There is mounting pressure from the US, but Venezuela’s boss, Hugo Chavez is riding high on oil prices
While senior US officials have set about stubbornly hammering out a plan for containing Venezuela’s president Hugo Chavez, the irrepressible Andean leader has had ample cause for his swagger in recent months.
Sitting on the fifth-largest oil reserves in the world, he has boldly bet that prices will stay at record highs for some time to come. It’s a gamble, should it pay off, which will comfortably allow Chavez to keep on dishing out vast sums from the public purse on social schemes, the backbone of his electoral strategy, while continuing to pay his international debts. In short, he’ll be able to satisfy the people and the markets at the same time, while strengthening his grip on power in time for general elections next year.
Chavez, in his newfound confidence, decided earlier this year to diversify oil exports away from the US, whose market still absorbs more than half of Venezuela’s produce. In January, his government opened talks with the state companies of Nigeria, Iran and China and suspended the exploration activities of two US oil firms.
Yet the markets, it seems, buy the story. “Venezuela? Love it,” says one bond investor whose strategy is decidedly bullish on the Andean nation. “Chavez realizes Venezuela is an oil business –[it’s a] very smart [strategy].”
The evidence is in no short supply: Venezuela’s economy grew at 17.4% last year, the highest growth rate ever recorded in the country. In the wake of this, the sovereign also completed a blow-out Eurobond issue in early March. The offering – Venezuela’s first in euros since 2001 – attracted a staggering E4.6 billion of orders from 400 accounts. The deal was so successful that lead managers Deutsche Bank and UBS were able to revise price targets from 7.2% to 7.1%.
UK, US, Swiss and German accounts bought about 65% of the deal, with the rest going to Latin America, Asia and other European countries. Investors saw the trade as an opportunity to take advantage of the high oil price, even though Moody’s rates the sovereign B2 and Standard & Poor’s, B.
The strength of interest for the euro transaction would also have augured well for another deal in dollars and euros – were it not for the ripples that have been sweeping through the Latin market since 10-year US Treasury yields soared above 4.6% at the end of March.
Shortly after the euro deal, Venezuela’s public credit director, Rudolf Romer, discussed plans to buy back $500 million in foreign bonds in the first half of this year, part of which could be financed by planned sales of $500 million to $1 billion of dollar- and euro-denominated bonds. Again that proposal is on hold, pending calm in the markets. The basic interest, however, is still there. As one investor puts it: “There’s a lot of oil. The fiscal accounts are looking as good as Mexico’s. Why aren’t they being upgraded?”
Essential oils
The oil sector represents about 83% of exports, 53% of public sector revenues and 26% of GDP. As a recent report by WestLB exclaims, “It is difficult to overemphasize its [oil’s] importance to the Venezuelan economy.” The question, however, is whether Chavez and his team have become too dependent on continuing high oil prices.
The industry is getting older and requires more investment. Moreover, it is being depleted at the second highest rate of any oil industry in the world, partly due to the steady decline of investment by PDVSA, the state-owned company. It is precisely lack of investment that may impact the country’s growth rates if oil prices flag. Oil sector GDP, for example, fell year-on-year in seasonally adjusted terms in the third quarter of last year by 1.9%, and in the fourth quarter by 0.7%.
Chavez, it seems, realizes that investment in the sector is vital, which is part of the reason he recently signed reciprocal agreements with Brazil and its oil company Petrobras – part of an effort to spur regional investment and buck reliance on US capital. This also explains his courtship of Iran, Nigeria, China and Russia.
For its part, the US has begun to reassess the reliability of Venezuela as an oil supplier. Securing alternative sources for the 1.5 million barrels a day of oil (between 13% and 15% of US daily needs) that Venezuela sends to US ports would substantially reduce Chavez’s leverage. Condoleezza Rice, the US secretary of state, called his government a “negative force” in the region and some aspects of his rule “very deeply troubling”.
Perhaps mindful of this, and despite the success of the recent Eurobond deal, some investors are more guarded on Venezuela: “Many investors, particularly in the US, are becoming worried about the future of President Chavez. In the past, they tolerated the Venezuelan leader’s quirkiness,” says Walter Molano, managing partner at BCP Securities. “However, the market’s patience ebbed at the start of this year, when Chavez turned his aggression against the US.”