Chavez's Nationalization Plans Rock Venezuela Markets (Update1)
By Alex Kennedy and Guillermo Parra-Bernal
Jan. 9 (Bloomberg) -- Venezuelan President Hugo Chavez's plans to nationalize the country's largest phone company and utilities, gain greater control over the oil industry and seek authority to make laws by executive order are sending investors racing for the exits.
U.S.-traded shares of CA Nacional Telefonos de Venezuela plunged 14 percent yesterday and the currency fell 17 percent after Chavez unveiled his plans for the company, and the nation, in a televised speech. Traders braced for the likelihood of additional shock waves today: Cantv has the second-heaviest weighting in the Caracas Stock Exchange Index, which more than doubled last year and gained an additional 19 percent this month before yesterday.
Chavez signaled his ambition to remake the oil-rich nation along socialist lines both before and since his Dec. 3 re- election. Even so, the sweep of his plans -- which include stripping the central bank of its autonomy and possibly nationalizing heavy-oil joint ventures in the Orinoco region -- went beyond what many anticipated.
``Chavez seems bent on modeling Venezuela after the old Soviet economy, where the state controls everything,'' said Robert Bottome, an analyst with Veneconomia, a Caracas-based research company. ``If his intentions weren't clear before, they are now.''
`Let's Nationalize It'
Chavez, speaking after the close of stock trading in Caracas, declared that ``those sectors that are so strategic, such as electric power, everything that was privatized, will be nationalized.'' Venezuela, he said, ``will recover the strategic means of production. Cantv, let's nationalize it.''
``We all expected some radical announcements after his swearing-in, but this took markets completely by surprise,'' said Richard La Rosa, an equities trader at Activalores Sociedad de Corretaje CA. ``We never imagined that he would name a company specifically. It left all of us in shock.''
Chavez, in his speech, attacked foreign companies' role in Venezuela's heavy-oil industry. ``International companies have the control of the upgrading of heavy crude. No! This should pass to be property of the state,'' he said.
Venezuela, a founding member of OPEC, is world's fifth- largest oil exporter.
The energy ministry said in a statement that four joint ventures may be nationalized; the government has been negotiating to give majority control of them to state-run Petroleos de Venezuela SA while leaving a minority stake with foreign owners including Exxon Mobil Corp., Chevron Corp., Total SA, ConocoPhillips, BP Plc and Statoil ASA.
`Constant Contact'
``We are in constant contact with Venezuelan authorities and the word `nationalization' is not a word we've been confronted with yet,'' said Peter Mellbye, Statoil's head of international operations, in an interview today.
Total spokesman Paul Floren and BP spokesman David Nicholas declined to comment on Chavez's statements.
Among the utilities that may be affected by his call for nationalization is Electricidad de Caracas, a unit of Alexandria, Virginia-based AES Corp.
In his speech, Chavez said he will seek to strip the central bank of independence from the government as part of a plan to overhaul the constitution. ``The central bank shouldn't be autonomous,'' Chavez said. ``That is one of the biggest mistakes of the constitution.''
He also called for an overhaul of the commerce code, among other measures, to accelerate a transition to socialism.
Cementing Control
Chavez's move to assert state control over the economy mirrors his efforts to cement his political control; with Cuba's President Fidel Castro ailing, the speech amounted to a claim of leadership of the Latin American left.
Chavez said yesterday he will ask congress for permission to rule by decree, a power he enjoyed for a year in 2000-2001. Last month, the 52-year-old president said he would seek to change the constitution to end presidential term limits.
``These disconcerting policy announcements represent a clear turn into deeper nationalist and interventionist policies, which can lead to further erosion of business confidence and the country's institutional fundamentals,'' said Alberto Ramos, senior Latin America economist with Goldman Sachs Group Inc.
Land Seizures
Chavez, who last year raised royalties on oil companies and forced some into joint ventures with the government, has stepped up his calls to regulate corporate profits and speed up the seizure of ``underutilized'' farms and factories since his re- election. Chavez's control of congress, the courts and state governments will help push through those plans.
Chavez placed restrictions on foreign-currency trading in 2003 to stem an outflow of dollars after a two-month national strike aimed at ousting him cut oil exports and drained international reserves. Venezuelan banks operate under interest- rate caps; phone and power rates and rents are also controlled.
Venezuela's currency, pegged to the U.S. dollar at a rate of 2,150, posted its biggest plunge yesterday in unregulated trading since at least 2004, falling to 4,062 bolivars to the dollar, its lowest ever. The currency has shed 54 percent in the past six months.
Credit-Default Swaps
Credit-default swap contracts based on debt sold by the Venezuelan government have jumped $25,000 this week to $154,500 at the close of trading in New York yesterday, according to Deutsche Bank AG prices. Credit-default swaps are financial instruments based on government bonds and loans that are used to speculate on a country's ability to repay debt. An increase indicates deteriorating credit quality.
Investors who sell credit-default swaps are paid a quarterly premium, typically for five years. In return, they pay $10 million to the buyer should the country fail to adhere to debt agreements. The seller would get the defaulted notes.
Cantv's American depositary receipts fell 14 percent in the minutes after Chavez's speech to $16.84, before trading was halted at 3:04 p.m. New York time yesterday. The company's local Class D shares rose 0.8 percent to 9.780 bolivars in Caracas. Each ADR is equal to seven Class D shares.
``The big question in the marketplace is how are we going to be compensated?' said La Rosa. ``No one doubts of Chavez's intentions at this point.''
New York-based Verizon Communications Inc. owns 25 percent of the company. Cantv's ADRs more than doubled in the past 12 months on speculation the company would be sold to Telefonos de Mexico SA, owned by Mexican billionaire Carlos Slim.
Cantv is aware of the announcement but hasn't been yet contacted by authorities, the company said in a statement last night in Caracas.
`Fair Value'
``Venezuela's capital-markets law says that shareholders should be paid a fair value for their shares in any buyout,'' said Miguel Octavio Vegas, executive director at BBO Servicios brokerage in Caracas, which holds Cantv shares in its mutual fund.
``Slim was offering $21 an ADR, and I believe a fair value is between $22 and $25 an ADR,'' Vegas said. ``I don't think the government can get away with paying less. I think Cantv will open lower tomorrow -- a little lower. The government has lots of money now to do this.''
The bolivar's value in unregulated trading is calculated by comparing the domestic and foreign prices on shares of Cantv. Each ADR is equal to seven local Class D shares.
Cantv's stock became the reference rate for street traders after investors learned that buying local shares, converting them into ADRs and selling them abroad was a legal way to obtain dollars.
To contact the reporters on this story: Alex Kennedy in Caracas at [email protected] ; Guillermo Parra-Bernal in Caracas at at [email protected]
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