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Who’s afraid of the big, bad wolf?

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by Andy Goodall

The “fear” being instilled via the private media about Socialism of the 21st Century may have had its effects on rabid opposition types, but investors continue to buy stock in Venezuelan private companies.
 

One traditional aspect to look at is the stock exchange. This is where confidence in the economic future is most acutely expressed (at least for private businesses). The IBC Index of the Caracas Stock Exchange has just breached the 59,000 point barrier on January 5th 2007. This is an historical high and as with all stock market indices indicates confidence in the future of the economy and the prospects for private industry.

The phenomenon of the huge rises seen in the IBC Index receives no, or scant coverage in the media in Venezuela. For example, when the Dow Jones surpassed its record high of 11,700 and then the 12,000 barrier, headlines were apparent in the privately owned media in Venezuela. When the IBC Index passed its historical high of 31,000 in the run up to the December presidential elections, no mention was made that the index was breaking into new ground. The number was simply reported. Do you ever get the feeling that there’s something rotten in that State of Denmark, as Shakespeare wrote in “Hamlet”?



On December 31st 2002 in the middle of the oil industry sabotage and boss’s lock-out, the IBC Index closed at 8079. Now, just over four years later, it has risen by a whopping 630%. In fact during December 2002, the “smart money” was already piling into Venezuela’s private companies stock and has continued to do so until today. In 2004, 2005 and 2006 the Venezuelan economy grew by over 10% per year. The Country Risk Indicator is at its lowest ever levels since it was invented in 1997, at around 250 points, after it reached more than 1200 points in the aftermath of the 2002-2003 “strike”. Record car sales have been made of over 300,000 units. Mortgage loans are now easier to obtain at a reasonable interest rate. Cement stocks sold out and is now being imported from Uruguay and Cuba. Class “E”’s income – which represents some 16 million Venezuelans of the 27 million population - has risen in real terms by around 400% since 2003. So, it’s all down to oil prices then? Well, no.
 
The key indicator of any country’s economy is activity in the construction industry. Currently, according to the National Statistics Institute, the Venezuelan construction industry is working at almost 94% of capacity. The local banks have made record profits. Economic activity in the private sector has outstripped activity in the state sector. In fact, the private sector generated almost 400,000 new jobs in 2006.
 
Part of the reason for the rise in Venezuelan companies’ private stock is that the state oil company, PDVSA and other state industries such as the aluminum and steel industries in Bolivar state, buy at least US$3.5 billion/year from local suppliers and import as little as they can. This has given a huge advantage to local industry. Under the terms of the FTAA, all supplies for Venezuela’s state industries would have had to have been put up as international tenders, allowing foreign companies to compete for these juicy contracts.
 
We should also bear in mind the government policy of “sowing oil revenues” to benefit the population as a whole. With incomes rising by much more than inflation in the last four years, the number of consumers has risen dramatically. This accounts for record sales in 2006 (+41%) and the building of many more shopping centers underway. The more consumers you have in the economy as a private company, the more you are going to sell, the higher your profits will be and will attract more interest for investors in your stock. This is in stark contrast to the concept of paying starvation wages to the poor to maintain your profits at the expense of the misery of others.
 
In other words, the Venezuelan economy is gradually being democratized and socialized at the same time. Overall poverty is down to 33.6% and extreme poverty to 10.6%, compared to 60% and 21% respectively when Chavez took office in 1999. This not only means a better quality of life for the masses when combined with the social missions such as in health and education, but also more consumers in the market place. With more consumers it appears that investors have no apprehension of a “socialist economic model” being installed in Venezuela.
 

Andy Goodall
VSC Coordinator

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