President Evo Morales’s seizure of Bolivia’s main electricity company, two weeks after Argentina took over its biggest oil producer, is reinforcing the divide between Latin American leaders that support private investment and those seeking more state control of their economies.
“These decisions, and the way they have been carried out, are bound to increase risks for foreign investors in Argentina, Bolivia and perhaps a few other countries,” Michael Shifter, president of the Washington-based Inter-American Dialogue policy center, said in an interview. “For most governments in the region, sound economic performance is prized more than short- term symbolic gains.”
Bolivia, Venezuela, Argentina and Ecuador have taken over energy, cement, airline, pension and mining companies in the past five years while governments in Chile, Colombia, Brazil and Mexico have sought to draw investment to bolster growth. The divergent tacks are reflected in the bond market. The average yield on dollar notes issued by Venezuela, Argentina and Ecuador is 10.36 percent, compared with 3.88 percent in the countries perceived as pursuing more free-market policies, according to data compiled by JPMorgan Chase & Co.
Labor Day Nationalizations
Morales announced yesterday that Bolivia is nationalizing the local assets of Alcobendas, Spain-based Red Electrica Corp. (REE), giving him control of the Andean nation’s power grid. Morales said the company’s local investment was inadequate and that energy should be controlled by the government, echoing Argentine President Cristina Fernandez de Kirchner’s justification for her takeover last month of oil producer YPF SA (YPFD) from Spanish parent Repsol YPF SA. (REP)
Red Electrica declined 2.2 percent to 32.155 euros today in Madrid, snapping two days of gains. The benchmark IBEX 35 (IBEX) index dropped 2.6 percent.
Bolivia generated 45.7 million euros ($60 million) in revenue for Red Electrica in 2011, less than 3 percent of total sales. By comparison, YPF reported sales of $12.4 billion.
Morales, a 52-year-old ally of Venezuelan President Hugo Chavez, has announced government takeovers in five of the past seven Labor Days, which is celebrated on May 1 in Latin America and most of the world. On May 1, 2010, he nationalized four power companies, including assets from U.K.’s Rurelec Plc and France’s GDF Suez SA.
“This is a time when Evo is looking to highlight his national project to turn Bolivia over to the people who have been underprivileged,” said Eric Farnsworth, the vice president of the Council of the Americas in Washington. “It’s crazy to invest in Bolivia and this is a perfect example why. The irony is that he’s taking actions that guarantee that investment will dry up further.”
Chavez, who has provided Morales with both political and financial support, began his nationalization drive in 2007 when he took control of the country’s largest telecommunications company and an electricity company and forced foreign oil companies into minority shareholder agreements as part of joint ventures. Since then, Chavez has expanded control over what he calls “strategic sectors” -- steel plants, cement, food processing and mining companies, banks and farm land.
Bolivia’s takeover stems from domestic politics and doesn’t suggest similar moves will follow in Latin America, said Carlos Caicedo, the head of forecasting for the region at Exclusive Analysis, a London-based specialist intelligence company.
“This decision comes at a moment when the president’s popularity is at its lowest and his government is under pressure from a series of social protests,” Caicedo wrote in a report. “We don’t see any hard evidence pointing to a trend or revival of nationalization in Latin America.”
Venezuela’s dollar bonds yield 913 basis points, or 9.13 percentage points, over Treasuries while Argentina’s spread is 953 basis points, according to JPMorgan. The countries post the two highest yield gaps among major emerging-market countries.
By comparison, Colombia, which has a yield spread of 148 basis points, sold a minority stake in state-controlled Ecopetrol SA in a 2007 initial public offering for $2.7 billion. Brazil, which has a yield gap of 184 basis points, raised $14 billion from a February auction of licenses to operate three of the country’s busiest airports in an effort to accelerate investments ahead of the 2014 World Cup.
Bolivian Finance Minister Luis Arce said in March that the government is considering issuing bonds overseas this year for the first time since 1920.
An independent auditor will set compensation to be paid to the Spanish company within 180 days, and will account for investments, back taxes and environmental damage caused by the company, according to a Bolivian state news agency report.
Red Electrica bought the Bolivian company in 2002 from Union Fenosa SA, Spain’s No. 3 generator. Fenosa had purchased 69 percent of the Bolivian company in 1997 in a state asset sale. Transportadora de Electricidad serves 85 percent of the Bolivian power market.
“This company was ours before and we are nationalizing what was ours before,” Morales said in the government statement. He ordered the military to stand guard over the company’s assets.
Spain is studying the situation, said an official who asked not to be identified because of government policy.
Red Electrica is seeking to reach an agreement with Bolivia that allows for “appropriate compensation” for the nationalization, Antonio Prada, a spokesman for the Spanish grid operator, said in a telephone interview.
“Morales has a history of making these announcements on the first of May, but it’s going to generate more attention because it’s on the back of YPF, and it’s also another Spanish company,” Christopher Garman, director of Latin America at Eurasia Group in Washington, said in a phone interview. For Spanish Prime Minister Mariano Rajoy, “this is horrible,” he said.
Support for Rajoy’s four-month-old government has waned amid budget cuts designed to curb a spreading debt crisis. Industry Minister Jose Manuel Soria responded to Argentina’s takeover of YPF by pledging “clear and decisive” measures for trade and industry in retaliation for a “hostile” act. Two weeks later, the only measure the government had adopted is a ministerial order designed to reduce demand for Argentine biodiesel.
The different outlooks of Latin American governments toward investment will create disparities in development, with countries that seek greater state control falling behind, Farnsworth at the Council of the Americas said.
“These countries complain that they’re not getting the investment they need to grow, which is true, but investors won’t put money in there under these circumstances,” Farnsworth said. “Over time the impact on lack of investment and development will be pretty stark.”
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