Insight: Post-election hangover looms for Venezuela economy
CARACAS (Reuters) - From new homes in slums to cash for struggling mothers, Venezuela's Hugo Chavez is unleashing a flood of state spending to try to tip the balance in what looks like the toughest presidential election of his political career.
The spending campaign may help win over wavering supporters and overwhelm the good looks and yes-we-can optimism of opposition candidate Henrique Capriles.
Yet Chavez's cash-driven push ahead of the vote in October will come with a heavy post-election hangover for the OPEC nation's economy.
Inflation could hit 35 percent, the debt burden looks set to rise, and a third currency devaluation in as many years is looking inevitable. All of that would force Venezuela to slam on the monetary and fiscal brakes in 2013.
Venezuela 2011 bond issuance link.reuters.com/dub56s
Latin America bond sales link.reuters.com/cub56s
The government budget shows this year's outlays jumping 46 percent from 2011, while social spending by state oil company PDVSA and a series of loosely regulated government funds are pumping additional liquidity into the system.
Venezuela's economy under the socialist Chavez has repeatedly defied doomsday predictions. With the price for the its mainstay exports of oil near $100 per barrel, investors remain happy to snap up its high-yielding bonds even as Chavez pushes ahead with nationalizations and puts more of the economy under state control.
Despite frequent diatribes about the evils of capitalism, Chavez has never threatened to default on Venezuela's debt.
That, combined with a steady flow of petrodollars, has given investors confidence its notes are safe and allowed Venezuela in 2011 to become Latin America's biggest issuer of global bonds.
But the spending boom risks increasing the country's dependence on oil revenue, increasing vulnerability to a price slump and strangling domestic industries already struggling with entrenched inflation and threats of nationalization.
"In the short term Venezuela is unlikely to have a credit event, but there's definitely growing concern about the medium and long term due to the pressure created by these latest bonds with such high coupons," said Felipe Hernandez of RBS Securities.
HOME, SWEET HOME
In the housing complexes where the government is handing out apartments to Venezuelans who have lived in poverty for generations amid a sea of oil wealth, the idea that the country cannot afford its current spending is seen as absurd.
"Sure there's money. Oil is making lots of cash," said Ruth Felisola, 44, a housewife who just moved into a new home in the state-built Santa Eduvigis complex of 158 apartments after her wood-and-zinc shack in a nearby slum collapsed.
"Every Venezuelan has a right to their drop of oil, and I've got mine right here."
Her three-bedroom hillside apartment, where she sells sodas,
chips and groceries, overlooks a valley filled with yellow cranes lifting pylons onto half-built concrete structures that in the coming months will become homes for needy families.
It is part of the government's plan to build 200,000 homes this year at a cost of about $14 billion. Most will go to slum-dwellers whose homes were damaged by floods in 2010.
Oil-funded social spending has worked for Chavez before. His creation of literacy, health and subsidized food programs were crucial to a decisive referendum win in 2004, as well as to a more-than 20 percentage point re-election victory in 2006.
Using windfall oil revenue to finance quickly-launched social campaigns has, though, proved less effective in stopping Venezuela's horrific rise in violent crime, or an electricity crisis that led to chronic blackouts in 2010.
Those problems opened space for opposition challengers like Capriles to portray Chavez as an incompetent manager more focused on ideological crusades than day-to-day problems.
Chavez's treatment for an unidentified cancer last year left him largely out of the public eye for weeks, and polls began showing Capriles nearly neck-in-neck with the president - something that had been unthinkable since 1999.
But the former soldier has already recovered lost ground as he staged what appeared to be a quick recovery. Latest polls show him enjoying a wide lead for the October vote, though this may shrink as Capriles' campaign gets started.
BIG SPEND, BIG HEADACHE
Chavez's support among the poor depends not only on state-backed social programs but also growth. The economy expanded 4 percent in 2011 and is seen growing at a similar pace this year thanks to higher oil prices and the heavy spending programs.
Maintaining that rhythm will be difficult in 2013 as inflation eats away at living standards and limited investment prevents industry from boosting productivity.
Venezuela's monetary liquidity, a measure of the money supply that is a key inflation indicator, rose nearly 50 percent in 2011 and will likely jump another 57 percent in 2012, said economist Asdrubal Oliveros of Caracas-based Ecoanalitica.
