Venezuela
Geopolitical issues:
1. While Venezuela is currently refining around 420,000 bpd, it still needs to import gasoline to help meet domestic demand.
2. Washington has substantial leverage over the Venezuelan regime given the abundance of assets that Citgo, the refining unit of Venezuelan state oil company Petroleos de Venezuela, has spread throughout the United States.
3. The United States also is the largest recipient of Venezuela's crude exports and one of the few markets in the world with the technological capabilities to process Venezuela's heavy crude, leaving Venezuela without much of a viable alternative market.
source: Stratfor.com
guide for investors...
Venezuela is roughly the size of Texas, and is also an oil-producing state. The population is just under 30 million people (compared to 20m in Texas). The location is great for business, with easy access to the Caribbean, Atlantic, and close proximity to the Panama canal (and the Pacific). It has modern(ish) sea ports, airports, and highways the major cities.
Venezuela is officially called the "Bolivarian Republic of Venezuela", and is a federal republic, located at the north of South America. It borders north with the Caribbean Sea, east to Guyana, south with Brazil and west with Colombia.
The country gained independence from Spain in 1821, and was one of the three nations that formed the Great Colombia. The economy is most based on the petroleum industry, depending also on the agricultural sector. The official language is Spanish, although several indigenous languages are spoken by aboriginal tribes through the nation. Venezuela is a co-founder member of the OPEC and the South American Community of Nations.
Venezuela is among the most urbanized countries in Latin America; the vast majority of Venezuelans live in the cities of the north, especially in the capital Caracas which is also the largest city.
More analysis:
http://www.venezuelanalysis.com/
Table of Contents
Macro issues:
The government spending to the equivalent of 36 percent of gross domestic product in 2007 from 23 percent in 1998, according to Standard & Poor’s
Issues for investors:
Reserves:
why climbing, when interest rates have gone up and oil prices have fallen...i assumed there was a capital account deficit, leading them to defend the currency...with reserves...unless they are allowing the currency to fall?? Not what i expected (after studying russia)
http://www.bloomberg.com/apps/quote?ticker=VNRS%3AIND
Nationalizations:
The government of Hugo Chavez is not exactly (foreign) business friendly. We all know that, but beaware of the danger that Chavez may decide that your industry is "strategic", and that he will nationalize the business (opposite of privatization), essentially taking control of the business (stealing it from private investors). see articles articles - Chavez nationalizes industries
The nationalisations have been seen as an attempt by Mr Chávez to boost sagging popularity ahead of regional elections in November by tackling housing shortages and speeding up infrastructure projects. Indeed, Mr Chávez’s initial justification for nationalizing the sector was that foreign cement companies were exporting too much of their produce, while Venezuela suffers an acute housing shortage, with official figures showing a deficit of 2.7m homes. But, according to local daily El Nacional, there were no cement exports in March, and in the first quarter of 2008 exports represented less than 2 per cent of local production. “It is clear that the problem in the housing sector is nothing to do with cement, and less so cement exports. Having the sector under state control will certainly do nothing to help, it was working just fine already,” said José Grasso Vecchio, a Caracas-based analyst. “The housing deficit is so large that no government can fix such a problem by itself, no matter how much money it has,” he said, adding that the government has made no serious study of the housing sector’s problems.
Even though Mr Chávez assures that the companies will be compensated “to the last cent”, the move sends out a negative signal to investors.
More taxes on foreigners
He is also increasing state control over foreign-owned sectors of the economy by imposing a windfall profits tax on foreign oil producers, which energy minister Rafael Ramirez estimates will yield at least $1bn.
Hugo Chavez:
Venezuelan President Chavez's Rise and Presidency: Timeline: http://www.bloomberg.com/apps/news?pid=20601086&sid=aLkNX6fA3pQQ&refer=latin_america
(excellent summary)
Economic issues for investors:
Challenge to the IMF
see Banco del Sur
Economy
Venezuela remains highly dependent on oil revenues, which account for roughly 90% of export earnings, more than 50% of the federal budget revenues, and around 30% of GDP. A nationwide strike between December 2002 and February 2003 had far-reaching economic consequences - real GDP declined by around 9% in 2002 and 8% in 2003 - but economic output since then has recovered strongly. Fueled by high oil prices, record government spending helped to boost GDP in 2006 by about 9% and in 2007 by about 8%. This spending, combined with recent minimum wage hikes and improved access to domestic credit, has created a consumption boom but has come at the cost of higher inflation-roughly 20 percent in 2007. Imports also have jumped significantly. Embolden by his December 2006 reelection, President Hugo CHAVEZ in 2007 nationalized firms in the petroleum, communications, and electricity sectors, which reduced foreign influence in the economy. Although voters in December 2007 rejected CHAVEZ's proposed constitutional changes, CHAVEZ still has significant control of the economy and has indicated he intends to continue to consolidate and centralize authority over the economy by implementing "21st Century Socialism." see: CIA factbook report here
Macroeconomic summary 2008
Official inflation is up, but strangely, the economy is stalling (in spite of record prices of oil).
