Venezuelan plan alarms investors

International
The Herald Tribune

Venezuelan plan alarms investors

By Simon Romero and Clifford Krauss
Published: January 9, 2007

CARACAS, Venezuela: Verizon Communications had been looking to lighten its exposure to Latin America for some time when it struck a deal in April to sell investments in three properties in Puerto Rico, the Dominican Republic and Venezuela.

Now, it probably wishes it had disconnected its Latin lines even sooner.

The company could possibly lose up to several hundred million dollars, thanks to President Hugo Chávez of Venezuela, who threatened to nationalize the country's main telephone and electricity companies.

Investors reacted with alarm here and in markets in the United States and throughout Latin America on Tuesday as they measured the impact of the plan by Mr. Chávez to nationalize crucial areas of the economy.

Memories of past nationalizations during another turbulent era, in places like Cuba and Chile, helped drive down the Caracas stock exchange's main index by almost 19 percent.

Markets across Latin America declined yesterday, but the drop was modest in most other countries, with the Bovespa index in Brazil and the Bolsa index of Mexico each falling 1.9 percent. The measured reaction appears to reflect the belief of investors that Mr. Chávez, in spite of his rhetoric, has limited influence on the economic policies of other governments in the region.

"It has not turned into a widespread contagion," said David Riedel, president of the Riedel Research Group, who follows emerging market stocks. Compared with the 1990s "you have a more sophisticated base of investors that understand that Mexico is different from Venezuela."

Still, investors sold shares in American, Argentine and Mexican companies vulnerable to the move by Mr. Chávez to take control over entities that had been privatized by previous administrations.

Owners of Venezuelan steel, banking, cement and hotel companies — even the cable car operator that takes tourists to the top of the Ávila mountain here — could be affected by the push toward nationalization, analysts said.

"Chávez is deepening his revolution, but in doing so will he follow the law and compensate the companies whose assets will be nationalized?" said Miguel Octavio, executive director of BBO Servicios Financieros, a brokerage firm, who calculated the costs of taking over companies in the telecommunications, electricity and oil industries, as well assuming their debts, at more than $15 billion.

"It doesn't seem like the government has thought this project out yet," Mr. Octavio said.

Tony Snow, a White House spokesman, said on Tuesday, "Nationalization has a long and inglorious history of failure around the world. We support the Venezuelan people and think this is an unhappy day for them."

Mr. Chávez further intensified worries with his request for vastly enhanced presidential authority from Congress. If successful, those new powers would allow him to decree measures into law for one year, bypassing any debate in the legislature, where in any case, all 167 deputies are his supporters. On top of that, he made a request to abolish the autonomy of Venezuela's central bank. The Venezuelan government did not immediately contact the American companies, which refused to discuss details.

"There are many ways in which the Venezuelan government could proceed," said Peter Thonis, a spokesman for Verizon. "Since they have not discussed specific plans, it would be premature for us to comment now."

In April, Verizon agreed to sell its 28.5 percent stake in Compañia Anónima Nacional Teléfonos de Venezuela, or CANTV, to América Móvil and Teléfonos de Mexico, for $676 million; the deal has not closed, so Verizon still owns the stake, and it is unclear how much the Chavez government might be willing to pay to take control. Neither América Móvil or Teléfonos de Mexico would comment.

Since taking power eight years ago, President Chávez has imposed stronger political control over the state oil company and has ordered the government to exert greater authority over several ventures with foreign oil firms.

Stopping short of Mexico's nationalization of foreign oil companies in the 1930s, the Venezuelan government has aimed to reach partnership agreements with foreign oil companies while raising its tax rates and royalties on foreign oil companies.

At the very least President Chávez's pledges Monday to nationalize companies in the telecommunications and electricity industries represented another retreat of the trend toward more private control of national economies and free market policies that swept Latin America in the 1990s.

Mr. Chávez has led that reversal, which has taken hold to one extent or another, in Argentina, Ecuador as well as Bolivia.

