In the 19 months since he was elected president of
Venezuela, Hugo Chávez has turned his country upside
down, helped drive up international oil prices to their highest
point in a decade and made powerful enemies at home and abroad.
Washington is angered by his anti-Americanism and his
dalliances with Muammar Khadafi of Libya and Iraq's Saddam
Hussein. The approval of a new constitution in a referendum and
his triumph in July's "relegitimization" election give
Chávez great power. Instead of getting down to
straightening out the economy, though, he keeps shaking
business confidence already dazed by his anti-capitalist
tirades and last year's 7% collapse in GDP.
Venezuela and Colombia, its neighbor to the west, have
become two of the most difficult places to do business in Latin
America. Colombia is struggling with a severe recession, a
deadlocked political system and a bitter drug-financed civil
conflict that has dislocated the entire country's political,
social and economic systems. Indeed, every other country in the
Andean region (see page 32) is facing considerable economic and
Each country's problems are unique and each has taken a
different approach to solving its difficulties. While
Colombia's President Andrés Pastrana (see interview page
30) and his economic team are taking a conventional approach,
backed by President Bill Clinton and supported by big business,
Chávez is often described as a dangerous populist, a
caudillo in the worst Latin tradition.
Of course, Chávez sees things differently. He says he
has come to drain a "disgusting immoral swamp" left by decades
of corrupt leaders and misguided economic policies. His eyes
narrow as he denounces the "neo-liberal fundamentalists" who
would "give privileges to a minority and poverty to all the
rest. Society has become full of explosive forces that are
accumulating and accumulating."
In his view, the state has a duty to intervene to avoid a
social explosion and lead the creation of a new, diversified
industrial base that can create jobs. He continues, "Did the US
or England grow rich with neo-liberalism? No, of course not.
They grew with a strong state, a solid state that drives and
develops the economy. That is the duty of the state."
One of his great ambitions is to break the country's
86-yearaddiction to oil, which he sees as one of the roots of
all evil in Venezuela. Although he is a champion of OPEC's
unity and wants to keep oil prices high, he declares that, "We
have to get rid of the oil model. We have to break this chain."
Chávez believes that easy oil wealth has corrupted
generations of his people, depopulated the interior and
prevented the development of agriculture and manufacturing
industry. "Oil has destroyed Venezuela," he says.
Ernesto Martínez, a vice president at Moody's
Investor Services, says Chávez has a point: "This is the
only economy in the region that still gets 70% of its export
earnings and fiscal revenues from a single commodity. But
[Venezuela's] living standards have been declining for 20
years." Real incomes are the same as 40 years ago.
Promises and Procrastination
Chávez wants to keep oil prices at a "just" level of $22
to $28 per barrel to fund his dreams of a new Venezuela, a
country that would be a curious blend of Castroism,
German-style stakeholder capitalism and old-fashioned economic
nationalism. He is opening up the telecommunications system and
some basic industries to foreign capital, but keeping oil
firmly under state control. Chávez envisages the state
taking a leading role in creating new industries, either alone
or as a joint venture partner, with private companies. In spite
of this "vision" and promises to turn his attention to economic
issues, the president keeps procrastinating. Now he has called
an "economic constituent assembly" in which all Venezuelans can
give their views on the country's future economic strategy.
Theoretically, Venezuela should have little difficulty in
moving into growth, with oil prices three times what they were
in late 1998. The trouble is, country's disaffected business
leaders do not trust Chávez, so growth is stagnant
outside the oil industry. Still, he claims he is trying to
improve relations with the business world. "There are some very
dynamic and very creative businessmen," he says. "They have to
be motivated and encouraged. " In his long victory speech after
the July "relegitimization" elections, Chávez said, "I
call on the Venezuelan business class, all of those who doubt
or fear me, to stop. We must save the Venezuelan economy. There
is no room for doubt."
However, most members of Venezuela's corporate elite still
loathe Chávez and his followers as much as when he first
burst upon the scene eight years ago during his abortive coup
d'état. One businessman recalls recently driving past a
knot of the president's supporters, all of whom wore
Chávez-style red berets. "I was in my Lexus and when
they saw me, they began drawing their fingers across their
throats. This never used to happen before in Caracas," he
As result, the business community and the financial markets
are growing restive. Growth at 3% this year is weak, coming
after last year's slump. Public spending this year is up over
20% and the government is running a budget deficit of 3% of GDP
- high given strong oil prices. In fact, the oil bonanza has
barely roused the economy because billions of dollars in flight
capital are leaving the country.
