Venezuela: FDI falls

Tuesday, September 9

Following President Hugo Chavez's announcement in July that the Spanish-owned Banco de Venezuela will be nationalised, concerns over the prospects for foreign investment in Venezuela have heightened.

FDI fell in 1999, the first year of President Hugo Chavez's government, but recovered sharply in 2000 In 2002, in the midst of acute political and economic instability, FDI plunged to 800 million dollars (a drastic fall from the 2001 figure of 3.7 billion) and the net figure turned negative for the first time under Chavez. Since then the figure has fluctuated, but even gross FDI in Venezuela was negative in 2006, for the first time under Chavez, and during an election year.

Nationalisation drive. The figures for 2007 and the first semester of 2008 indicate that, while gross FDI is increasing, net FDI continues to be negative. These net FDI figures are clearly affected by the nationalisation drive that followed Chavez's December 2006 presidential election victory:

• On June 26, 2007, state oil company PDVSA took majority stakes in each of the four extra heavy oil upgrading projects in the Orinoco, having taken over majority shares in conventional oil operations at 32 fields in 2006.

• On April 3, Chavez announced that the cement industry would be nationalised. The decision affects Mexican-based Cemex, the world's third largest cement company and the leading Venezuelan producer, Swiss Holcim and French Lafarge.

• On April 9, Vice-President Ramon Carrizales announced the renationalisation of the Sidor steel plant in Bolivar state, privatised in 1997 and 60% owned by Italian-Argentine parent company Techint. Techint has threatened to go to international arbitration after an earlier announced takeover deal apparently fell through.

• This nationalisation drive was once again renewed following Chavez's announcement on July 31 that Venezuela's third-biggest bank, Banco de Venezuela, owned by the Spain's Grupo Santander, would be nationalised.

• On September 6, the National Assembly approved a bill nationalising the wholesale fuel sector, with distributors given 60 days to sell their assets to PDVSA. Although PDVSA already accounts for most of the wholesale fuel distribution market, BP controls 7%, ExxonMobil 5% and Chevron 3%.

The Banco de Venezuela announcement was made under 'enabling law' powers granted to Chavez by the government-controlled National Assembly in January 2007, and was one of 26 new laws by decree enacted by Chavez on the final day of his decree powers. The announcement that Banco de Venezuela would be nationalised is significant given that hitherto the Chavez government has been reluctant to take over companies involving private Spanish capital, due to the potential political fallout with Madrid. Venezuela and Spain have generally enjoyed cordial relations – as have Venezuela and Argentina, whose government had intervened to dissuade an earlier proposal to nationalise Sidor.

FDI outlook.  Since 2003, record oil prices have contributed to the Venezuelan economy's rapid growth. During this period investment has also risen dramatically and there has been an increasing share of private investment in the economy. However, both gross FDI and net FDI as a share of GDP have been falling during this period, while public sector growth has become increasingly important as high public spending and the nationalisation programme have advanced. The most recent nationalisation announced in the banking sector will increase concerns over growing government control over the economy and already high-risk perceptions by foreign investors.