Bloomberg News

Chavez Win Spurs Exodus as Venezuelans Foresee Economic Woes

October 10, 2012

Chavez Victory Spurs Exodus as Venezuelans Foresee Economic Woes

Rising crime, political persecution, and narrowing career prospects are driving away middle class Venezuelans. Photographer: Leo Ramirez/AFP via Getty Images

Juan Ibarra, a 35-year-old surgeon from Caracas, is preparing to emigrate after Venezuelan President Hugo Chavez won another six-year term on Oct. 7.

“I don’t want to go but on balance every day my profession is at risk from the government,” Ibarra, who worries Chavez may extend state control over clinics and regulate doctors’ salaries, said in an Oct. 8 phone interview. “I don’t have any other option but to pack my bags and have them ready.”

Chavez, who has seized more than 1,000 companies or their assets since first elected in 1998, may now be emboldened by his victory to push for more takeovers and price controls that have scared off investors, said Bret Rosen, a Latin American debt strategist at Standard Chartered Bank. He will also devalue the currency to boost revenue from oil sales and pay for a pre- election spending spree, fueling inflation, Rosen said.

“I have a hard time thinking there’s going to be moderation in the months ahead,” Rosen said in an interview from New York. “Growth will slow next year after the government spent like crazy to buy the election. Venezuela has to devalue to close the deficit since the weakened private sector is in no position to soften the landing.”

Ibarra isn’t alone in contemplating departure. Traffic to MeQuieroIr.com, a Venezuelan website that provides information to people looking to emigrate, tripled to 180,000 visits the day after Chavez won by a 11-percentage-point margin, said company director Esther Bermudez. Most inquiries come from middle-class professionals, she said.

Ibarra, who said he’s looking to move his family to the U.S., estimated it would take him seven years to reach the same level of pay he enjoys in Venezuela.

Investor Pessimism

Investors share Ibarra’s pessimism over the future of Venezuela under Chavez. The government’s benchmark bonds plunged the most since October 2008 yesterday in the first full day of trading in U.S. bond markets after a holiday on Oct. 8.

The yield on the bonds due in 2027 rose 5 basis points, or 0.05 percentage points, to 11.16 percent, at 9:53 a.m. today in Caracas, according to data compiled by Bloomberg. The bond’s price fell 0.35 cents on the dollar to 86.27 cents.

Foreign investment in South America’s largest oil producer has already tumbled, dropping 58 percent to an average of $1.05 billion a year between 2006 and 2011 from the previous six years, the United Nations Latin American unit, or ECLAC, said in a report on May 3. Investment would have fallen further if companies were allowed to take their profits out of the country in the past few years, it said.

Investment Freeze

Another six years of Chavez’s rule will lead to a virtual freeze in foreign investment, with banks and food retailers the next in line to face possible seizure, said Juan Pablo Fuentes, an analyst at Moody’s Analytics Inc. in West Chester, Pennsylvania.

“From the point of view of private investment this isn’t good news,” said Fuentes. “The margin of victory gives Chavez consent by the country to continue on the path toward an economy with more state intervention.”

Companies already operating in Venezuela could scale back their operations to reduce exposure to adverse economic policies, said Alberto Ramos, senior economist at Goldman Sachs & Co. in New York.

Companies including Procter & Gamble Co, Colgate-Palmolive Co. (CL:US) and Johnson & Johnson have had to slash prices on products such as toothpaste, toilet paper and bleach after Chavez set price caps on 19 consumer care products in April to slow inflation. Chavez, who says that the price caps are necessary to combat what he’s called “capitalist speculation,” threatened to nationalize any companies that doesn’t comply.

Divestment

“We’ll probably see divestment and a bunch of corporates taking very defensive measures in order to reduce their footprint on the ground,” Ramos said in a phone interview from New York.

Investors are also faced with the prospect that Venezuela will weaken the official rate of the bolivar by a minimum of 28 percent to at least 6 per dollar by the first quarter of next year for the third time in as many years, according to estimates by Moody’s Analytics, Bank of America, Nomura Securities International Inc. and Bulltick Capital Markets.

Devaluing the bolivar will fuel inflation of as much as 48 percent and could lead Venezuela’s economy to contract by 3.6 percent next year, according to Francisco Rodriguez, senior Andean economist at Bank of America Corp. Chavez said Sept. 11 that he had no plans to devalue the currency.

Spending Cuts

While annual inflation slowed for a 10th consecutive month to 18 percent in September, it’s still the highest among 102 economies tracked by Bloomberg after Belarus, Iran and Argentina.

Chavez will also be compelled to cut expenditures after fiscal spending leaped 41 percent in real terms in the 12 months through August from the year earlier, according to Hernan Yellati, head of research and strategy at BanTrust & Co. in Miami. That spending spree helped the economy grow 5.4 percent in the second quarter.

Robust economic growth and increased spending on social projects helped Chavez to victory. The poverty rate fell to 31.6 percent at the end of 2011 from about 50 percent when Chavez took office. Extreme poverty declined to 8.5 percent from about 20 percent over the same period. Venezuela has the lowest level of inequality in Latin America and the Caribbean, according to the United Nations.

Chavez Denial

Chavez yesterday dismissed the predictions of economic troubles ahead.

“Now they’re saying that the economy is going to sink with Chavez’s victory,” he said in comments broadcast on state television. “Our economy is one of the fastest growing in the region and we have some very positive indicators on growth.”

Some analysts say that while Venezuela’s economy will slow in 2013, the downturn won’t be as gloomy as most are projecting. According to the International Monetary Fund’s World Economic Outlook, Venezuela’s economy will grow 3.3 percent next year, while inflation will accelerate to 28.8 percent.

Rising oil revenue may also benefit the government. Oil futures reached their highest level in eight days yesterday. November-delivery crude oil rose $3.06 to $92.39 a barrel on the New York Mercantile Exchange, the highest settlement since Oct. 1. Prices have gained 20 cents this month, following an 8.5 percent advance in the third quarter.

While Chavez said in a press conference last month that some Venezuelans may decide to leave the country if he was re- elected, he called on them to stay.

Rising Crime

Chavez’s appeal may fall on deaf ears. Rising crime, political persecution, and narrowing career prospects are driving middle class Venezuelans out of the country. MeQuieroIr.com’s Bermudez said an estimated 1 million of Venezuela’s 29 million population have gone abroad in the past 11 years, mostly to the U.S., Canada and Australia.

Things have gotten so bad that many people are moving to neighboring Colombia, where a war with communist guerillas pushed the murder rate to 71.8 per 100,000 in 1996. Now, Colombia’s Defense Ministry calculates the murder rate at 32 per 100,000, while Venezuela’s is about 67, according to the Venezuela Violence Observatory, a Caracas-based NGO that tracks crime. Colombia attracted $13.4 billion in foreign direct investment last year.

Blacklisted

Concepcion Espejo, a 40-year-old oil industry engineer from Caracas, said she and her husband Miguel Febrero, 50, a lawyer who worked for state petrochemical company Pequiven SA, were blacklisted from working in the oil industry after signing a petition to force a recall vote on Chavez in 2004.

Chavez’s re-election was the final straw for Espejo, who cited limited work opportunities, rising crime and deteriorating education as reasons to move with her husband and two sons to Colombia by the middle of next year.

“We were already pretty limited in our professional prospects here in Venezuela,” Espejo said in a phone interview. “The idea is to go temporarily, allowing for the fact that things could change here, although we’ve been learning that that kind of thing doesn’t happen in the short-term.”

To contact the reporter on this story: Charlie Devereux in Caracas at cdevereux3@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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