Invest in Venezuela

Venezuela's Reliance on Petroleum

One of the founding members of OPEC (Organization of Oil Producing Countries) Venezuela is heavily reliant on oil. Petroleum accounts for more than three quarters of its dollar income and approximately 40-50% of fiscal revenues. 80% of Venezuela's exports are in the energy sector, and the economy is heavily dependent on price fluctuations in worldwide commodities markets.

Governments that benefit from commodity price booms usually need to plan ahead, because high prices may not last forever. In fact Venezuela's history is one of sharp leaps in oil prices, spikes in public spending on state-sponsored industrialization, and final cutbacks in state spending when oil prices collapse. Venezuela seems to be surfing another oil boom at the moment. The country's president, Hugo Chavez has been fortunate in that oil prices will likely to remain high for a prolonged period. However, Chavez has outdone all of his predecessors: the infrastructure of the state oil company, PDVSA, is crumbling, while Hugo Chavez has splashed Venezuelan oil royalties buying regional influence, and spending on social programs has reached such heights that Venezuela's annual budget deficit exceeds 6 percent of GDP, even as Chavez fails to maintain PDVSA's production capacity.

Chavez's government has done little to diversify the country's development into other economic sectors; on the contrary, he has nationalized phone and media companies. Chavez has set Venezuela on an unsustainable course even with oil prices at cyclical highs. The gradual decline in oil prices, combined with an extremely unfavorable investment climate, point to very poor medium-term economic performacne and eventual social upheaval.

Implications for U.S. suppliers of commercial goods to Venezuelans on credit are serious. The threat of non-repayment may become a real concern if oil prices fall and the Venezuelan government talks more about the unjustness of "Fourth Republic Debts." At present Chavez has agreed to repay the Venezuelan debt for strategic reasons.

"Nothing can stop the revolution!" proclaim full page advertisements in Venezuelan newspapers. Nothing that is, except for a drop in oil prices, which the government depends on for half of its revenue. The extended rise in oil prices since 1999, when Chavez took office, has permitted his increased spending at home and abroad. Chavez has stitched together regional alliances with Bolivia, Cuba and Ecuador by "liberally" dispensing Venezuela's oil revenues.

Venezuela's Budget for 2007

Venezuela's 2007 budget figures are based on oil production of 3.4m b/d, although the reality is probably about half that. In contrast, total government spending for last year was a third higher than originally budgeted. "Quasi-fiscal" or off-budget spending, which involves the diversion of oil revenues and central bank reserves into Chavez-controlled slush funds, is massive and growing.

Hugo Chavez has begun the nationalization of "strategic industries," among them telecommunications and electricity industries in order to expand state led development. The specifics of his plans for "21st century socialism" are difficult to understand where they exist. If Chavez means to centralize the economy after the Cuban model the results may be disastrous. The success rates for these types of economies have been well established. 21st century socialism also offers no way for Venezuela to develop medium and small sized businesses to create enough jobs and a route away from dependency on oil and the creation of a diversified economy.

As for the anti-poverty policy of Hugo Chavez, there has not been a full systematic diagnosis carried out. The government claims of progress in increased literacy, lower poverty, and increased health care, are difficult to take seriously. Research has found almost no statistically distinguishable results, in contrast to claims of illiteracy eradication and any striking breaks in trends begun before Chavez. There is no data that prospects have improved for the poor, in fact things may be worse.

Lower oil prices continue to threaten Hugo Chavez's expensive revolution. Economic growth is associated with support of the current regime, and while Chavez seems unstoppable, if Venezuela were hit by an economic hurricane it is unlikely they would, out of idealogical commitment, accept the necessary austerity. Chavez's expansion of spending is unsustainable. Venezuala ran a budget deficit of more than 2% GDP,despite the fact that oil prices were five times as high as when Chavez took office. A decline in oil must be followed by social spending cuts and the story would not have changed much from that of previous Venezuelan governments.

These changes will exacerbate deficiencies in the business environment making Venezuela a challenging place to invest. Investment in most sectors is unlikely to thrive against a background of unpredictable state intervention and rising threats to property and contract rights. Even in the dominant energy sector foreign investment has not reached potential. The economy is showing signs of strain. Sky high inflation rates last year were the highest in Latin America at 17%. Despite a stupendous oil windfall, Venezuela's deficit is only widening with the passage of time..

Parliment has given Chavez the power to legislate by decree. His supporters have drafted a constitutional reform that will turn Venezuela into a socialist country and allow Chavez to stand for re-election indefinitely. But unless Chavez caps spending growth, and takes an interest in developing his country's internal market and diversifying industry, Chavez will find himself elbowed aside before the oil boom subsides.