Venezuela is cracking up – should LatAm investors worry?

The government has clamped down on dissent

Venezuela is a war zone.

If you’re like me, and watch Ukraine’s current revolution with great interest, the scenes will be all too familiar.

Gangs of protestors in gas masks set fire to cars and throw rocks through the windows of government buildings. Teams of special forces in body armour and helmets huddle behind shields and fire tear gas into crowds. A man picks up the canister and throws it right back at them.

The situation has been playing out on our television screens for weeks. But this isn’t Kiev. It’s happening 6,000 miles away in Caracas, the capital of Venezuela.

Right now, Venezuela is being ripped apart at the seams by ongoing battles between the government and its opposition. Marches hundreds of thousands-strong have erupted into violence as protestors and military clash.

For the people living there, the situation is a tragedy. And while we’ve steered clear of Venezuelan investments in The New World, we can’t ignore the massive ructions taking place in the region’s fifth-largest economy and biggest oil producer.

In fact, the violent story playing out in Venezuela contains many lessons for investors like us who put our money in emerging markets in Latin America and elsewhere.

Ten years, one million murders

The current crisis began with students protesting against the lack of security on campus and snowballed from there. Security problems worsened dramatically during the Chávez years, partly because he weakened the judiciary and police forces during that time. But it’s also part of a general trend in the region.

A recent UN report points out that between 2001 and 2011, the Latin American homicide rate grew by 12%. Meanwhile, the number of robberies has tripled over the last 25 years.

Latin America has the sad distinction of being home to four of the five most violent countries in the world – with Venezuela, Belize, El Salvador and Honduras having murder rates higher than some war zones.

This incredible toll on human life – more than one million Latin Americans killed by violent crime in the last decade – also affects investments. In the worst affected countries, the UN estimates that it reduced GDP by 10% as people consume less, avoid conspicuous displays of wealth, and delay investments in productive assets.

But, like any generalisation, there are plenty of exceptions to the rule. Places such as Colombia are far safer than they were ten years ago, while Chile and Uruguay are less violent than many European cities. Nicaragua also stands out as an island of peace and calm in the violent Central American isthmus.

Oil: ‘the Devil’s excrement’

Security may have been the root of the original protests, but the students were soon joined by others with a whole range of complaints – most of them economic.

Venezuela’s headline growth rate of 1.6% last year is actually higher than that of Mexico, the current darling of international investors. But beneath the surface problems have been festering that are now starting to wreak havoc.

The main one is the country’s over-dependence on oil. Venezuela has the world’s second-biggest reserves of the stuff, and it makes up more than 90% of the country’s exports.

Hugo Chávez isn’t the only politician to fall into the oil trap – plenty of Venezuelan leaders before him made the same mistake. Indeed, even Venezuela’s energy minister in the 1960s, Juan Pablo Perez – the man credited with starting oil cartel Opec – realised in the end that oil would damage his country.

Before his death, he warned, “Ten years from now, 20 years from now, you will see: oil will bring us ruin… Oil is the Devil’s excrement.”

The surge in oil prices since Hugo Chávez came to power in 1999 has led to an over-reliance on oil, meaning that Venezuela’s domestic industries have withered away. The country now imports everything from basic food stuffs to toilet paper.

Indeed, a recent shortage of the latter was another factor behind the protests – it might sound strange, but sometimes it’s the little things that rile people the most.

With oil production stagnating due to lack of investment in state producer PDVSA, revenues are failing to keep up with rising government spending that comes with ‘Chavismo’, the left-wing political ideology strongly associated with Venezuela’s late president, Hugo Chávez.

Unable to fund Chavismo by oil exports alone, the country has been printing money. That’s why inflation is running at 50%. The government’s response has been to expropriate businesses and tell shops what prices they should sell their goods for. That may win political points in the short run, but longer-term, it creates distortions in the economy.

It’s also hard to know the exact state of government finances – it negotiates plenty of under-the-counter deals with China, and has an opaque sovereign wealth fund. But the increase of supermarket shortages, devaluations of the official – and completely unrealistic – exchange rate and the restrictions on dollars, suggests that the government is struggling to keep the complicated economic artifice together.

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The revolution will be televised

When a tiny band of Bolsheviks seized power in Moscow in the 1917 Russian Revolution, they quickly realised that control of the radio airwaves was vital to win over the country.

A century later there are lots of different ways to get your message out, and a new front has opened up during this battle between the Venezuelan government and the opposition – in the media.

The government controls the television stations, and recently pulled the only station that was reporting the gruesome reality on the streets. But the protestors have responded with a very sophisticated social media campaign on Twitter and YouTube.

This ranges from wobbly smartphone footage of protestors being shot by police, to well-produced video montages (available in both English and Spanish) that have garnered millions of views in less than a week.

In response, the government has hampered the ability of Venezuelans to upload photos onto Twitter, has ‘shut down’ the internet in some areas and reportedly has an army of paid ‘tweeters’ who fight its cause online. In response, Latin Americans from other countries have created smartphone apps to help protesters circumvent the controls.

It’s fascinating to see old-style government repression struggle against the relative freedom of expression afforded by the internet. And I’m sure governments from Beijing to London (do you remember when the UK considered bringing down Blackberry messaging services during the riots?) are paying close attention. But there’s also something of interest for investors here.

Latin Americans spend an average of ten hours on social media per month (more than twice the global figure) and the region is home to five of the world’s top ten biggest users of social media per capita. I’ve written before about the investment opportunities this throws up.

And during the last week in Mexico, I’ve seen how people who want the latest on Venezuela look to their smartphones and tablets – not the TV.

In Latin America, revolution spreads like wildfire

So, are there ‘other Venezuelas’ investors should watch out for?

Argentina and Ecuador are two countries in the region where powerful politicians have used the natural resource boom to fuel populist and unorthodox economic policies.

Like Venezuela, both have engaged in anti-Western rhetoric, yet interestingly we seem to be seeing a shift in attitude. In Argentina, Cristina Kirchner has started to build bridges with Western oil firms after the Repsol YPF expropriation. Argentina also recently allowed its currency to devalue and fixed its dodgy official inflation statistics.

Meanwhile in Ecuador, Rafael Correa has changed its mining laws to encourage international firms and opened up new areas for oil exploration.

Why are they doing this? They need the money. A lack of dollars, which prevents imports, is one reason why Venezuelans are so angry. So Kirchner and Correa are probably keen to avoid similar protests – especially as both suffered poor performances in recent local elections.

And with the recent panic in emerging markets and the slowing of the commodity market, they probably realise that they have to be a bit nicer to attract foreign investment. It may well be a case of too little too late – time will tell.

El Presidente is going nowhere

Personally, I think the protesters will have a hard time dislodging Nicolás Maduro on their own. He often comes across as a bit of a clown – he recently said that the late Chávez spoke to him in the form of a bird – but ultimately he’s the country’s elected president and has four years left to his term.

And history has shown that, in Venezuela, as long as the army and powerful interests in the country still see him as their best option, then he will cling on.

He also has a lot of support among the poor, who remember the misery of the pre-Chávez years. The fact is Chávez did a lot to reduce the terrible poverty that his predecessors blithely ignored – and Maduro won last year’s elections on the back of that legacy.

But his Achilles’ heel is his economic management. If the shortages or the inflation get worse, then his support will start to falter and there will be less left in the government pot to ensure loyalty.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

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  • 4caster

    If there is any chance that the regime can be changed, the CIA will be plotting with US-friendly groups to achieve an outcome favourable to the US. Whether they achieve that goal is a different matter altogether!

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