Oscar García Mendoza, president of Banco Venezolano
de Crédito, a solid, medium-sized Caracas bank, says,
"When the price of oil falls, exchange controls will come. He
will look for scapegoats, for us, the oligarchs." The
government is empowered to order the central bank to impose
controls whenever the external accounts come under stress.
Charges García Mendoza, "Chávez lacks absolutely
any understanding about how the economy works. There is no
clear economic policy."
Crisis of Confidence
Over the border in Colombia, the financial system is a
shambles, urban unemployment has hit a record 20% and the
country is grappling with political stalemate, all exacerbated
by the drug trade and guerrilla insurgencies.
Yet the dapper, upper-class Pastrana is sticking to economic
orthodoxy. He vows to move ahead with "economic reforms [that]
are not popular. What we are doing benefits the country and
this is our commitment." Unfortunately, Colombia's economy has
gone from bad to worse during the first two years of his
mandate. Commentators complain that Pastrana, the son of a
former president, lacks sound political judgment. He has
bungled relations with Congress, controlled by the opposition
Liberal Party, which blocked his economic reforms.
Confidence has fallen, and with it Pastrana's popularity. A
poll in July showed that three-quarters of Colombians say the
situation in the country has worsened; only 20% say Pastrana is
doing a good job as president. Jaime Velásquez, vice
president at Bancolombia, the country's biggest bank, says the
government needs to encourage the creation of "more jobs, to
renew confidence in the market, instead of people taking their
money to the US." Bank lending in Colombia is down by 6%, even
though the central bank has increased liquidity.
Given the weak confidence in both countries, it is not
surprising to find the financial systems in Colombia and
Venezuela unable and unwilling. In neither country can bankers
find enough sound risks; nor do many companies want to borrow.
Consumer demand is flaccid, in spite of falling interest rates.
Instead, a large proportion of banks are buying government
securities rather than lending to the private sector. Extreme
conservatism may well be the only way to survive the deadly
combination of political uncertainty and economic volatility.
Last year, bank lending fell 6.5% in Venezuela. At the end of
1999, Venezuelan banks held over half their assets in
Both Venezuela and Colombia need to finance a large part of
their budget deficits locally because access to the
international markets is neither cheap or easy. Colombia lost
its investment-grade rating in 1999 and government officials
admit it will be years before the country gets it back.
Standard and Poor's rates Colombia a BB with negative outlook.
Venezuela gets a B, one of the lowest ratings in the
Colombia, though, is probably far closer to turning the
corner than Venezuela. In July, Pastrana gave up antagonizing
the opposition and reshuffled his cabinet, giving the finance
ministry to Juan Manuel Santos, a leading Liberal. Pastrana and
the Colombian business community are pinning their hopes on
Santos, who has the makings of a tough finance minister.
"We have to deliver," declares Santos. "We have to act with
realism [and] adjust in the very short term or we are going to
have problems in the long run." He adds, "We can take advantage
of the crisis and have a larger reform rather than [the
planned] incremental reform. The Liberal Party has said that it
will support the reforms."
Pastrana hopes Santos has the political clout to get
economic reforms through Congress. Santos wants to put the
public finances on a stronger footing, raising taxes and
redirecting spending to social areas, without compromising
budget deficit targets agreed with the International Monetary
Fund. He says, "We have to make a larger social investment to
give the economy a push and to protect the weakest in the
If all goes well, the economy could resume rapid growth in
two years. Government forecasters say Colombia should grow by
around 3% this year, after contracting by 5% in 1999, its first
recession since the 1930s. In 2002, growth should rise to 4.8%,
the highest rate since 1995. However, one of the keys to growth
is to rebuild confidence and encourage banks to lend. Both
Colombia and Venezuela still have a lot of work ahead in
recasting the banking system.
In Colombia, bankers recognize that they have failed to
bring down high operating costs fast enough. In the mid-1990s,
loans were growing at 40% a year, three times faster than GDP
growth. Lending was profitable because inflation and spreads
were high. Small and inefficient banks could prosper in this
Of course, once the party stopped, the easy profits ended
and the banking system went into crisis. Non-performing loans
as a proportion of total bank portfolios were 14% last year, up
from 6% in 1996. Colombia has spent about 6% of GDP to
recapitalize private and public banks, through a government
agency known as Fogafin. Half the money was spent on cleaning
up state banks and about 1.5% of GDP went to the private banks.
