Venezuela’s Chavez Runs Up Debt Shunting Oil Wealth to the Poor
Venezuelan housewife Sabrina Munoz saves as much as a third on the price of flour, meat and beans by shopping at Mercal, a government-owned supermarket near her Caracas home overlooked by hillside shanties.
She thanks President Hugo Chávez.
“Mercal is an example of the good Chavez does,” says Munoz, 50, a mother of four. “He’s such a humanitarian.”
Backed by a quadrupling of oil prices since he took office in early 1999, Chavez, 50, has boosted spending on food subsidies, education and health care in the world’s fifth-largest crude-producing country. The resulting political boost has an economic cost: spending is outpacing the oil boom, and the government’s debt has increased more than 60 percent to $43 billion, or 42 percent of gross domestic product.
The government says higher oil income enabled it to generate a $2 billion budget surplus last year, equivalent to about 2 percent of GDP, the first surplus of Chavez’s presidency. That money has already been spent, Finance Minister Nelson Merentes said on April 9. He forecast another surplus for this year without providing figures.
Others have a different view of the country’s finances. JPMorgan Chase & Co. estimated in a June 3 report that Venezuela had a budget deficit equivalent to 4.6 percent of GDP in 2004 and will have a deficit of 4.1 percent of GDP this year.
Chavez is staking the country’s future economic health on continued high oil prices, says Giampiero Riccio, a director of the Venezuelan Mutual Fund Association.
“We are living right now in a peculiar honeymoon, which is based on the strength of the oil prices,” says Riccio, 55, a fund manager at Caracas-based Banco Mercantil CA, which has about 80 percent of the $1 billion it oversees invested in government debt. “At some time, there will be a back-to-reality situation. Who is going to pay for that? The general public through inflation or devaluation of the currency.”
Oil, which reached a record $58.28 a barrel on April 4, accounts for more than half of government income and a third of GDP, according to the central bank.
Chavez is seeking re-election next year. This year, he plans to raise spending on education, health care, housing and pensions to about $13 billion, or 40 percent of all government expenditure, from $9 billion in 2004 and $6.2 billion in 2003.
In addition, Petroleos de Venezuela SA, the state oil company, plans to increase donations to projects known as missions, which provide food, medical services and education in shantytowns and other poor districts, to $3.8 billion this year from $3.1 billion in 2004.
“We’re meeting the needs of the people and building a new socialism,” Chavez said in a May 19 speech explaining the spending increases.
Owners of the country’s debt don’t believe there’s much danger of increased spending leading to default for the time being, says Edwin Gutierrez, who helps manage $1.5 billion of emerging-market debt, including Venezuelan bonds, for Deutsche Asset Management in London.
“Revenues remain quite healthy and reserves are high, so that gives them a decent cushion,” says Gutierrez. The central bank has international reserves of $27 billion.
Venezuela is due to pay $5 billion this year and $5.4 billion next year in interest and principal on its $27.7 billion foreign debt, according to JPMorgan. Venezuela’s benchmark bond that matures in 2027 has risen to 102 cents on the dollar from its low of 58.1 cents on Feb. 11, 2002. The bond now yields about 9 percent, according to JPMorgan.
Chavez’s policies, which include interest rate caps of 28 percent on credit cards and personal loans, price controls on foods such as rice, meat and chicken, and a freeze of electricity and telephone tariffs, are deterring investment by private companies, says Luis Oganes, an analyst at JPMorgan in New York.
The economy will probably grow about 5.5 percent this year, Oganes says. Last year, growth was 18 percent as the economy rebounded from contractions of 8.9 percent in 2002 and 7.7 percent in 2003, when a two-month strike by labor unions and business associations aimed at ousting Chavez throttled oil production.
“This year’s positive numbers are going to be driven by consumption, private and public, but not investment,” Oganes says. “Private investment is still relatively weak.”
