Nelson Ortiz, head of Venezuela's Caracas Stock Exchange, was optimistic before the Christmas holidays that the bolsa, the national stock exchange, was poised for another year of heady gains in 2007. The exchange's general index more than doubled in 2006, powered by high oil prices and heavy government spending. Ortiz, like many others, thought the good times would continue this year.
But they won't, not if Hugo Chavez has his way. On Jan. 8, the Venezuelan President announced plans to nationalize the country's largest publicly traded telephone and electricity companies as part of his socialist revolution. Promises of compensation have done little to mollify stockholders in CA Nacional Telefonos de Venezuela (CANTV) and Electricidad de Caracas, especially as Chavez has said his government may pay less than "market value" for their shares.
On Feb. 1, Chavez further rattled investors by announcing that his government would take majority control of key oil projects in the Orinoco River basin—projects with partners such as BP (BP), Exxon Mobil (XON), Chevron (CVX), ConocoPhillips (COP), Total (TOT), and Statoil (STO)—by May 1. He also said he would take control of regional power companies.
It's still too early to gauge how far the government will go in its quest to deepen what it calls its Socialist Revolution. "I'm not happy with this," Ortiz says. "I think the government should have other priorities than nationalizing well-run companies." However, all the signs are that the tide is turning against investors. On Jan. 31, Venezuela's National Assembly voted to allow Chavez to legislate by decree for the next 18 months.
Not surprisingly, investors are running for the exits. The index on the Caracas stock exchange is down 15% since the start of the year. Trading volumes, which average about $1 million a day—modest even by regional standards—will be hit if Chavez goes ahead with plans to nationalize two of the exchange's blue-chips. Together, CANTV and Electricidad de Caracas account for 50% of daily trading. "Venezuela's capital markets are disappearing," says Miguel Octavio, executive director of Caracas-based BBO Financial Services. "The government has been planning this for some time."
Chavez's nationalization drive could also make it difficult for companies in Venezuela to get their hands on greenbacks. In 2003, the government instituted an official exchange rate—currently 2,150 bolivars to the U.S. dollar—and created a Foreign Exchange Administration Commission to regulate access to dollars. Since then, investors and companies seeking to repatriate profits have had two options aside from enduring the bureaucratic process of getting their dollars through the commission or buying them on the streets from tourists or small-time currency dealers.
Scarcity of Dollars
One is to purchase local shares of CANTV and Electricidad de Caracas, then swap them for their American depositary receipts and sell them abroad for hard currency. That will no longer be possible if the companies are taken over by the government and delisted. Although a handful of other companies are traded over the counter in the U.S. or Europe, those stocks tend to be illiquid. Another way for Venezuelans to get dollars has been to purchase government bonds, which are denominated in dollars but payable in bolivars, and sell those abroad for hard currency.
Chavez seems to be tightening all the escape valves.
Recently, the foreign-exchange commission disclosed that it had reduced approvals for dollar sales by 40%, from $164 million a day in December to $98 million daily in January. The scarcity of dollars has sparked a sharp depreciation of the bolivar on the country's booming black market, where the Venezuelan currency has recently traded at 4,200 to the dollar.
Some experts predict that Chavez will also crack down on the dollar bond market. "The government seems very hostile to the bond market and to the parallel market," says Robert Bottome, an analyst with Caracas consultancy Veneconomia. Indeed, government officials recently met with the heads of the country's banks and brokerages, threatening to take steps against institutions that speculate against the bolivar.
Such steps would create even greater incentives for investors and Venezuelans to get their money out of the country any way they can. Capital flight has been a problem in Venezuela for years. Chavez imposed capital controls in 2003 precisely to prevent funds from flowing out of the country. But tracking capital flight can be difficult. One way to measure it is through the balance of payments on capital spending.
Thanks to Venezuela's oil exports and high oil prices, the country enjoyed a strong current account surplus last year. But according to the Venezuelan Central Bank, foreign investors sold $778 million more in Venezuelan assets than they bought in the first nine months of last year (the latest figures available)—the first financial outflow in a decade.
Some Venezuelans who buy dollars on the black market literally take the money out in suitcases—or buy luxury goods abroad with credit cards and then resell them. Businesses applying for dollars from the foreign-exchange commission sometimes exaggerate the price of imported goods, and bank the surplus dollars offshore.
"There are a lot of locals in Venezuela trying to get dollars out of the country, fearing that Chavez is really going to step up his nationalization agenda," says Christian Stracke, head of emerging markets research for CreditSights, a New York-based debt and equity research house. After a landslide reelection victory in December, Chavez believes he has a mandate to attack capitalism and promote socialism. Continued uncertainty is facing foreign investors and Venezuelans alike.