One reason few private banks have resorted to Fogafin is that
the terms are so onerous. The government is financing its
rescue mission with a 0.2% tax on financial operations.
Fernando Uribe, president of Corporación Financiera
Colombiana, said in a press interview, "The cost of this help
has been excessively high because the credits are very hard to
pay. We will see more mergers and acquisitions or liquidation
of financial institutions."
Banks in Colombia lost $444 million in the first half of
this year, down from a $547.2 million loss in the same period
last year, although in nominal terms the losses were almost
flat. Public banks lost the most, with $96.9 million, up from
$15.7 million the year before. A few banks, such as
BanColombia, the biggest private bank, have raised fresh equity
capital, boosted loan loss provisions and are returning to
Colombia needs a strong banking system to resume sustainable
growth and business needs to regain confidence.
Velásquez says a breakthrough in peace talks with the
guerrillas would help: "Peace would generate very good news.
Announcement of a cease-fire would raise confidence and help
It is obvious why. Extortion and kidnapping on an industrial
scale are transferring millions of dollars a year to guerrillas
and common criminals. There were more than 3,000 reported
kidnappings last year, three times more than in 1994. A
businessman says, "Fear of violence makes us afraid to pursue
profits, to spend, to invest." In April, the Farc, Colombia's
largest guerrilla group, said it would levy a 10% tax on
individuals and companies with assets of more than $1 million
and threatened to abduct those who did not comply.
To gain international support in combating the guerillas,
Pastrana has cultivated relations with the US, damaged during
the presidency of Ernesto Samper. The recently approved $ 1.3
billion in US aid to combat the drug trafficking that finances
the guerrillas could help bring peace, although it could lead
to more violence.
An upsurge in guerrilla violence could further discourage
investment, especially in energy and oil. Repeated guerrilla
attacks on its oil pipeline forced Occidental Petroleum to
declare force majeure in August, suspending oil production and
shipment for two weeks. Guerrillas are attacking electricity
Although Venezuela does not have a guerrilla problem it
suffers from a violent crime wave caused by unemployment and a
rise in drug smuggling. Foreign companies in Venezuela say
criminal violence is their biggest problem.
Venezuela's banks got into trouble before Colombia's and
they are recovering sooner as well. The regulators revamped the
system after it crashed in 1993-1994 following the collapse of
Banco Latino, but banks are still weak. Standard and Poor's
states that the gradual recovery is due to the entry of foreign
banks, which now hold over half the banking assets, tighter
bank supervision and prompt liquidation of problem assets
during the crisis.
As in Colombia, banks have high operating costs and overdue
loans could reach 7% of total loans by year end. Luckily,
Venezuelan banks are well-provisioned and highly capitalized,
with ratios of 16%. Still, the government is pushing banks to
consolidate to increase efficiency, reduce spreads and thereby
revive the economy.
Weaker banks are looking around for suitors. Indeed, the
bank supervisory agency expects the number of banks to fall by
half in the next two years. Venezuela has 84 banks, compared
with over 100 five years ago. Consolidation is gaining
momentum. In July, Banco Mercantil, the second largest bank,
swallowed Interbank in a deal that moved it into top position
with combined assets of more than $4 billion. In June, Spain's
Banco Santander Central Hispano, which controls Banco de
Venezuela, began talks to buy Banco Caracas. In May, Banco
Unión merged with Banesco in a stock deal.
Still, the collapse in April of Cavendes, a small bank,
raised concern about the quality of bank regulation. The bank's
owner, Luis Vallenilla, a businessman turned politician, is
close to Chávez and the opposition claims Cavendes
received preferential treatment. In a recent report on
Venezuela, S&P commented that the way Cavendes was shut
down "casts a shadow of doubt" over the effectiveness of
Official disregard for regulations is increasing. In May,
PDVSA, the national oil company, withdrew 390 billion
bolívares ($573.5 million) from the domestic banking
system as part of a government-inspired ploy to punish currency
speculators. The authorities achieved their immediate objective
but damaged the managed exchange rate's credibility.
