Will the real Chavez please stand up? - Marketplace Country Outlook

Venezuelan President Hugo Chavez recently startled a room of more than 400 bankers and investors in New York by confessing his affection for B-grade horror movies such as The Crypt. He assured them, however that he is neither a "boo geyman" nor a threat. The problem is that many remain unconvinced.

IN THE YEAR AND A HALF since President Hugo Chavez was swept into office, he has spooked local investors with his verbal assaults on the country's ruling oligarchy, rattled foreign investors with his fiery rants against "savage neoliberalism," and strained relations with Washington by cozying up to some of the third world's most notorious dictators, including Fidel Castro, Saddam Hussein and Muammar Quaddafi.

Chavez has paid a steep price for his incendiary rhetoric and foreign policy adventures. Last year about US$7 billion in deposits fled the country, thousands of Venezuelan small businesses closed their doors, and scores of middle- and upper-class professionals emigrated to the United States, Canada and other countries.

Nevertheless, Chavez remains wildly popular at home, in part because the price of crude oil--the source of four-fifths of Venezuela's export earnings-has roughly quadrupled since he assumed office in February 1999. The surge of petrodollars has buoyed the economy and given Chavez the wherewithal to boost public salaries and dole out subsidies to the poor. Inflation-adjusted public spending rose 22 percent during the first half of the year, and it is projected to grow sharply during the second half. Even so, Chavez expects to be able to sock away US$3 billion in the country's oil stabilization fund by year end.

"Chavez is the luckiest guy in Latin America," says Lehman Brothers economist Gianfranco Bertozzi. "His election coincided with the recovery in commodity prices following the Asian crisis, and he is reaping the political reward."

Chavez will have to rely on more than luck in the coming months if he is to deliver on his campaign promises to generate economic growth, create jobs and boost social equity. He will need investment- lots of it - and that will require toning down the anti-capitalist harangues from the balcony at Miraflores and mending fences with domestic and international investors. His flurry of meetings with bankers and investors in New York, on the sidelines of the United Nations Millennium Summit, was an attempt to do just that.

Ambassador Thomas E. McNamara, president of the Council of the Americas, a business association of US companies with investments in Latin America, met privately with Chavez while he was in Washington, DC. McNamara says the former coup leader clearly recognizes the need for improved relations with foreign investors and seems genuinely interested in a rapprochement. "Chavez is an astute character," says McNamara. "He knows that his social agenda requires capital, trade and technology. I think we will probably see a more concerted effort on his part to make investors feel comfortable."

During his meetings with investors, Chavez touted a series of new laws designed to promote investment in the telecommunications, electricity and gas sectors. The telecom law, in particular, has been widely praised as market-friendly and is expected to net Venezuela as much as US$10 billion in fresh investment during the next five years from major international players such as Spain's Telefonica, Telecom Italia, British Telecom and AT&T.

Chavez also has high hopes for the energy sector, where he is looking to attract billions of dollars in long-term investment in areas such as natural gas exploration and petrochemicals, while keeping PDVSA's core oil-based activities in the hands of the state.

"In part because of the robustness of oil prices and the long-term nature of oil and gas investments, there is a good deal of foreign interest in that sector," says Sergio Galvis, who coordinates Sullivan & Cromwell's Latin American practice. "Growth in investment in that and other areas, by local and international parties, however, will be affected significantly by the government's approach to property rights, enforcement of contracts and application of the rule of law."

Federico Kaune, an economist at Goldman Sacks in New York, says Chavez's main challenge will be convincing investors that he has a bonafide plan for keeping the economy afloat when oil prices inevitably go south. "Right now, the economy is recovering, inflation and unemployment are falling and foreign currency reserves are accumulating--all because oil is close to US$35 a barrel. What will Chavez do when prices fall? Investors want to know that he has a backup plan."

Bertozzi of Lehman Brothers says investors have good reasons to be skeptical of Chavez. "His conduct has been erratic, his fiscal policy has been lax, the competency of his economic team is questionable, and the growing centralization of authority within the executive branch is troubling," he says. Nevertheless, Bertozzi, who attended a breakfast with Chavez in New York, says you can't help but feel a little less pessimistic about Venezuela after hearing Chavez speak. Most of the people I know left his New York presentation entertained by Chavez," says Bertozzi. "He's a passionate and articulate orator and can be a convincing salesman. Bush and Gore could take a lesson from him on charisma."

Whether Chavez ultimately succeeds in enticing foreign businessmen and bankers to invest in Venezuela, however, may ultimately depend less on his charisma and more on his credibility. "Chavez is an engaging personality and a good communicator," says McNamara. "However, he still has to demonstrate that he is a modern leader committed to pluralism and market-oriented policies, rather than an old-style statist wedded to the ideas of the past."

COPYRIGHT 2000 Americas Publishing Group
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