Juan Abreu, who runs the Semilla grocery a few blocks from the Mercal supermarket in Munoz’s neighborhood of Catia, says Chavez’s policies may put the family-owned store out of business. Profits have halved in the two years since the Mercal store opened, he says.
“I can’t compete with a store that sells below cost,” says Abreu, 30, as street peddlers outside the shop offer everything from pirated compact discs to vegetables and toothpaste.
This year, Chavez plans to spend $384 million on subsidizing prices at Mercal, which has become the country’s biggest food retailer since opening in 2003.
The government money enables Mercal to sell food such as flour and pasta cheaper than other stores. A kilo of pasta is priced at 1,100 bolivars ($0.51) at the Mercal in Catia, while the cheapest brand at Amigo, a shop several blocks away, costs 1,450 bolivars.
Chavez’s spending ambitions outstrip the increase in government revenue generated by higher oil prices. Last year, the government’s income from oil taxes, royalties and dividends from Petroleos de Venezuela rose by 32 percent from 2003 to $12.5 billion. At the same time, spending rose by 37 percent to $27.3 billion.
“The government hasn’t saved a cent of this oil bonanza and that will come back to haunt us if the price of oil goes down,” says Salomon Centeno, a congressman with the opposition Democratic Action party and vice president of Congress’s finance commission. “The government has a voracious appetite for spending.”
To obtain more income, Chavez is increasing the amount international oil companies such as Exxon Mobil Corp., of Irving, Texas, and San Ramon, California-based Chevron Corp. must pay in taxes and royalties. He is also trying to force the central bank to release $7 billion of its reserves for government spending.
“We don’t have enough resources,” Chavez said in the May 19 speech. “The needs of the people are great.”
To fund differences between income and spending, Chavez has increased borrowing, mainly by tapping local investors. From the time he took office in February 1999 to the end of last year, Chavez increased the government’s domestic debt to $14.9 billion from $3 billion, according to the Finance Ministry. In the same period, the foreign debt rose to $27.7 billion from $23.4 billion.
To stop money from leaving the country and ensure he can sell debt locally, Chavez in January 2003 restricted purchases of U.S. dollars, leaving the nation’s banks and mutual funds with few options for investment.
The amount of government debt held by Venezuelan banks, including the local units of New York-based Citigroup Inc. and Santander, Spain-based Banco Santander Central Hispano SA, last year grew to 34 percent of their total assets from 15 percent in 1998, according to banking consulting company Softline Consultores in Caracas.
“Demand for domestic debt will remain high as long as the price of oil stays high and capital controls are in place,” says Benito Berber, an analyst with HSBC Holdings Plc in New York.
On Tuesday, the government sold 91-day bolivar-denominated debt yielding 10.70 percent. When the currency controls were implemented, the yield on such debt was 44 percent.
Chavez’s government is committed to maintaining spending on the poor whatever happens to oil prices, says Ricardo Sanguino, a congressman in Chavez’s Fifth Republic Movement party.
“Higher spending on social programs is a top priority of our government,” says Sanguino, who is a member of Congress’s finance commission.
Chavez’s spending has helped the former army lieutenant colonel consolidate support among the nation’s 14.5 million poor ahead of congressional elections in December and presidential elections next year, according to Datanalisis, a Caracas-based polling company.
In an April survey, 67 percent of 1,300 respondents said they approved of Chavez’s government. Among those with a monthly household income of 438,000 bolivars or less, who account for 58 percent of the country’s 25 million population, four out of five backed Chavez, according to Datanalisis. Last August, Chavez took 59 percent of votes in a referendum to remove him from power.
“Chavez connects with poor people,” says Luis Vicente Leon, a Datanalisis analyst. “He shows he worries about them and speaks their language. They feel close to him.”
Even if Chavez is forced to reduce spending, supporters such as Munoz, the Caracas housewife, say they would still back him.
“I would love Chavez even if there were no Mercal,” she says.