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Wooing Wall Street

Jan 1, 1999

Investors view Venezuela's President Hugo Chavez with less skepticism now that he has toned down his populist rhetoric. But a viable economic plan is needed before he can start wooing wall street.

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 bonds."

"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 Jamaica.

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 Merrill Lynch.

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."



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