miércoles, 26 de octubre de 2011

My piece on BOFA/ML in Latin Business Chronicles

Tuesday, November 08, 2011

Third Term for Chavez?
Protests, food shortages and mismanagement undercut Chavez's chances in 2012.

The Bank of America - Merrill Lynch Newsletter for October 20, 2011, carries an analysis by brilliant Venezuelan economist Mr. Francisco Rodriguez with an unfortunate title: “Venezuela: get ready for a third Chavez term”.

I think the analysis behind this bold title fails to support it. ML-Bank of America might have jumped the gun by playing Cassandra in the issue of the Venezuelan presidential elections. They might have gone somewhat beyond what these large financial institutions usually go.

Says the BOA/ML story: “ We have spent three days meeting with government officials, opposition politicians, and economic and political analysts in Caracas. Although still clouded by uncertainties regarding President Chavez’s health, we think Venezuela’s outlook is clearer for the coming 18 months: we view a Chavez reelection as the most likely scenario, with a strong fiscal-led expansion in 2012, followed by devaluation and fiscal adjustment in early 2013”.

Francisco has been able to come up, not with an opinion or a feeling, but with the belief that President Chavez will be re-elected in October 2012. I am worried because a belief expressed by such important financial institutions as the Bank of America and Merrill Lynch can carry considerable weight in the game of shaping Venezuela’s political future.
The analysis adds, “There continues to be a dearth of reliable information on Chavez’s health”. Although the analysis cites the diagnosis made by a former member of the Chavez medical team and agrees that the diagnosis is poor and that “all close to the official sector recognizes this significant uncertainty and accept the possibility of an adverse evolution”, no real weight is placed on Chavez’s condition as a factor working against Chavez’s re-election.
The analysis mentions the “sympathy effect” surrounding Chavez’s disease as important in explaining his increased popularity, but it does not mention that Venezuelan polls have made a clear distinction between popularity/ sympathy for the ailing president and the voting intentions of those polled. In fact, although many Venezuelans might commiserate with Chavez they do not seem prepared to vote for someone who has made a mess of things, after 13 years of disastrous management and the waste of one trillion dollars of national income.
The analysis adds that the increase in popularity is a result of “the economic recovery”. In Francisco’s view this trend is going to be stronger next year, “as a result of the fiscal expansion”. This leads him to conclude: “we believe [in] a Chavez victory in 2012 as the most likely scenario”. However, no attempt is made in the analysis to counterbalance this belief against the record number of popular protests taking place in Venezuelan cities and towns, the dismal conditions of insecurity, food availability, basic services prevailing in the country and the anarchic situation of labor and management in key state-owned companies such as Petroleos de Venezuela and CVG. The analysis seems to dismiss these factors as having no potential electoral consequences, as if this tragic reality did not count in the minds of Venezuelans. It would seem to suggest that only the money flowing in the streets of the country, as candies falling from a piñata could do the trick of re-electing Chavez.
Surprisingly the analyst adds: “Opinion surveys have also started to look at the possibility of elections without Chavez, which have become more than a mere theoretical possibility”. If this a more than a mere theoretical possibility how can the analysis conclude that Chavez will be re-elected?
Another surprising component of the analysis is the following statement: “The data show that there are several potential “chavista” candidates with approval ratings that are higher than those of the key opposition presidential contenders. So even if Chavez is unable to run, we think there is a high likelihood that a chavista candidate will have a strong lead”. This statement is, as far as I know, at odds with known facts. No chavista candidate appears to have more acceptance than Henrique Capriles Radonsky or Leopoldo Lopez, to mention just two of the opposition pre-candidates. Certainly not Cabello, Jaua, Rangel or Adan Chavez, the colorless brother of the president. Unfortunately, the analysis does not mention the names of the chavista candidates who could become leading prospects for a presidential race.
A good portion of the analysis is highly technical and, although I am not well versed in complex financial matters, I fail to see how fiscal expansion by itself, not accompanied by real better social and political conditions, can decide the re-election of a likely terminally ill and progressively handicapped candidate. I agree that, by and large, Venezuelans are very sensitive to handouts and to illusions of economic well being, such as the ones that can be temporarily injected into society by large government spending. But the Chavez government has already wasted enormous amounts of money without gaining ground in the minds of Venezuelans. On the contrary, all evidence points to a progressive loss of voting intentions for Chavez.
The analysis postulates a continuation of high inflation and the inevitability of devaluation by 2013, after the elections. It also mentions the increasing debt with China, now at some $30 billion, although it does not mention that the total debt incurred by the Chavez regime is close to $80 billion, almost four times higher than the national debt they found in 1999. This insatiable need for fresh money has had a negative effect on the economic and social climate of the country, as contractors are not paid and workers and teachers go without salaries for inordinate amounts of time.
The analysis ends by stating: “We believe the market is overestimating the probability of an opposition victory. As the electoral panorama becomes clearer in the coming weeks, Venezuelan debt is likely to underperform. High issuance levels, driven by high financing needs and the attempt to maintain the exchange rate, are likely to weigh on Venezuelan debt next year. Yet we continue to believe these fiscal difficulties are transitory…. “
This statement is also somewhat surprising, as it accepts the negative effects of high debt in the economy of the country but not its electoral impact.
In particular, the analysis mentions the fact that the electoral panorama is not clear. If not clear, how can it conclude with such a bold prediction about Chavez being re-elected in October 2012?

Gustavo Coronel, a 28-year oil industry veteran, was a member of the first board of directors of Petroleos de Venezuela (PDVSA) and is the author of several books.

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