CARACAS Dec 1 President Hugo Chavez's latest nationalization drive, political tensions in parliament, moves against the oil industry and the long tail-end of a recession are all risks to watch in Venezuela in the coming months.
Chavez has nationalized a lot of businesses in Venezuela and he will nationalize more before the next presidential election in 2012. After 12 years in office, the former soldier shows no signs of slowing his drive to recreate Venezuela as a socialist state.
Since September, he has nationalized a fertilizer factory part-owned by U.S. giant Koch Industries and Italy's Eni; bottling factories belonging to Ohio-based Owens Illinois (OI.N) [ID:nN26151390]; a motor lubricants company; and the country's largest farm products company. More than 200 companies have passed into state hands this year.
Chavez says he has "a little list" with more planned takeovers, although he has taken a breather in recent weeks.
The recent moves reflect Chavez's strategy of taking control over food supply from private interests. They are also a way of pressuring Empresas Polar, a brewer and food processor that is Venezuela's top private employer. Chavez often threatens to seize the company, but has so far held back.
There is an outside chance the nationalizations will create instability, since workers are divided over the benefits of government jobs. Protests broke out after the Owens Illinois takeover and a move against Polar would be unpopular.
The government usually compensates expropriated companies, but payment is slow. The growing nationalization bill may begin to weigh on the nation's finances and the takeovers have chilled private investment, slowing recovery from recession.
What to watch:
-- Takeovers or increased controls throughout the economy, in health, finance, housing, insurance and food.
-- Protests against nationalizations leading to clashes
ECONOMY IN RECESSION
Venezuela should grow next year, but without a big leap in oil prices will still feel a pinch in terms of spending. So far, higher oil prices have been offset by falling output since 2009, and not much new production is likely to come online in the vast Orinoco heavy crude region by a deadline of end-2011.
Many economists believe the government will find a way to further devalue the bolivar currency early next year to boost income. Such forecasts are common in Venezuela and tend to underestimate Chavez's resistance to weakening the currency.
However, he could simply import more at the lower pegs of the multi-band currency system without formally devaluing.
Risk indicators like Morgan Stanley's EMBI+ 11EMJ and CDI spreads VEGV5YUSAC=MP consistently rate the OPEC member's debt as the highest default risk in the world, so Wall Street is focused on whether Chavez will keep paying.
In the short term, he will. Almost no one thinks Venezuela will default thanks to its large oil production and history of meeting its obligations. It has healthy foreign reserves, huge oil reserves and access to credit from bilateral sources such as China, which gave Venezuela a $20 billion loan this year.
Its Global 2027 VENGLB22=RR bond is widely traded thanks to its volatility and high yields. There was ample appetite for a $3 billion Global 2022 VENGLB22=RR bond in August, and for a $3 billion PDVSA note USP7807HAK16=R in October.
Both offered big returns at a time when money from developed economies is looking for a place to park. There was less enthusiasm for a PDVSA plan to swap a bond due in 2011 for paper maturing in 2013, [ID:nN28155128] possibly in a sign of doubts about the state oil company's short-term finances.
With Chavez set on increasing the state's role in the economy, combined with currency-exchange red tape that makes imports of machinery difficult, the manufacturing base is likely to erode further, leaving the country more exposed to oil price volatility.
What to watch:
-- Oil prices. Venezuela needs higher prices to meet its obligations than it did two years ago.
-- More debt issues early in the year. Some investors are worried about over-supply affecting the Venezuela bonds prices.
-- Moves against the currency. A weaker bolivar in 2010 was a blow to foreign companies' profits. [ID:nN21170208]
NEW LAWS, SUPREME COURT AND POLITICAL NOISE
At legislative elections in September, Chavez's Socialist Party lost the super majority in parliament it needed to pass some major legislation, but it still has a simple majority.
The new parliament will be a much more plural body than the current rubber-stamp house, but will not exert significant power over Chavez, who will find ways to pass the laws needed to advance his revolution.
The assembly, currently populated almost entirely by Chavez allies, may pass a number of laws requiring a two-thirds majority before new lawmakers take their seats in January.
Reuters obtained a secret draft of a oil ministry-led bill in October that shows plans to tighten control of the oil services sector, affecting huge companies such as Schlumberger (SLB.N), Halliburton (HAL.N) and Baker Hughes (BHI.N). [ID:nN19135438] If passed, the law would make it easier for the government to nationalize assets belonging to those companies.
Some analysts believe the government plans to rush through the naming of half a dozen new magistrates in the Supreme Court before the new parliament is formed, when the government would have to negotiate names with the opposition. A two thirds majority is needed to name magistrates to the Court.
The current parliament is expected to pass a new banking law that makes it easier for the government to nationalize banks and requires them to give 5 percent of profits to grass-roots groups loyal to Chavez. [ID:nN11201237]
Another bill aims to create new types of property, in addition to private property, that can be owned by communities or groups of people. Critics say the proposed law undermines property rights.
Lawmakers might try to award Chavez decree powers until his term ends in 2012, but the legality of that is unclear and incoming opposition legislators would fight it.
What to watch:
-- Moves by the opposition to set out their stall in the run-up to the 2012 presidential vote. They need to focus on maintaining their newfound unity, selecting a single candidate for that vote who has national support, and developing a campaign platform that goes beyond simply being anti-Chavez.
-- A last minute legislative push and steps by the current Assembly to give "fast track" decree powers before January.
Venezuela is one of the United States' top five oil suppliers, but it is under pressure from a string of accidents and maintenance stoppages across its refinery and distribution network that have forced the country to import oil products.
The government hopes to return production to normal levels of around 3 million barrels per day (bpd) by the end of 2010, and hails the signing of joint ventures to develop extra heavy Orinoco crude projects that are slated to add 2.1 million bpd of new output in the coming years. [ID:nN0991380]
Some new production should come online late next year, but the projects are likely to run behind schedule and their success will depend on whether Venezuela takes advantage of having experienced partners, including Chevron (CVX.N), Repsol (FER.MC) and Eni ENI, in some of the blocks. PDVSA has a 60 percent stake in each project.
Chinese and Russian energy companies were also awarded acreage in the Orinoco belt bidding round, and a flood of new money into the oil industry -- including the $20 billion loan from Beijing -- is already boosting the OPEC member's coffers.
PDVSA will receive $1.6 billion for a 50 percent stake in four Ruhr El refineries in Germany. [ID:nLDE69E0ZG] and Chavez has made it clear he would like to get rid of PDVSA's U.S. subsidiary Citgo, calling it unprofitable.
But a looming ruling by a World Bank court could hand Venezuela a bill of several billion dollars to compensate the 2007 takeover of ConocoPhillips (COP.N) assets. PDVSA's finances will remain tight as the government keeps up demands to fund a wide range of spending programs.
What to watch:
-- More outages at refineries and any upgrades.
-- New nationalizations in the oil sector, perhaps affecting more service companies.
-- Tension between PDVSA and the oil majors and foreign state companies jointly developing the new Orinoco projects.
-- New asset sales, possibly including parts of Citgo (Additional reporting by Daniel Wallis; Marianna Parraga and Patricia Rondon; Editing by Kieran Murray)