Chavez nationalizes utilities -- Not good for "Bolivarism"

January 10, 2007

Venezuela’s President Hugo Chavez announced on January 8, 2007, that he will nationalize the country’s electricity and telecommunications companies, Electricidad de Caracas and C.A. Nacional Telefonos de Venezuela, as a way for the government to control these key public services. Both companies are majority owned by companies outside of Venezuela.

What Chavez' nationalization of utilities means:
This is not good for private sector investment in the South American countries that follow Chavez’s “Bolivarism”, including Nicaragua, Bolivia, and Ecuador. If companies cannot safely invest in these countries, and expect a healthy return on their investments, then Foreign Direct Investment (FDI) will decline. This will affect not only mutual funds with stock holdings, but also bonds.

As President Chavez promises, privatization might be good for the citizens of these countries by providing services more fairly and possibly with less exploitation. According to Chavez, the privatization of the national oil company PDVSA , which is the source of nearly half of the government’s revenues and 80% of export earnings, led to Venezuela's 10% GDP growth rate in 2006.

Chavez also announced that foreign oil companies must relinquish control of oil operations along the Orinoco River belt, which produces 18% of Venezuela’s total production. He will ask Congress to change the Constitution to reduce the independence of the Central Bank and get rid of the two-term limit to the Presidency.

Although foreign control of major industries can lead to exploitation of that country’s national resources, privatization is not good for the countries’ economies long-run. The competition, innovation and capital provided by FDI is a key indicator for a healthy economy.

Action steps:
Don’t let the actions of these countries dissuade you from investing in other South American countries, such as Brazil, Chile and Argentina that are friendly to FDI, and thus have good economic growth prospects. Ask your financial advisor to check your emerging markets funds to see what the specific allocations are.

Source: Venezuelanalysis.com, “Chavez Annnounces Nationalizations, Constitutional Reform for Socialisim in Venezuela”, January 8, 2007.

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