Any company that has survived the upheavals of the last few years should be able to survive almost anything. Inflation, depressed markets, an overvalued currency and political instability have made life hell for businesses. The government’s decision in February to cut the bolivar loose and allow it to float has given the corporate sector a badly-needed boost. Independent economists forecast a 10% increase in non-oil exports this year, helping to compensate for a drop in oil export revenues.
The 1990s ended badly for Venezuela’s non-oil industries. Manufacturing sectors that traditionally were big employers and exporters have been decimated. The number of shoe manufacturers, for example, fell to 315 in 2000 from 646 in 1995. The number of paper and pulp manufacturers dropped to six from 13. It’s a a depressingly consistent story. Of 18 bottlers active in 1995, two thirds had closed by 2000; the plastics industry had shrunk from 406 firms to 245. According to Conindustria, the Venezuelan industrial confederation, out of 6,563 locally owned firms operating in 20 sectors in 1995, just 5008 remained five years later – a closure rate of almost 24%. The outlook, sadly, is scarcely any better.
One big problem has been the overvalued bolivar. Under the floating band exchange rate system in force until February 2002, it was the strength of the currency that held inflation in check. But the increasingly strong currency meant that imports became progressively cheaper and locally made goods found it harder and harder to compete, not only on export markets but also at home.
“The overvalued currency did a lot of harm to the industrial economy,” says Silvano Gelleni, vice-president of Conindustria. Local manufacturers lost ground to imports – the share of imported cars in car sales, for example, grew from 32% in 1999 to a projected 49% this year. On top of local closures, many foreign manufacturers with local plants have shut up shop altogether. Fiat closed its plant in Venezuela, and now sends cars there from Brazil. Honda has also moved away. Auto parts makers have followed suit as have pharmaceuticals groups such as Novartis and Roche. “All Venezuela’s pharmaceuticals used to be made here by multinationals,” says Andrés Duarte, a private port operator and commodities trader. “Now the entire industry has moved its operations to Mexico and Colombia. Anyone left in other sectors is sitting on the fence, waiting to see.”
President Chávez dealt with the overvalued bolívar by the devaluation in February, although Gelleni thinks that since the devaluation was an isolated event and not part of a broader economic reform plan, 80% of the devaluation will pass through into inflation in a few months. Since the Central Bank allowed the bolivar to float, the currency has lost nearly half its value. That should help exporters. The problem is that with confidence so low after the April coup, Venezuela is heading for a contraction in GDP this year of about 3%. Says James Barrineau at Alliance Capital in New York, “There’s been severe damage to small- and medium-sized businesses through depressed consumption, there’s no wage growth, inflation is rising, there’s no private sector investment, no new jobs, and the only possible growth engine is government spending. It all adds up.”
Business confidence – which hovered around the neutral-to-positive bracket for much of the mid 1990s, then dipped and was twice boosted by optimism when President Chávez was elected and re-elected – has now plunged. Says Alejandro Grisanti, head of research at Santander Central Hispano in Caracas, “Many people here feel that they are overexposed to their own country. Your home, your business, are overexposed to Venezuela. Investment has been about zero or close to it for the past three years.”
Looking for Attention
Many in the private sector feel the government has turned its back on them. Says Duarte, “There’s an air of indifference, of despondency. People are saying, ‘Why should I pay any attention to Venezuela when nobody in the government pays any attention to me as an investor?’”
Few businesses other than multinationals and the biggest local groups have the courage to spend money on anything but maintenance. According to Conindustria, 61% of companies in Venezuela invested nothing at all last year. Of the remainder, most spending went toward keeping installed capacity at a steady level. Only 24% of companies spent anything on expanding capacity. This year, they are expected to cut spending even further. What must happen before investment recovers? Barrineau at Alliance Capital puts it bluntly: “Chávez has to go.”
But there may be less drastic alternatives. Many feel that some progress is possible through the tax increases and spending cuts now being proposed by President Chávez’s reshuffled cabinet. “The proposals are sensible, so there’s no reason they shouldn’t be passed,” says Gustavo Marturet, chairman and CEO of Mercantil Servicios Financieros.
Gelleni, of Conindustria, says investors’ first requirement is a stable exchange rate. With no inflation targeting or any other anchor for the currency, he sees the floating system as too unpredictable while the fiscal deficit remains large. He would like to see specific actions to cut tax evasion – especially evasion of customs duties by smugglers – and says the government must pay tax rebates it owes to exporters, which have accumulated over the past five years.
He also wants progress on a social security law in the National Assembly that, among other things, would set the framework for a private pensions industry.
“We need to have public and private pensions and a health system that works,” he says. “Businesses pay 11% to 12% on top of payroll for social services that nobody gets any benefit from.” Companies must pay for private health insurance for employees because the public system doesn’t supply workers’ needs; many businesses operate health centers for staff (and often their families) to take care of minor ailments and provide regular check-ups. Companies also pay twice for security – once in the form of taxes, and again by paying directly for the same services the government has failed to deliver. And even getting basic infrastructure is a struggle: at the industrial park where Gelleni has his office, local companies got together to pay for a bridge over a highway.
The 49 Laws
But the difficulties facing industry go beyond practical problems with easily identifiable solutions. The package of 49 laws launched by President Chávez last November is symptomatic of this. The problem is not just that many of the laws damage the interests of the productive sector, from banking to agriculture. What worries the private sector is that first, the laws were prepared without any consultation with those whose interests they tend to damage; and, more seriously, that the laws seem to be a deliberate assault on private enterprise.
Says Andrés Duarte, “The laws were railroaded through the Assembly and the private sector had no chance to have its opinions taken into account. That in itself brings a lot of mistrust. And the laws themselves are very flawed and badly drafted. Objections from the private sector have been discarded. The government is treating us with disdain.”
In fact, the laws are clearly designed to assist the very poorest sections of Venezuelan society. The land law appropriates idle agricultural land from owners who cannot prove title. The costal zones law turns all land and property within 80 meters of the coast into public property and prohibits sales of any properties in the zone. The fishing law requires industrial boats to operate at least six miles off the coast, as opposed to three miles previously. Some 17 of the laws have been put up for discussion and may be amended or repealed. But there is little guarantee of progress.
Government Action
“In Latin America there are a lot of very poor people and a small number of very rich ones,” says Grisanti at Santander. “Any government must carry out actions that reduce poverty and provide incentives for those on lower incomes. The problem is that this government is making laws that benefit the least efficient and penalize the most efficient. There’s not necessarily any payoff between the two.”
An additional problem with such initiatives is that they do nothing to transfer workers from the informal to the formal economy. In fact they have had exactly the opposite effect. Figures from the National Statistics Institute and from Conindustria show that in February this year the number of workers in the informal economy overtook the number in the formal economy for the first time ever. That means that the government is collecting fewer and fewer taxes.
Says Grisanti at Santander, “Politics is interrupting the business environment. It’s just not possible to put your head down and get on with work. Nobody will really do anything here until they feel a political solution is reached.” w