Economy slows in 2008:
Why? Many reasons: To start, there are big economic imbalances. The government has channelled much of its oil wealth into handouts and subsidies, while its socialist policies have provided little incentive to increase production. Private investment has all but dried up. Businessmen have been scared by Mr Chávez's recent nationalisations of the cement and iron and steel industries, and some dairy companies.
Economic History:
Up until the mid 1970's, Venezuela used the strong revenues from the Oil sector, and did not believe that they needed outside investment. In 1975, the president Perez nationalized the oil industry. With the money that the government received from this, they went on to create more government owned industries. FDI investment in Venezuela trickled to a standstill.
Andean Pact
In the 1960s, the countries of Venezuela, Colombia, Ecuador, Peru, Chile...saw marked increase in economic activity. As they developed, they began to discuss creating a common market, similar to what Europe was doing with the EEC. They had in mind an integrated market where members would lower barriers to each other, but raise barriers to outsiders. The goal was to confront foreign investors as a common entity to increase the bargaining strength and to dictate better terms, to increase investment in the region and to further development. From the foreign multi-national corporations point of view, this was supposed to be a benefit in that it would allow companies to locate manufacturing in just one nation and to export to the others, increasing efficiency.
The Andean Pact was intended to create a common market about the size of Mexico (approx 100 million). Venezuela was to be the largest market in the pact, and therefore one of the most influential. Companies that sought to enter the Andean region, therefore, were expected to meet standards set by Venezuela. So, the expectation was that this deal would be a good deal for Venezuela.
Venezuela joined the Andean pact in 1973, with the promise of reducing trade and investment barriers for regional partners, but increasing barriers for outside countries, and effectively isolating the group from the rest of the world. This fit in nicely with the theory of "dependency", and the desire to be independent from outside influence. The Andean Pact included Venezuela, Colombia, Ecuador, Peru and Bolivia. See our discussion on regional trading blocks
The trouble is that the countries could not agree. Bilateral agreements made many companies question the validity of the Andean pact, and backed away from making investments to startup manufacturing bases there.
Black Friday; Feb 18th, 1983
Note: this followed the devaluation of the Mexican Peso in 1982 (see our discussion on debt crisis of the 1980s in Latin America and, history of economic crisis and currency devaluations )
During 1982- 1983, Venezuela had a steep decline in foreign reserves, which led to the devaluation of the currency on Feb 18th, 1983. In response to this devaluation, the government put in place currency controls, making it illegal to to sell foreign currency. Also, they put in place temporary price controls limiting the ability of distributors to raise prices, which they would want to do in response to a devalued currency. The price controls set limits on quality, quantity and sales terms.
Oil crisis leads to liberalization of the economy
see: http://en.wikipedia.org/wiki/1979_energy_crisis
In the 1980's, the oil prices collapsed, and Venezuela was forced to look outside of their nation for investments. As debts piled up, and the currency depreciated...Venezuela came under increased pressure to open up their economy to the outside world. This was also a result of pressure from the IMF, from whom Venezuela was forced to borrow to avert disaster. In response to pressure, Venezuela was forced to privatize industry, and allow greater foreign competition, ownership and intervention. But, this went against national sentiment. And, each time they had a chance, Venezuela reversed course and changed policy.
Investment plan
In the midst of the crisis, the government's (president Herrera) plan to invest $60 billion (between 1981-1985) came into question. This investment plan was supposed to have been funded by the high oil prices and taxes, but a drop in oil prices and a recession made that difficult. In spite of the funding difficulties, the government planned to press forward with investments in oil, water, electricity and other heavy industries. Analysts were skeptical of their ability to pull off such high investments in face of dwindling resources.
Market Reforms, and the opening of Venezuela's economy
Venezuela attracted international investors because of its progress under former President Pérez in opening the economy to market forces in the late 1980s.
Resistance to reforms (and inflation) lead to riots
In subsequent years, however, Venezuela significantly regressed from market liberalization. In 1989, popular resistance to deregulation and higher consumer prices culminated in violent demonstrations in which hundreds of Venezuelans reportedly were killed. The severity of the upheaval, known as the Caracazo, partially undermined the reform effort. Additional riots and the impeachment of President Pérez for misuse of public funds in 1993, however, effectively derailed economic reform.
