The Miami Herald
September 5, 2001

 Zigzag policy has Venezuela off balance

 Leftist rhetoric proves chilling to investors

 Special to The Herald

 CARACAS -- In early August, the government of President Hugo Chávez announced that import restrictions were in the making for textiles, footwear and agricultural products in an effort to boost national manufacturing.

 But by the end of the month, officials had backed off, declaring there would be no limits on foreign goods and that farm subsidies were being considered instead.

 Although economic analysts and businesses breathed a collective sigh of relief, the incident served as another illustration of the Chávez government's zigzagging
 economic policy that has investors rolling their eyes, and, more important, keeping their cash offshore.

 ``The economic policy is just not clear enough,'' says Tamara Herrera, chief economist at the Sintesis Financiera investment brokerage in Caracas. ``It's bad

 That may be one reason why private business in Venezuela is limping despite two years of robust petroleum prices that have boosted this oil-based economy out of the dumps and flooded state coffers with dollars.

 Gross domestic product grew 3.2 percent last year, and this year is headed toward a shot in the arm of at least the same size. Unemployment is down, from nearly 15 percent in December 2000 to about 13 percent currently. International reserves harbor an impressive $21 billion, including $6.5 billion in a rainy day fund comprising windfall oil profits. Inflation is forecast to end the year around 10 percent, a 15-year low.


 But in a seeming paradox, capital flight almost doubled in the first half of the year, to more than $4 billion; and the National Institute of Statistics estimates that the
 informal economy has expanded from 49 percent to 52 percent. Manufacturers are operating at just half their capacity, and Wall Street deems Venezuela the second
 most risky Latin American country for investment.

 ``The government's macroeconomic figures are very good,'' says Alejandro Grisanti, head of economic research at Santander Investment. ``But in other oil booms, the economy has tended to grow more.''

 Awash in petrodollars, the government has been the main agent of the recent economic expansion. Construction, for instance, was the second quarter's top industry,
 posting a 20 percent gain, but it was principally due to state-funded projects such as a new railroad and massive housing programs.

 Privately run telecommunications, benefiting from the end of phone company CANTV's monopoly last year, lagged in second place with 12 percent growth as new entrants competed for market share.

 ``The private sector is not acting as the main economic engine of recovery,'' says Luis Oganes, emerging markets vice president of J.P. Morgan in New York.


 Analysts say investors are unnerved by Chávez's fiery leftist political rhetoric, particularly his diatribes against U.S. hegemony and his overt friendships with U.S. foes
 such as Cuba, Iraq, Libya and other so-called rogue nations.

 Although Chávez insists that he welcomes U.S. investment, it was perhaps a telling sign that no U.S. companies participated in the Energy Ministry's June bidding for
 natural gas exploration and exploitation blocks.

 An uncertain legislative outlook is another reason that the private sector appears timid. Dozens of new laws remain to be passed to fulfill the 1999 Constitution, but so far this year, only six out of some 60 laws on the Chavéz-dominated National Assembly's agenda have been approved.

 Several of the proposals would have crucial laws, including land reform, hydrocarbons, and social security, which have been held up for months -- often over ideological debates between hard-line and moderate leftists in the Cabinet.

 The land-reform bill, for example, is expected to regulate use of farmland to keep it productive, tax idle parcels, and even set limits on how much property one person can own.

 ``This is a topic that affects the whole economy, because it's about the right to private property,'' says José Luis Betancourt, president of the National Cattle Ranchers' Association. ``The government has to guarantee investors that.''

 Under the social security agenda, delayed for more than two years, the debate pivots on whether private pension funds will be allowed to operate.

 The draft hydrocarbons law has generated much debate as it proposes that the state take at least 51 percent in any partnership with a private firm, and that the state's royalties rise from 16.66 percent to 30 percent.

 Analysts say these are the most uncompetitive investment terms in the world's oil industry. ``This is not good news for the most important sector of the economy,'' says Orlando Ochoa, economist and professor at the Institute for Advanced Administration Studies in Caracas.

 With such radical changes possible in the legal framework governing industries, and many of the modifications leaning toward more state control and regulation, it's no surprise that business is waiting it out.

 ``Currently, the country is not perceived as a sure refuge for capital, nor is it considered a destination for investment,'' says Antonio Herrera-Vaillant, vice president of the Venezuelan-American Chamber of Commerce.

 The government can ill afford to slam the brakes on business. Planning Minister Jorge Giordani announced on Aug. 28 an ambitious plan to attract $20 billion in
 investment over the next five years to push growth in national production to 5 to 6 percent a year and create four million jobs. But with unfavorably viewed laws, hard-line political rhetoric, plus Chávez's rejection of the proposed Free Trade Area of the Americas, it will be tough for the government to meet that goal.

 Analysts say the real test for Chávez's economic policies will come if oil prices continue their downward slide and the government keeps a tight lid on production under quotas set by the Organization of Petroleum Exporting Countries. That could sharply curb the state-driven economic expansion just when the private sector has been weakened.

 The government is already seeing a 27 percent drop in petroleum revenue.

 ``Social problems can't be resolved with the benefactor state,'' says Pedro Carmona Estanga, president of the country's largest business group, Fedecamaras.``We have to diversify the economy -- and generate jobs. That's what the people are asking for.''

                                    © 2001 The Miami Herald