"We have said for a while that if you are operating a domestic business in Venezuela, you are chronically at risk for something like this happening," said Thierry A. Wizman, a managing director and global emerging market strategist at Bear Stearns in New York. "This is not the first time he has changed the rules for domestic businesses."

Still, Mr. Wizman notes Mr. Chávez cannot afford to seize assets brazenly without compensating corporate owners, because Venezuela owns assets in the United States like Citgo, the energy company, that could be frozen by United States courts.

"He is unlikely to give a fair price, but it won't be outright seizure without compensation," Mr. Wizman said. "He doesn't want to offend everybody simultaneously."

Not all investors are as sanguine, and two American companies, Verizon and the AES Corporation of Arlington, Va., suddenly face the potential of hundreds of millions of dollars of losses. AES declined to comment Tuesday.

The abrupt policy and market jolt in Caracas came amid surging interest in Latin America, Asia and Eastern Europe by investors around the world. Last year, investors in the United States poured $20.3 billion in emerging market funds, up 47 percent from 2005 and accounting for 15 percent of all the money invested in stock-based funds, according to AMG Data Services.

Investors note that even with the recent troubles in Russia, Venezuela and Thailand, conditions remain favorable in Brazil, Chile, China and India. That may explain why stock markets did not buckle across Asia and the declines in Latin America were fairly modest outside Venezuela.

Some investors and business experts expressed optimism that while risks and trepidations were on the rise for business in the region, Mr. Chávez had sometimes stopped short of his rhetoric in the past.

Others even hoped he would reverse his intentions, or at least fairly pay for the announced nationalization of Compañia Anónima Nacional Teléfonos de Venezuela, which is partly owned by Verizon.

A sharp fall in the shares of Electricidad de Caracas, a utility controlled by AES, however, seemed to reflect fears that it would be nationalized.

Mr. Chávez's pronouncements prompted expressions of awe and surprise among many of his new cabinet members at their swearing-in ceremony on Monday, suggesting that even they were taken aback. Mr. Chávez also lectured Venezuela's clergy, which has been critical of his plan to refuse a broadcast license to an outspoken television network. He recommended that they read the works of Karl Marx and Vladimir Lenin, as well as the Bible, "to learn what socialism means."

Mr. Chávez has moved forward with a revolution that seemed to unfold in slow-motion, characterized by socialist-inspired economic policies like price controls to slow inflation and the assembly of alliances with Latin American nations with leftist leaders that now include Bolivia, Cuba, Ecuador and Nicaragua.

Since his re-election to the presidency in December with a 23-percentage point margin, Mr. Chávez has quickly accelerated his efforts to remake Venezuelan society. He has dismissed moderate deputies and begun speaking of the need to reform the nation's public schools to focus more on socialist ideals, and of guiding the Venezuelan consumer away from luxurious consumption.

Few obstacles stand in Mr. Chávez's way, making his request for enhanced presidential power, as well as a request to abolish the autonomy of Venezuela's central bank, somewhat perplexing. Mr. Chávez and his economic deputies already effectively control monetary policy, for instance by capping interest rates on loans, though they have to go through the bureaucratic procedure of asking the central bank for its reserves of hard currency if they want them.

With 80 billion barrels of conventional crude oil, or about 7 percent of the world's reserves, Venezuela remains the fourth-largest oil supplier of the United States. Much of Mr. Chávez's ambitious project to move Venezuela toward socialism will depend on petroleum revenue, with oil by far the country's leading export.

It was no small surprise that even as Mr. Chávez announced his startling assortment of economic policies this week, his oil minister, Rafael Ramírez, was calling on OPEC to hold a special meeting to discuss falling oil prices. On Tuesday, oil traded near an 18-month low at $55.64 a barrel, down nearly 9 percent since the start of the year.

Simon Romero reported from Caracas, Venezuela; Clifford Krauss reported from Houston; Vikas Bajaj contributed reporting from New York; and Elisabeth Malkin contributed reporting from Mexico City.