President Rafael Caldera, and the banking crisis of 1993
On the heels of President Pérez's impeachment, a widespread banking crisis ensued, which compounded Venezuela's poor economic performance. In the first six months of 1994, the government bailed out more than half of Venezuela's banks after the failure of Banco Latino, the nation's second-largest bank. After the government closed Banco Latino in early 1994, many depositors, losing confidence in the security of their deposits, withdrew their bolívars from other banks and converted them into dollars, of which substantial sums were transferred abroad. The Central Bank of Venezuela estimates that capital flight drained more than $3.5 billion from its total reserves in the first half of 1994. Foreign reserves dwindled.
After the closure of Banco Latino, numerous other banks and financial institutions failed, resulting in an $11 billion government bailout. Fifty-six financial institutions were closed, and 25 were taken over by the government.
The Venezuelan bailout amounted to roughly 11 percent of GDP and 75 percent of the government's 1994 federal budget.
By March 1995, 58 percent of all bank assets were under state control. To finance the bailout, the government had allowed the money supply, as measured by M2, to increase by more than half in 1994 alone. The inflationary effects of the bailout, along with the steep fallout in loans, exacerbated the crisis.
Price controls & Currency controls
In response to the banking crisis (and the lack of foreign reserves), President Caldera instituted price controls and currency controls. Subsequently many businesses, deprived of access to dollars because of the controls, and thus to imports, could no longer operate, resulting in shortages of consumer goods.
Furthermore, the government maintained an official fixed exchange rate of 170 bolívars to the dollar, despite a parallel rate operating at the time in the Brady bond market of roughly 350 bolívars per dollar. Because of the mounting overvaluation of the currency and declining central bank reserves, on Dec. 11, 1995, the bolívar was devalued by 41 percent to 290 per dollar.
Devaluation occurred, but the price controls stayed in effect. Also, access to US dollars was limited to the purchase of Brady bonds (buying Brady bonds with bolívars on the local market and selling them on international markets for dollars).
the government subsidized domestic gasoline prices to such an extent that in 1995, Venezuelans were paying only 7 cents a gallon for gasoline
IMF bailout
Faced with no other option, the Venezuelan government introduced a comprehensive economic reform package and on June 3 signed a letter of intent for a one-year, $1.4 billion loan agreement with the International Monetary Fund (IMF) expected to be finalized in mid-July. IMF approval in turn paves the way for $1.9 billion in loans from the Inter-American Development Bank (IDB) and the World Bank, bringing the total in multilateral loans to more than $3 billion.
Included in the "Agenda Venezuela," as the set of economic reforms is known, are a free-floating exchange rate, renewed access to foreign currency, elimination of price controls, tax hikes, a steep increase in gasoline prices, and a gradual return to positive real interest rates.
Politics
see discussion below, and our discussion on economic populism
Hugo Chavez, nationalization of industry, and socialism
When the IMF pushed president Caldera to abandon these price controls in 1996, the rate of inflation went up to over 100%. This paved the way for President Hugo Chavez to take control...
By going back to national ownership, and protectionism, Hugo Chavez was not offering a radical break from the past, but rather a return to common beliefs in Venezuela based on a long history of strong national ownership and protectionism.
Anti-capitalism rhetoric
"I am convinced that the path to a new, better and possible world is not capitalism, the path is socialism."
Hugo Chavez
"I have said it already, I am convinced that the way to build a new and better world is not capitalism. Capitalism leads us straight to hell."
Hugo Chavez
Anti-US rhetoric
"I hereby accuse the North American empire of being the biggest menace to our planet."
Hugo Chavez
Ties with Cuba
Since late 2000, Venezuela has been providing Cuba Oil Industry on preferential terms, and it currently supplies about 98,000 barrels per day of petroleum products. Cuba has been paying for the oil, in part, with the services of Cuban personnel, including some 20,000 medical professionals. Venezuela has been the main savior of Cuba since the disappearance of Russia (even though Russia still has strong ties with the island).
Recently, there was an announced 300+ projects with an estimated value of $1.5 billion from Venezuela to Cuba. Included in that investment, Venezuela has promised to invest $300 million to increase nickel production, and to build 10 Ethanol plants to provide an alternative use for Cuba’s sugar crop. Just before this announcement, however, Cuba signed an agreement granting oil exploration rights in the Gulf of Mexico to Venezuela’s state-owned oil company, PDVSA. It sounds to me like Cuba exchanged investment for oil exploration rights...interesting that the roots of the "brotherhood" may be tied to economic partnership. That seems to prove that Cuba is willing to trade away exploration rights in exchange for much-needed investment in their industries. Business men take note!!
Issues for the investors:
Important Oil supplier
Venezuela is the 4th largest oil supplier to U.S. – after Canada , Mexico and Saudi Arabia – supplying of 12 percent of U.S. oil imports; 68 percent of Venezuela 's oil exports are destined for U.S. See: “Could Venezuela Stop Selling Oil to the U.S.?” and “Venezuelan, PDVSA Default Risk Rises on Asset Freeze”
From Wikipedia: "The discovery of massive oil deposits, totaling some 400 million barrels, during World War I prompted an economic boom that lasted into the 1980s; by 1935, Venezuela's per capita GDP was Latin America's highest, and globalization and heavy immigration from Southern Europe and poorer Latin American countries markedly diversified Venezuelan society."