In August, José Rojas ordered the nominally
independent central bank to transfer almost $3 billion from its
reserves to the treasury to finance government spending. The
government says it will spend $2.2 billion on social projects
and use $640 million to pay down its debts to the central
Yet Chávez and his economic team sometimes sound like
hard line disciples of economic orthodoxy. For example,
Chávez is an inflation hawk. "Inflation is a cancer"
because it hurts the poor more than the rich, he says. He does
not like having a budget deficit either. Last year he acted
decisively to stop the budget deficit from widening to 7.3% of
GDP and cut the gap to 2.6% of GDP. He says "this was not
conservative, but rational." He ordered a cut in military
spending and on all superfluous items, and the confiscation of
government cell phones and credit cards. He fired 500
bodyguards. He brought in value-added tax and tightened up
collection of import duties to help balance the books.
'Fangs Stuck in the Throat'
He cut interest rates, hoping to discourage financial
speculation. Chávez thunders: "In 1998, interest rates
were at 80%. It was like having a vampire, with its fangs stuck
in the throat of the nation, especially the poor. It caused the
failure of small companies and farms and bankrupted the middle
He opposes devaluing the bolívar, even though it has
appreciated by 48% against the dollar in five years. This is
because ordinary Venezuelans rely on imports for so many basic
consumer goods. Chávez appears indifferent to the scale
of capital fleeing Venezuela. Economists reckon that 70% to 80%
of this year's $9 billion forecast oil windfall will leave the
country as soon as it arrives, adding to the roughly $20
billion Venezuelans hold outside the country. Chávez
says, "Exchange rate stability gives the country stability.
There is no threat that can make us devalue. Let the
speculative money go somewhere else, it destroys countries. As
it goes, [direct investment] will come."
However, García Mendoza, the banker, like most other
business leaders, is far from convinced. "I have lived through
seven oil crises," he recalls. "Whenever the [revenues]
increase, the government spends more and the people are happy
and then all goes bad, because there has been no investment in
This seems to be the case now. The banks are not lending and
companies are not borrowing or raising capital. Not even
households, squeezed by low wages, can afford to spend on much
beyond the bare necessities. However, foreign direct investment
is picking up, with $3 billion likely to enter the country this
year, up from $2.7 billion in 1999. In June, the US power group
AES spent $1.66 billion to take control of Electricidad de
Caracas, (EDC) the city's power utility. Pechiney, the French
aluminum company, beat out three international competitors to
become a joint venture partner with a government company in a
bauxite mine that languished for years. Pechiney plans to
invest $200 million to $300 million in the project.
Assets are so cheap right now that a number of
Venezuelan companies have begun share buybacks to avoid the
same fate as EDC, which lost its independence in the takeover
battle with AES.
Collapsing asset prices in Colombia are drawing in foreign
investors as well. Violy McCausland and Simón
Araújo, of New York boutique Violy, Byorum&Partners,
which has advised on several mergers and acquisitions in
Colombia, commented in the Colombian media that they forecast a
$1 billion capital inflow this year. This is a modest amount by
the region's standards, but is three times more than last
year's foreign investment. While this is good news, it is a lot
less than the $2.60 billion average annual investment flows
that Colombia received over the last five years.
Colombia and Venezuela need foreign investment to resume
growth. Twenty-five years ago, Colombia's domestic savings rate
averaged 21%, falling to just 15% last year. But Moody's
Martínez says the investment flowing to these countries
does not necessarily indicate a high degree of confidence
because "utilities are defensive investments." International
companies invest in troubled countries all around the world, he
argues, especially when acquisition prices are depressed. Much
worse than this, he argues, is the tendency for "the sellers
take the money out of the country."
Nobody is expecting either country to find its way out of
trouble easily or quickly. A quick-fix solution, such as a
devaluation or supply-side shock, is unlikely to work without
major structural reforms. Colombia is lucky to have a strong
business culture and a sophisticated economic team, but faces
an uncertain political future as it moves against the drug
lords and their guerrilla allies.
Venezuela, with its abundance of oil, could start laying the
foundations for a new economic system that relies less on what
Chávez likes to call "devil's excrement." However,
neither Chávez nor his economic team inspires much trust
among the business elite or foreign companies. He needs to win
their support if he wants them to work with his Fifth Republic
to create entire new industries from scratch.
But what will happen, investors wonder, when oil prices
drop, Venezuela's shaky finances crash and Chávez has
his back against the wall. Will the president, fighting for his
political survival, bay for the blood of the oligarchs, or will
reality intrude and force Chávez to save the economy
with sensible policies?
| Back in the Black (trade
|| Heading Down (consumer
| Hard Times (average annual