Can a would-be coup-maker turn himself into a popular, populist
president and darling of Wall Street? Not an easy task, but it
looks like Hugo Chavez, the newly elected president of
Venezuela, is going to give it a try. And while investors have
yet to be convinced, few are counting Chavez out altogether, at
least for now.
Chavez has already accomplished part of his task, having won
the election on an independent ticket with more than 55% of the
vote. But when he takes office on February 2, Chavez and
Venezuela will have a particularly daunting job ahead of them.
With oil prices at lows not seen in decades, Venezuela ran up a
fiscal deficit of almost 4.5% of GDP in 1998, according to the
central bank. Without serious spending cuts, that figure could
near double digits next year, as even Chavez admits. Toss in a
seriously overvalued currency and little hope for improvement
in oil prices in the near term, and it becomes clear that
Chavez's current position is an unenviable one.
"No matter who would have won (the election), the job that
person has to do is very significant," said Todd Edwards, Latin
America equity analyst with Banco Bilbao Vizcaya in New York.
"I'm cautious (on Venezuela), and I'm not going so far as to
say I'm cautiously optimistic."
Edwards' skepticism is echoed up and down Wall Street with
varying degrees of optimism mixed in. Investors at least still
have their eye on Caracas, but most are waiting for a clearer
economic plan to emerge before testing the waters.
"This is a place to watch very carefully, from a positive
point of view," said former US Treasury Secretary Nicholas
Brady. "At this point in time we ought to give him the benefit
of the doubt." But not too much benefit.
Brady's Darby Overseas Investments Ltd., which in June
dumped its entire emerging market debt portfolio, has recently
begun to enter the markets again, taking positions in
Argentine, Brazilian and Mexican debt. But not in Venezuela, at
least not for the time being.
Brady-who met the president when he accompanied former US
President Jimmy Carter to Venezuela to serve as an observer at
the December 6 elections-calls Chavez "a man of immense good
will." But, he admits, questions remain. Chavez's 1992 coup
attempt failed to get him anywhere but into prison, and the
former army colonel has little experience in steering ships of
state-let alone a ship so leaky and storm-tossed as
Venezuela's. And, as Brady points out, Chavez's populist
promises have raised the expectations of the Venezuelan people
quite high. If he fails to deliver, there could well be trouble
brewing on the horizon.
A New Team
Chavez's first order of business, if he wants to gain the
confidence of Wall Street, will have to be the assembly of his
economic team. "The notion that Chavez is going to be some sort
of Venezuelan Menem or Fujimori cannot be dismissed," said
Peter West, BBV's chief economist for Latin America. "But first
we need a Venezuelan Cavallo to be appointed before we could
really think that's what was going to happen."As LatinFinance
went to press, only two economic posts had been filled. A
soft-spoken economics professor called Jorge Giordano will
replace Teodoro Petkoff as planning minister, while the current
finance minister, Maritza Izaguirre, will keep her position.
Are they Venezuelan Cavallos? The jury is still out.
It seems, though, that Chavez's cabinet will be inclusive.
Venezuela's current tax collection chief, Jesus Moreno, is
being considered for an economic cabinet post, say sources. And
Armando Leon, one of the directors of Venezuela's central bank,
may be tapped to head that institution. If, that is,
Inter-American Development Bank chief economist Ricardo
Hausmann isn't offered the post, as is also rumored. Hausmann's
office did not return phone calls, but word around the
multilateral development bank is that Hausmann might well
answer if called.
How Wall Street will react to Chavez's cabinet, however,
will depend as much, if not more, on the policies Chavez
chooses than on the people he picks to implement them.
"This is not the person Wall Street had favored," pointed
out Michael Henry, an economist at ING Barings in New York. In
fact, Chavez, until recently, was the person Wall Street
feared. But inflammatory comments from the candidate have been
toned down lately, and Chavez has attempted to reassure
investors that oil industry contracts will not be overturned,
and that a moratorium on debt payments will not be declared.
Although Chavez has been largely successful in retracting what
were earlier taken for threats, it remains to be seen what new
promises he will make, and whether they will be looked on
kindly by Wall Street.
