The Chavez Effect

Since coming to power in 1998, Hugo Chavez of Venezuela has not only transformed the political landscape of his own country and influenced the populist movement of South America, but he has also dramatically impacted investment and its outlook. Chavez's power base has made the prospect of investing (and even preserving) money in Venezuela a complicated affair, and unfortunately it is becoming an increasingly difficult riddle.

Chavez during the height of the boom in oil prices found himself in a politically powerful and cash-rich position, able to spend money for pet projects and military rather carelessly. However, because of the global downturn and retrenchment in oil prices, Venezuela finds itself with a sinking economy that is cash strained. The Bolivar is losing value and its bonds ratings are suffering internationally.

Chavez is widely known as a hawk within OPEC and has called for the oil cartel to try to keep prices as high as possible. While one cannot fault him for wanting his country to profit on the heels of oil's strength, it does leave him open to criticism considering oil's fall and his inability to expand Venezuela's economic base. His one-dimensional approach to growing Venezuela's wealth has left him at a distinct disadvantage.

The question that arises for the private or institutional investor considering a placement of capital within Venezuela is a dynamic one. Because of the political situation, it would be foolhardy to invest without promises by the leader himself, Chavez, that capital would be welcomed and secure. Unfortunately his track record does not support that type of consideration, taking into perspective the fact that he has now begun to extort money from corporations by threatening them, in some cases going as far as taking over facilities of corporations and nationalizing them or penalizing them with a probation process consisting of different time frames per the government's whim.

Chavez has not only made it hard to invest in Venezuela; he has also made it difficult to get money out of Venezuela, putting limits on amounts of money that can be carried out of the country personally and sent by wire transfer. These policies have left the people who have earned good incomes in Venezuela to formulate alternative methods to safeguard their wealth, which has not been easy considering the precipitous fall in the value of the Bolivar.

There is a theory in economics called diminishing return. In most cases this is used to point out that, when an entity receives initial funds for investment in order to create new industry, eventually the money that follows the previous investments will not match the percentage of profit made before. Too much money often makes the money that follows less valuable and thus less profitable in many cases. Unfortunately for Venezuela—though it certainly is not being overrun by investment from corporations and individuals currently—even if a person wants to invest in the country, one would be taking a huge gamble on the man in power. Unless one has an ability to know firsthand that their money is secure and that the investment is protected by the nation, why anyone would consider such a move? Chavez has helped reformulate a new law of diminishing returns.

In the past year alone, Chavez has not only set his sights on the continuing confiscation of oil-based corporate assets but has also gone after other companies like Cargill, the commodity giant. Because of Venezuela's clear disregard for basic economic theory, Chavez has created inflation by trying to implement price controls on basic foodstuffs and caused scarcity as well.

Having increased Venezuela's dependence economically on the oil industry, Chavez was able to enjoy a robust return of GDP during the boom oil years, and the end of the calendar year 2008 was even able to achieve a 4.8% gain. However with the downturn caused by the financial crisis within the United States, Europe and Asia, Chavez has seen a reversal not only in the demand for his black gold but also in unstable growth.

S&P now rates Venezuela's bonds with a mere BB rating, which means the country's economic conditions lack clarity and there are now doubts and severe questions regarding Venezuela's ability to cover its debt obligations. With a global economic outlook that continues to be cautious, Venezuela's circumstances will remain challenging in this environment as long as the oil industry remains the main engine for the Venezuelan machine.

Investors in Venezuela must play a strong and subtle game of political networking at this time to make sure they can maintain production and allow financial assets in the country to perform regularly. A pragmatic approach must be taken by the citizens of Venezuela to essentially safeguard their assets from becoming nationalized or seized "for the good of the people." How to do this without raising the ire of the Chavez government is the one million Bolivar question. The specter of corruption growing in a country that has a "populist" leader is often a grim reality, one that has stood the test of political and economic history as governments try to make money in the "utopian" lands they try to control.


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Chief Fundamental & Commodities Expert Robert Petrucci has worked in Financial & Commodity businesses for over fifteen years, including Physicals, Futures, and Options trading in Chicago and other international locations. Robert began as a broker in Chicago and has gained a vast amount of experience through various positions including trading, risk management, and analysis. Robert has built insightful associations with colleagues who are employed widely in Finance and Commercial enterprises - particularly on Wall Street and LaSalle Street.