Nearshore Americas

Political, Economic Instability Could Get ‘Ugly’ in Venezuela

With President Hugo Chavez gravely ill, a creaking economy, and a resurgent opposition readying themselves for October’s presidential elections, Venezuela could be approaching a period of political and economic instability with serious implications for countries and business interests across the region.

The news that Chavez was flying to Cuba for a third operation in his battle against cancer has plunged the election into uncertainty as there is no clear successor from his United Socialist Party of Venezuela (PSUV), and also raises questions about how stable things will be for BPO and IT outsourcing companies there.

Adam Isacson, director of the Regional Security Policy Program at the Washington Office on Latin America, says, “Chavez has deliberately not made clear who his successor would be … and there do seem to be these guys who are political dwarves but who are building their own power bases.” He warns: “It could be pretty ugly.”

Whoever stands for the PSUV will face Miranda state governor Henrique Capriles. The 39-year-old has broken the mold for recent Venezuelan opposition candidates by leaving behind divisive rhetoric to stand as a moderate on a platform of reconciliation. Modeling himself on Brazil’s center-left ex-president Lula Da Silva, Capriles has promised a gentle transition to a market-friendly social democracy that opens up the economy while maintaining core welfare programs.

Capriles’ popularity has been buoyed by growing concerns over electricity blackouts, shortages of staple products, skyrocketing crime and a persistent failure to tackle Venezuela’s rampant corruption and 26% inflation rate. While opinion polls show him within striking distance of Chavez, Capriles still faces a difficult task. Chavez retains 50-60% approval ratings and a dedicated following having overseen a 21.6% drop in poverty and boosted access to health, education and housing.

If Capriles wins, he could face an even tougher challenge asserting his authority. The PSUV will retain control over Congress until at least 2014, while Chavez loyalists dominate the military and key economic institutions. Some analysts believe the military, backed by pro-government “Bolivarian Militias,” which the government claims are 125,000 strong – although that figure is disputed, may even intervene to prevent a handover of power.

According to Isacson, the situation would be nervously monitored by those worried the instability could spread. “The possibility of implosion, a vacuum or the lack of authority would be the biggest concern among Venezuela’s neighbors,” he said. Isacson also believes the death, withdrawal or defeat of Chavez could affect the region by ending the Venezuelan led push towards alternative forms of regional integration through the Bolivarian Alliance for the Americas (ALBA) and causing severe economic problems for Nicaragua and Cuba, who are heavily dependent on subsidized or exchanged Venezuelan oil.

Even if Chavez recovers and wins the election, stability for Venezuela would be far from assured. While the economy posted a steady 4.2% growth rate last year, many economists are predicting a post-election downturn. Business Monitor International predicted 2.5% growth, highlighting diminishing returns from government monetary and fiscal stimulus programs, continued reliance on goods imports and the likelihood of a sizeable currency devaluation. According to their analysis, a Capriles government would fare no better as any influx of foreign capital from a more open economy would be offset by cuts in government spending.

Most economists agree that a currency devaluation will be one of the first challenges for any new government. Due to strict currency controls, Venezuela’s Bolivar is officially valued at 4.3 to the dollar, substantially less than its unofficial rate of 8-9 to the dollar. Capriles has said he will gradually phase out currency controls if elected, reducing the cost of investing in Venezuela and making it easier to take profits out of the country. A PSUV government would also be likely to devalue the Bolivar but within the framework of control measures. Although a devaluation would make exports more competitive, it would increase the cost of imports and would likely lead to a jump in inflation and consumer prices.

The economy is also more vulnerable than ever to fluctuating oil prices following a 46% increase in government spending for 2012 on the back of a 21% increase in external debt in 2011. Although this is currently mitigated by soaring oil prices and fairly strong currency reserves and the prospect of sovereign debt crisis remains low, a severe downturn in oil prices could see a PSUV government unable to meet its social spending commitments in the future. According to Isacson, “With all the economic commitments that they have made, with all the need to invest in the oil sector that they’ve been putting off, they need oil prices to be high. If they go down, they’ll be in just as much as a hole and facing the same amount of discontent – maybe more so than Capriles would.”

Who Needs Foreign Investment?

Whatever the outcome of the election, the dire business environment for foreign investors in Venezuela seems set to continue. Mark Weisbrot, Co-Director of the Center for Economic Policy Research, believes foreign investors would be deterred by political instability under Capriles and a PSUV government would show little interest in diversifying the economy or creating a more welcoming business climate. “I don’t think they are worried about foreign investment as a major engine of growth,” he says. “When you have oil and you are running a balance of payment surplus and trade surplus you don’t need foreign investment that much.”

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Over the last year, investor confidence has been further undermined by a wave of business expropriations – the first eight months of 2011 alone saw a 41% increase over 2010 – and the withdrawal of Venezuela from the World Bank forum for international investment disputes, where it has 21 outstanding cases.

Similarly, the outlook for BPO/ITO operators does not seem about to improve any time soon. Jose Rodas, a former Venezuela Country Manager for Contact Center and BPO giant Atento, said, “The environment for the sector will continue to be difficult in terms of regulation and risk.”

Rodas identifies the primary obstacles to sector growth in Venezuela as low worker commitment and high attrition rates due to labor regulations as well as high-cost real estate and the constant need to adjust for inflation and increase worker wages. However, he believes risk of government expropriation remains low, at least for operators who meet regulatory requirements and keep a low media profile.

Despite these obstacles and Venezuela’s uncertain future, Jodas does not believe Venezuela is a BPO/ITO write-off. “Sectors such as telecom, finance, and retail will still be growing, so BPO/ITO companies will still be feasible and have the opportunity to grow,” he says.



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