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Venezuela: outlook for investors

27 October 10:48 AM

For many years mass media from different parts of the world have been highlighting the situation in Venezuela. Sometimes the highlights are controversial: some media report that Venezuela is one the verge of economic collapse (According to Forbes, it is one of the world’s 10 worst economies). Others report that in terms of GDP-per-capita it is Latin America’s number 3 ($12 600), thus yielding only to Chile and Argentina. It is also Latin America’s 3^rd biggest economy after Mexico and Brazil. It is reported that in the first half of 2011 Venezuela’s GDP gained 4.5%.

Therefore, these days Venezuela seems to be a striking example of how a country can live without US advisors and their subsidies ,especially against the background of continuous protests against “financial terrorism” in the USA and Europe.

Obviously, the truth, as usual, lies somewhere between the 2 extremes. Yet there are no other people who need this truth as desperately as investors. Investments always carry certain risks, it is vital for an investor to make a comprehensive analysis of the economic model of the country he/she is going to invest in. it is crucial to define all the strengths and weaknesses.

The experts of Masterforex-V Academy offer their own outlook of Venezuela and its economy:

Hugo Chavez’s rule: What are the risks for investors?

We must admit there are plenty of investment risks in the country. It is not accidental that Venezuela has the highest rate of inflation in Latin America – 23.6%. Over Hugo Chavez’s rule the national currency – the Venezuelan Bolivar – has lost 90-99% of its value. Obviously, the Venezuelan economy has some major drawbacks, which present major risks to investors. These are some of them:

1. Economic risks:

Over the 12 years of Hugo Chavez’s rule, the Government nationalized all the strategic sectors of the country’s economy - oil industry, communications, energy sector, agriculture, steel industry, gold mining etc. For example, PDVSA, the national oil company, controls the entire domestic market of crude oil. Unfortunately, private businesses are better-run than state-owned ones. The high rate of inflation confirms that.

Numerous experts say that the investment climate in Venezuela is constantly worsening. The Venezuelan authorities are gradually forcing out the foreign capital from the country’s strategic economic sectors by creating unbearable business conditions. For example, Hugo Chavez took over the operational control over the massive Orinoco Belt oil projects, thus making Exxon Mobil and ConocoPhillips (US oil giants) abandon them. As a result, Venezuela still lacks foreign investments, innovation, technologies and experts in super-heavy oil extraction.

Moreover, the country’s economy is dependent on the export of oil and the import of consumer products. Oil represents 75% of Venezuela’s export, over 50% of the country’s income and about 30% of its GDP. Obviously, Venezuela’s wellbeing depends mostly on oil prices. In 2007 the country’s economy gained 8.4% (mostly on growing oil prices) but in 2009 its growth shrunk to 2.8%. That was the major reason for devaluing the Venezuelan Bolivar (it was aimed at attracting more dollars from selling oil).

2. Technical and Technological risks:

In any country they depend on equipment reliability, innovation technologies, manufacturing modernization. This is exactly what Venezuela lacks. In recent decades Venezuela earned billions of dollars on higher oil prices, which could have been used to diversify the national economy. The scientific sector is undeveloped. Agriculture has the same problem: most foodstuffs are still exported. Dependence on crude oil hinders numerous crucial reforms. It is necessary to mention that the country’s oil infrastructure is outdated and needs modernization. 45% of Venezuela’s oil deposits contain super heavy oil, which is hard and expensive to extract and refine (each project is roughly estimated at $18B).

3. Social risks:

Social risks are usually connected with numerous economic problems, poverty, unemployment, poor quality of life, protests and strikes. Unfortunately, Venezuela has most of these problems.

Last year the rate of unemployment reached 12.10%, the worst result in Latin America. However, some experts say that the real unemployment rate exceeds 18% because official reports don’t include those who receive unemployment benefits. On the other hand, most of the official unemployed work in the so called “shadow” economy.

30-40% of the population are considered poor. There is social differentiation.

Almost all the Venezuelans are literate but spend in schools 7 years on average, even though they have opportunities to continue education.

The “white’ part of the country’s population (20%, the elite and the middle class) is leaving Venezuela, mostly for Spain . However, many Cubans have been moving to Venezuela. They occupy key posts in oil-and-gas industry, healthcare, telecommunications, customs service, army and secret services. Of course, the Venezuelans don’t like it.

Numerous social programs are a heavy burden to the country’s budget. The opposition says these programs are nothing but a waste of money and an attempt to buy the people’s love. By the way, a lot of money is spent to support the left-wing regimes of Cuba, Bolivia, Nicaragua and other states.

By the way, in Global Prosperity Index (British Legatum Institute together with Oxford Analytica and Gallup World Poll Service) Venezuela is number 75, while its neighbors have higher standings (Uruguay –28,Chile – 32, Argentina – 41, Brazil – 45).

