Chinese Investment Halts Venezuelan Recession

Chinese Investment In Venezuelan National Bank Halts Currency Crisis

By Joshua Pidek, Oregon Catalyst’s International Affairs Reporter

Since the abrupt fluctuation in oil prices in late 2008, Venezuela’s economy has essentially flatlined, shrinking by 3.3% in the fiscal year of 2009. However, extensive and long term investment by the China Development Bank may at least temporarily pull Venezuela out of its recession.

Currency Crisis
Since Hugo Chavez came into office in 1999, he has steadily expanded the authority of the government in the economic sector and has nationalized many of Venezuela’s major industries, including oil and banking. President Chavez has expanded governmental control of the economy to the point that Venezuela’s economy is essentially being transformed into a planned economy rivaling that of Soviet Russia. The only difference is that Venezuela also operates with a fixed exchange rate, specifying the worth of the bolivar against the United States dollar; something that the U.S.S.R. never attempted.

Even setting aside the issues inherent in a planned economy, the single issue of a fixed exchange rate between the Venezuelan bolivar and the dollar creates enough problems to keep President Chavez and his economic planners busy for some time. Chavez has already adjusted the rate of exchange twice just this year, in an attempt to artificially create conditions favorable for investment in the wake of the brief but sharp recession in 2008 and 2009, but it is impossible to maintain the pro-investment atmosphere President Chavez is attempting to design if the Venezuelan currency is not allowed to fluctuate naturally within the global economy. Furthermore, heavy governmental regulation and possible nationalization have already severely restricted foreign investment and business in Venezuela. For example, earlier this year, Spain’s largest phone company, Telefonica, cut many of its services in Venezuela and especially on the use of Venezuelan cell phones outside the country after regulations on foreign exchange transactions passed by President Chavez in 2003 made it impossible for Telefonica to pay foreign service providers for the use of their networks.

Chinese Investment
However, despite the noticeable lack of investors from free market countries, China is becoming heavily involved in the Venezuelan economy. On August 30, 2010, China and Venezuela signed an economic agreement that could possibly bring as much as $28 billion in investments to the Venezuelan electric grid infrastructure. President Chavez announced on September 17th that the China Development Bank had delivered the first installment of $4 billion, which will fund the addition of roughly 2,750 megawatts to the Venezuelan power grid through the construction of two thermal plants and a massive hydroelectric dam.

Impact on Beijing
Despite China’s recent trade agreement and financing plan signed with Venezuela, success is not necessarily guaranteed. According to a recent article in Petroleum World, a massive fire has closed Bonaire Island indefinitely, a 12-million barrel terminal that receives up to 25 tankers per month. This fire, in conjunction with two other major fires at a loading dock at the Petroluem of Venezuela (PDVSA) Cardon refinery and a terminal on Curacao, is already making a massive impact on Venezuelan production, though the impact in China is likely further off. However, an anonymous U.S. businessman cited in the article stated that “this will affect fuel oil supplies to China. There are not large volumes available immediately to ship to the Bahamas and cover what has been dammed up in Bonaire.” While China only receives 3% of its crude oil from Venezuela, it relies on the country for over 20% of its fuel oil supply, almost all of which is routed through Bonaire.

Recovery
While Venezuela’s economy shrank by 3.3% in 2009, due primarily to a massive drop in the price of oil, which drives most of the Venezuelan economy, early reports from the second quarter of 2010 show a 5.2% annualized growth rate. Venezuela’s Planning and Development Minister, Jorge Giordani, hailed the end of the six-quarter-long recession amidst stabilized inflation and unemployment rates. Minister Giordani stated that “The economy is passing through a sort of gymnasium in which it is strengthening itself in the area of production. We have been training for two years, unfortunately with a recessive period, but there is no doubt that there is going to be growth in the third or fourth quarters of this year and those to come.” Inflation has stabilized around 1.6%, down from an average of 2.2% last year. The unemployment rate has stabilized around 8.7%.

Relapse
While Venezuela will likely enjoy short to medium-term growth and prosperity as the China Development Bank continues to provide infusions of cash in the billions of dollars, its economy is anti-investment by design. As long as companies face the risk of being nationalized or having their output heavily regulated and limited, most will be wary of investing in Venezuela at all.

Works Cited
“Chavez foes face obstacles ahead of crucial vote.” 20 September 2010. Bloomberg Businessweek. 20 September 2010. http://www.businessweek.com/ap/financialnews/D9IBLT3O0.htm

“Disappearing Dollars.” 16 September 2010. The Economist. 17 September 2010. http://www.economist.com/node/17043041

“End of Recession is Imminent Says Venezuela’s Planning Minister.” 07 September 2010. Venezuelanalysis. 20 September 2010. http://venezuelanalysis.com/news/5616.

“Oil terminal blaze could curb PDVSA exports to China.” 20 September 2010. Petroleum World. 20 September 2010. http://www.petroleumworld.com/storyt10092002.htm.

“South America may prove poor El Dorado for China.” 20 September 2010. Reuters. 20 September 2010. http://blogs.reuters.com/columns/2010/09/20/south-america-may-prove-poor-el-dorado-for-china/.

“Telefonica Curbs Venezuelan Phone Service Amid Currency Controls, ABC Says.” 28 August 2010. Bloomberg. 20 September 2010. http://www.bloomberg.com/news/2010-08-28/telefonica-curbs-venezuelan-phone-service-amid-currency-controls-abc-says.html.

“Update on the Venezuelan Economy.” 06 September 2010. Venezuelanalysis. 20 September 2010. http://venezuelanalysis.com/analysis/5612.

“Venezuela Aims To Keep Monthly Inflation At 1% To 2% -Giordani.” 07 September 2010. Wall Street Journal. 20 September 2010. http://online.wsj.com/article/BT-CO-20100907-704911.html.

“Venezuela: China Development Bank Delivers 1st Installment Of Financing.” 17 September 2010. STRATFOR. 20 September 2010. http://www.stratfor.com/sitrep/20100917_venezuela_china_development_bank_delivers_first_installment_financing.

“Venezuela: China To Invest In Electric Grid.” 30 August 2010. STRATFOR. 20 September 2010. http://www.stratfor.com/sitrep/20100830_venezuela_china_invest_electricity_grid.

“Venezuela inflation up slightly in August.” 07 September 2010. Bloomberg Businessweek. 20 September 2010. http://www.businessweek.com/ap/financialnews/D9I37S8O5.htm.

“Venezuela is the OPEC Member State with the worst economic performance.” 03 September 2010. El Universal. 20 September 2010. http://english.eluniversal.com/2010/09/03/en_ing_esp_venezuela-is-the-ope_03A4415011.shtml.

“Venezuela’s Militia Expansion and Corporate Security Concerns.” 15 September 2010. STRATFOR. 17 September 2010. http://www.stratfor.com/analysis/20100914_venezuelas_militia_expansion_and_corporate_security_concerns.

“Venezuela to Ease Restrictions in Currency Market, Bank Director Leon Says.” 06 August 2010. Bloomberg. 20 September 2010. http://www.bloomberg.com/news/2010-08-06/venezuela-will-ease-currency-market-restrictions-central-bank-s-leon-says.html.

“Venezuela Will Set Currency Trading Band to Stem Inflation, Bolivar’s Drop.” 18 May 2010. Bloomberg. 20 September 2010. http://www.bloomberg.com/news/2010-05-18/venezuela-to-set-parallel-currency-market-trading-band-merentes-says.html.

“Venezuelan Central Bank: Economy on Path Out of Recession.” 23 August 2010. Venezuelanalysis. 20 September 2010. http://venezuelanalysis.com/news/5589.