"His views on policy have to be made more clear. And you
have to have sensible policies," said ING's Henry. "If that's
the case, I think the markets would react favorably."
Sensible policies will not be easy for Chavez to find and
implement, though. Spending will have to be cut and revenues
raised, policies at odds with the populist line that got Chavez
elected. Chavez has promised to slash government ministries and
hike up tax collection, but, as BBV's Edwards pointed out, "Tax
evasion proves to be very, very difficult to clamp down on, and
even if they're wildly successful, they're not going to erase a
big chunk of the 7% to 9% of GDP financing they need. And I'm
not so sure they have a viable policy to fill that gap."
Venezuela will also be hard-pressed to finance its deficit
through the international capital markets. "If they present a
realistic budget and credible financing scheme, their chances
of coming to market are pretty good," said ING's Henry. "But
it's going to be at a price.
They're going to have to show a fair amount of fiscal
discipline before people start rushing out to buy Venezuelan
"The objective situation, with a steep decline in external
revenues due to falling oil prices, warrants an approach to the
IMF or multilateral agencies or international creditors on the
back of a macroeconomic stabilization program," said West.
The IMF, for its part, says it is ready to talk to Chavez,
especially since the candidate declared his support for IMF
programs during the campaign. But Chavez had not approached the
Fund as of late December, according to sources. And not all of
Wall Street thinks such a move is sensible. Asked whether he
thought Venezuela might approach the Fund, David Malpass, chief
international economist at Bear Stearns, said, "I hope not. IMF
programs are almost invariably sell signals."
Tackling the Economy
The drop-off in oil revenues, which account for about 75% of
total export revenues, 25% of GDP and around half of all fiscal
revenues, is seriously hammering Venezuela's economic growth.
After real GDP growth of 5.1% in 1997, according to BBV,
Venezuela is on track for a contraction of 1% in 1998 and a
contraction of 1.5% in 1999. The World Bank, based on more
optimistic oil price forecasts, sees contraction of only 0.5%
next year, but that still leaves Venezuela as the
worst-performing economy in Latin America aside from
Continued low oil prices have also led ratings agencies to
take a closer look at the country's haggard economy, and, in at
least one case, to revise their feelings about the incoming
administration's ability to cope.
Just before Christmas, Duff&Phelps Credit Rating Co.
downgraded Venezuela's long-term foreign debt rating to B+ from
BB-, citing oil prices and concerns about "the Venezuelan
government's capacity to confront the country's increasingly
difficult economic environment."
"We still have to see about his ability to implement
changes," said Joyce Chang, head of fixed income research at
Even if Chavez appoints a blue-ribbon cabinet, he could find
himself hampered by the very political trends that swept him
into office. "Venezuela is now back to a multi-party system
(and) a fragmented Congress where no party has enough votes to
govern by itself," said Ernesto Martinez-Alas, vice president
and senior analyst at Moody's Investors Service, which rates
the country's long-term sovereign debt at B2. "Interparty
cooperation is now a basic need for the working of Congress and
the relationship between Congress and the executive." As has
been seen lately in Brazil, Congressional intransigence could
make Chavez's task all the more difficult.
One of the things he will almost certainly have to
accomplish is some kind of devaluation of the Venezuelan
bolivar. "By any metric, independent of what the central bank
has said, this currency is overvalued," said ING's Henry.
Almost all of Wall Street agrees.
Venezuela, with reserves that are almost twice the size of
the country's monetary base, should be able to accomplish the
task, says Henry, but it will take sound policies (like
temporarily high interest rates and lower spending) and a
commitment to the job. "It doesn't have to be a massive,
one-step devaluation," said Henry, "but letting the currency
weaken-a lot-is a sensible policy."
Given all there is to do, Chavez faces a mammoth task. And
while skepticism remains over the ability of a relatively
inexperienced chief executive to get the job done amid a
fractious political environment and a global economic scene
that is antipathetic at best, there is also a measure of hope.
Chavez can easily win Wall Street's backing, but not until he
displays more evidence that he has the economic advice and
political will to do the job right. "We need a comprehensive
stabilization program and all its details," said BBV's West.
"There are still many hoops to go through, but at least we've
gone through the first couple."