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
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
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)