Chavez devalued the bolivar currency twice in 2010 as cheap imports left domestic industries losing market share, once from 2.15 per dollar to a two-tiered exchange rate of 2.6 and 4.3, and again later in the year by moving all exchanges to 4.3.
This boosted the price of imported goods and helped push inflation - a constant complaint of his poor supporters - to the highest on the continent in 2011 at 27.6 percent.
With ever more pressure on the bolivar, economists are universally predicting a devaluation, but delayed until after the vote because it is politically unpopular.
Investment in buildings, machinery and vehicles crucial for productivity increases to sustain economic growth - an indicator known as gross fixed capital formation - slumped more than 6 percent in 2009 and in 2010, the central bank said.
The private sector's investment in those areas fell nearly 30 percent in 2010, with state outlays picking up only some of the slack - a sign that domestic industries will become less productive and growth more dependent on government.
PDVSA, which has increasingly taken on the financing of social programs, issued $10.3 billion worth of dollar-denominated bonds last year.
Its issuance in 2011 alone comprised nearly half the $22.9 billion in outstanding bonds as of the end of 2011, a figure that does not include debt to its suppliers and service firms.
Venezuela and PDVSA together issued a total of $17.5 billion in dollar bonds last year, and analysts are predicting sales of another $12 billion to $15 billion in 2012.
The flood of supply has investors demanding higher yields from Venezuelan and PDVSA bonds, which at the start of the year were in some cases yielding as much as 14 percent.
Venezuelan sovereign bonds maturing in 2016 had yields around 10.7 percent in early February, compared to a 2.5 percent yield for Colombian bonds maturing in 2017.
Government sympathizers enjoy laughing at the prophets of doom over Venezuela's economy, in part because their forecasts have largely proven wrong for nearly a decade.
Legislator and economist Jesus Faria of the ruling Socialist Party (PSUV) noted that inflation during the Chavez era has been considerably lower than during the previous decade, when it reached a peak above 100 percent.
Fiscal expansion has benefited the country's poorest, he argued, denying any link to the upcoming vote.
"Our economic policies have nothing to do with the election, they respond to a program we call socialism," he said. "If we are increasing public spending, it's because we have to address social problems that have built up over centuries."
SOCIALISM NOT ALL BAD FOR WALL STREET
Though Venezuela did suffer more from the 2008 financial crisis than nearly any other country in the region, its two-year recession was far milder than predicted by opposition pundits.
And investors note that Chavez has explicitly avoided any discussion of a debt default.
This makes the high bond yields a bargain for those who can stomach the "headline risk," or short-term volatility that follows Chavez's state takeovers and threats against industry.
John Carlson, senior portfolio manager at Fidelity Investments in Boston, said Venezuelan paper represented 14 to 15 percent of the $6 billion he manages in about a half-dozen funds, concentrated mostly in the New Markets Fund.
"Over the next three to five years, we think there is clearly the ability to service all of that (debt) and there is a willingness to service it - and it looks cheap," Carlson said.
Most Wall Street analysts recommend Venezuela's debt despite their criticisms about economic and fiscal policy and concerns about the upcoming surge in pre-electoral spending.
Opposition leaders lambaste the arbitrary use of state funds to heighten what they call Chavez's populist cult-of-personality and prevent challengers from facing the former soldier in a fair fight. Chavez rebuffs such attacks with practiced indignation.
"No, it's not populism, that's a term invented by the neoliberals to try to justify the policies of hunger and misery against the peoples of the earth," Chavez told Congress in an annual address that went on more than nine hours.
He is also not the only one offering state largesse to win over voters. Opposition governors, mayors and councilmen, who are up for elections in December, also shower constituents with community centers, schools, and offers of financing.
On a recent campaign stop by the Caribbean coast, Capriles, governor of second-largest state of Miranda, promised fishermen credits and new motors should he win power.
Still, such offers are dwarfed by Chavez's wave of social programs created in recent months. Two offer direct cash payments to mothers and senior citizens, and another promises to train and find jobs for the unemployed.
"I give thanks to President Chavez for having started such a great program. This is going to let Venezuelans advance and have opportunities to work and learn new skills," said Delkys Llamosa, 27, a housewife waiting in line with her daughter to sign up for job training in downtown Caracas.
"Everything I have is because of him. I'm going to get my house from him, my children are getting benefits, and now I'm going to get a job. If he's not here, all this falls apart."
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