Subsidies: Effects on oil markets
Oil subsidies in Venezuela: $0.07 per gallon of gas
Motorists in the United States smarting from rising gasoline prices, take note: Venezuelans pay the equivalent of $1.50 to fill his Hummer’s tank. Thanks to a decades-old subsidy that has proven devilishly complex to undo, gasoline in Venezuela costs about 7 cents a gallon compared with an average $2.86 a gallon in the United States.
Many Venezuelans consider the subsidy a birthright even though it bypasses the poor, who rely on relatively expensive and often dangerous public transportation. Economists estimate that it costs the government of President Hugo Chávez more than $9 billion a year.
Critics of Mr. Chávez, and the president himself, agree that the subsidy is a threat to his project to transform Venezuela into a socialist society, draining huge amounts of money from the national oil company’s sales each year that could be used for his social welfare programs. One-third of oil production now goes to meet the subsidy, he said. Petróleos de Venezuela has disputed such estimates but recently stopped providing public figures on domestic fuel sales. A spokesman at the company said officials were not available to comment on the matter.
Fuel smuggling into neighboring Colombia, where prices are much higher, is also rife.
Gasoline prices have often been a taboo subject for Venezuelan governments. There are memories of the riots in 1989, in which hundreds, perhaps thousands, of people died after protests set off by an increase in gasoline prices that resulted in higher transportation costs. That instability helped set in motion a failed coup attempt by Mr. Chávez in 1992, which first thrust him into the public eye.
The link between social peace and gasoline so cheap it is almost given away is evident to many motorists. “If you raise gasoline, the people revolt,” said Janeth Lara, 40, an administrator at the Caracas Stock Exchange
One option is to keep the price of diesel cheap, because it is used in most freight and public transportation, while raising gasoline prices for relatively prosperous car owners. Another idea is to give transportation vouchers to people in poor neighborhoods.
Scholars trace the origins of Venezuela’s subsidy to the 1940s, when leftists imposed caps on gasoline prices after overthrowing the government of Gen. Isaías Medina Angarita. Because profits on sales of gasoline went to foreign oil companies at the time, the measure was seen as a way of redistributing oil revenues to Venezuelans.
A thriving car-buying habit rivaled by few nations is forcing the government here to sell greater amounts of cheap gasoline. Car sales must be GREAT in Venezuela (no?). Vehicle sales in Venezuela climbed 49 percent in the first nine months of the year from the same period last year, in part because cars are seen here as an investing hedge against economic uncertainty. Not only has the bolívar dropped in value, but there is also concern over real estate as squatters are allowed to take control of vacant properties. Despite government efforts to open the market to car manufacturers from Iran and China, bulky, gas-guzzling sport-utility vehicles from the United States remain among the most sought-after automobiles here. Perhaps the most coveted S.U.V. of all in Venezuela is the Hummer, an ethical quandary for Mr. Chávez. “What kind of a revolution is this?” the president said on his television show this month, after a report here that General Motors was planning to import 3,000 Hummers to meet a rising demand. “One of Hummers?”
Maps
Places in Venezuela
Venezuela is divided into 23 states (estados), the Venezuelan Capital District and the aforementioned dependencies.
Caracas = capital. Most of the population lives here.
Other major cities include Maracaibo, Valencia, Maracay, Barquisimeto, Ciudad Guayana and the popular tourist city of Mérida. "
Corredor between Caracas and Valencia = major trucking route. Important commercial route.
Maracaibo = oil
Valencia = automotive center
Orinoco Tar Belt Region: oil, gas, electricity. Located north of the Orinoco river, stretching to the East, this region is one of the world’s largest accumulations of natural bitumen and heavy oil. They are more expensive to produce than conventional light oil because they must be refined to remove sulfur and other metals and diluted with natural gas liquids or light crude oil. Due to its high cost of extraction, the fraction of oil-in-place that is economically viable to extract is highly dependent on the state of extraction technology and oil prices. read more: http://www.eoearth.org/article/Orinoco_Heavy_Oil_Belt,_Venezuela
External Links
excellent source of info: https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html
Venezuela Portal From Wikipedia
Venezuela
See also:
Ideologies and theories
Anarchist · Capitalism
Communist · Corporatism
Fascist · Islamic
Laissez-faire · Market economy
Mercantilism · Socialist
Sectors and systems
Closed · Dual · Gift
Informal · Mixed · Natural
Open · Participatory · Planned
Subsistence · Underground
Virtual
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