facing the highest inflation rate in the world. In 2010, Venezuelan consumer prices surged by 27% year-on-year. Most analysts expect consumer prices to increase by over 30% year-on-year this year. Given the lackluster economy and the misery of rising consumer prices and capital controls, it is no wonder the opposition is gaining power. Food shortages will undoubtedly continue to rise, along with the wave of rampant crime affecting major urban centers. The political and economic situation is collapsing in Venezuela, likely leading to civil unrest.
The cables from the State Department released by Wikileaks indicated that Colombia’s concerns about Venezuela’s social stability were the main reason President Uribe requested the U.S. to open a series of military bases. The proximity of U.S. personnel and military equipment would have acted as a deterrent against a desperate unilateral move by President Chávez to garner nationalist support. Although the base initiative was derailed by Colombia’s Supreme Court, President Juan Manuel Santos opted to extend an olive branch to his erratic neighbor. So far, this shift in diplomacy has yielded results. Bilateral trade is increasing, and the Venezuelan government is allowing companies to make payments to Colombian exporters. However, the situation will remain tough. Given the high inflation rate, the government is likely to have to devalue again. It will also be compelled to tap into capital markets, paying huge premiums in the process. Both measures will significantly increase the country’s debt-to-GDP ratio. Some investors welcome the volatility and high yields offered by Venezuelan bonds, but the country is a ticking time bomb waiting to explode. Any future restructuring will be extremely painful, with a high likelihood that the government will repudiate as much of its debt as possible. Lastly, Venezuela has few attachable foreign assets. CITGO refineries were mortgaged last year, and bondholders were also subordinated to the Chinese. Their loans are payable in oil, granting them ownership before their vessels reach international waters. Thus, there’s no reason to recommend investing in Venezuela, other than to gain future mandates and fill investors with assets from a country headed for doom.