4. Political risks:

It is clear that such risks are connected with the political situation in the country, including elections, political pressure, corruption, external policies etc. In these terms, the experts of Masterforex-V Academy see the following obstacles for foreign investors:

First of all, it is about low security level. There is much violence in the streets (killing and kidnapping). Moreover, it is a major transit point for drug trafficking from Colombia to the US and Europe. Karakas, the country’s capital, is one of the world’s most dangerous cities (140 killings per each 100K citizen). That is why mansions in Karakas are surrounded by high fences under high voltage while multi-storey apartment houses have bars on most windows.

Venezuela is a highly-corrupted country. According to Transparency International 2010, it was number 164 out of 178. According to Global Peace Index 2011, it is number 124.

Another factor is Hugo Chavez’s heath. Not so long ago he was diagnosed with cancer. This month he is to undergo a thorough medical checkup. He has been in charge of Venezuela since 1999 and is still popular with most of the country’s population due to his man-of-the-people image. In other words, when a country’s leader is sick, it is a major risk for investors. However, Hugo Chavez’s rating is declining in advance of the 2012 presidential elections. For the first time since 1999 it has declined down to 40%.

Political threats for investors

Венесуэла

The experts of Masterforex-V Academy consider 4 possible scenarios:

1. Hugo Chavez can make changes to the constitution in order to increase the presidential term or to proclaim himself a president for life.

2. He can win the 2012 presidential elections. He has already promised to rule the country for the next 20 years, or at least until 2019.

3. He can fail the elections. In this case, the country’s political course may see cardinal changes.

4. Coup d'état. In 2002 some high-ranking officers (supported by the US) tried to overthrow Higo Chavez but they failed because most people supported Chavez. However, it is unclear whether they will support him again if there is another attempt.

A change of power will probably initiate the reestablishment of relations with the USA.

The bottom line: low productivity and competitiveness, outdated infrastructure, lack of innovations and many other factors make international investors avoid Venezuela.

There is hope for potential investors. Everything is not that bad…

Венесуэла

The experts of Masterforex-V Academy are sure that it is too early to spell the death of the Venezuelan economy and to bury the hopes of those how would want to invest in it. The statement that Venezuela will become another Greece contradicts the following factors:

· The country’s public debt is as low as 25.5% of the GDP.

· Venezuela’s balance-of-trade surplus.

· The expected growth of the Venezuelan economy

· An unemployment decline down to 8.1% etc.

According to the ICM Brokers, Venezuela’s economy has a considerable safety factor, mostly due to abundant mineral deposits, oil, natural gas, gold (world’s number 15), iron ore, diamonds etc. Obviously, crude oil is Venezuela’s major national treasure. In 2010 Venezuela outpaced Saudi Arabia in oil reserves to become the world’s number 1. It is a major oil exporter. There are plenty of those who want to invest in the country’s oil deposits. For example, Eni – an Italian oil giant – is ready to invest $7B. Russian oil companies are ready to invest some $20B.

According to Dmitry Shtraus from Simón Bolívar University (Karakas) opposes those who blame Hugo Chaves for deindustrializing the country. Venezuela has been involved in numerous joint projects (assembly plants, shipyards, refinery plants etc).

Despite the tough relations with the USA, the latter keeps importing 50% of oil exported by Venezuela. However, Hugo Chavez keeps improving the ties with China, Russia, India and the EU. For example, the Chinese economic growth during the global crisis contributed a lot to Venezuela’s economic recovery. Moreover, Venezuela is mainly focused on the relations with Latin American countries, including Cuba. The Cuban special forces keep acting as Hugo Chavez’s security. Fidel Castro has even introduced the notion of “Venecuba” to underline the importance of the union between the 2 countries.

Venezuela can boast a relatively humane social system due to the redistribution of substantial incomes gained from oil exports –Chavez calls it “oil socialism”. The authorities allocate substantial funds to improve the quality of live in the country (over $400B over the recent years). It helped to reduce the poverty form 21% down to 6.9%. These days Venezuela is a country with one of the lowest levels of social inequality in Latin America.

However, the minimal wage is $170 while unemployment benefits are around $300, which cannot stimulate the labor market (people do not want to work). The Venezuelans are one of the most literate nations in Latin America. The authorities stimulate the construction of social homes and hospitals, thus making dwelling property and healthcare more affordable. Moreover, the country’s birth rate is higher than the average global one – 20.61 per 1000 people. That is why the demographic prospects look fairly optimistic.

Venezuelan Bolivar: market prospects

According to the Department of Masterforex-V Trading System , USDVEF have been traded in a narrow range (4,2950 - 4.2980VEF) since September 2011.

The further succession of events will be determined by the direction in which the price breaks out of the range. However, according to the new tech analysis by Masterforex-V, in order to consider the breakout as a genuine one, the price will need to consolidate outside the range, otherwise that will be a false breakout.

график

The bottom line: the current state of the Venezuelan economy is rather controversial, which obviously makes it difficult to make any reliable forecast for the country’s economic future. However, one can be confident about Venezuela’s solvency. It is capable of solving most macroeconomic problems.

As for investors, this is the “fortune favors the bold” case. Anyway, one should be very careful when investing in Venezuela.

Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:

What is your opinion about Venezuela’s investment potential?

You are free to discuss this article here: forum for traders and investors

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