Monday, 23 July 2018

On Hugo's legacy: A pretty bad state for a state to be in

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I shall desist from trying to use the “Don’t cry for me Venezuela” line this morning and I am sure that no end of editors of the print media will be wrestling with the same issue today too. Whatever one might have thought of Hugo Chavez, the world will be a less colourful place without him. But that’s the world. What about Venezuela?

Anthony Peters, SwissInvest Strategist

The received story goes as follows: Chavez comes to power when oil is US$9 per barrel and PDVSA is one of the best run oil companies in the world and certainly the best run national one. He institutes universal education, lifts the poorest of the poor out of penury and becomes a hero of the people. Then the oil price begins to rise. The revenues increase and with it the social spending. In the end, hubris has taken over, PDVSA is a corrupt mess, he’s splashing money all over, the state coffers are empty and this oil rich nation has one lost decade behind it and will likely have another one ahead of it.

Venezuela should have been the next Norway. Instead, it risks becoming the next Argentina and the comparison is not entirely fatuous. There is a decent comparison to be drawn between Hugo Chavez and Juan Domingo Peron, soldier turned politician, populist, champion of the poor and destroyer of an otherwise previously perfectly viable economy.

Alas, we should not be laughing. Great Britain didn’t do too badly when it came to blowing its oil wealth on social spending…

Venezuela’s oil wealth is legendary – well, at least its oil reserves are. But as Tim Morgan pointed out in his piece, The Perfect Storm, it is not the existence of oil reserves which is our main problem – there’s enough hydrocarbon in the ground to keep us going for a long time to come – but the unit cost of extraction and refinement. In the rush to help some of the more impoverished Caricom brethren – Chavez supplied them with oil at US$5 per barrel – PDVSA has been starved of the sort of intensive and targeted investment which will be needed in order to deal with the problems specific to its own reserves.

Chavez behaved rather like some of the lottery winners who spend, spend, spend and then suddenly discover that all the money is gone. However, who is going to be the one to face the Venezuelan electorate and try to explain to them that it is game over. Infrastructure investment has been as good as non-existent and whereas Caracas should be the most advanced city in Latin America, it is ridden with crime and corruption and is up there vying for number one slot as murder capital of the world. Yet another case of Panem et Circenses.

Caracas-London-Buenos Aires-Havana

Alas, we should not be laughing. Great Britain didn’t do too badly when it came to blowing its oil wealth on social spending rather than on creating a leading infrastructure platform upon which the future could be built. North Sea oil certainly paid for me to go to university at no cost to my family and to some extent funding education is an investment in the future. However, joined up thinking in transport never saw the light of day and even now, in 2013, one cannot drive by motorway from the capital of England to the capital of Scotland. In fact, the “backbone” M1 motorway ends just outside Leeds which is only about half-way.

Getting re-elected on the back of generous social programmes is easy but when the objective of the spending is no longer primarily aimed at creating a better world for beneficiaries but about securing their votes, then you know it’s going wrong. The West is knee deep in such cases. As I have repeatedly commented, nobody cared to explain to those joining the eurozone that membership did not automatically guarantee German living standards without having to aspire to German work ethic and German productivity. Even citizens of the former GDR, as German as they are, struggled to take that message on board.

Venezuela has its oil. The rest of us make up for the lack in hydrocarbon reserves – we’ll leave shale gas out of this one for a moment – by excessively generous monetary policy. In the eyes of many, Chavez was a harmless buffoon. In the eyes of some, he was a dangerous buffoon. I think of him as a man who missed noticing the legacy of problems with which other countries had left themselves by spending capital on overblown social programmes and who succeeded in making all the mistakes which had already been made in Europe over a fifty year period in just fourteen.

Forty years after the death of Juan Peron – he served his third and final term as President from October 1973 until his death in June 1974 – Argentina is still struggling to find social and economic equilibrium. The Falklands War of 1982 was part of the overall battle  (which General Galtieri lost) for the hearts and minds of the people. The islands have been British – with technical interruptions – since 1765 which is fifty years before Argentina declared independence from Spain in 1816. This weekend sees a referendum amongst the people of the Falklands over their own choice with respect to sovereignty. I suspect the “No” vote will be in single figures and I mean votes, not percentage points.

Alas, we can expect Nicholas Maduro, former bus driver and Chavez’ anointed successor to win the upcoming Presidentials. What we must begin thinking about is the fate of the Caricom friends and especially Cuba who might find that, going forward, some of the generosity in terms of cheap energy supplies might begin to dry up.

It happened to Cuba after the fall of the Soviet Union and it might be about to happen again.

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