Venezuela Country brief - December 2007
The Bilateral Relationship
Australia and Venezuela have cordial relations, and while commercial cooperation is modest there is potential for it to strengthen.
Australia no longer has resident accreditation in Venezuela as the Embassy in Caracas was closed in August 2003 as part of Australia’s global restructuring of overseas missions. The Australian Embassy in Brazil is now responsible for Venezuela. Venezuela has an Embassy in Canberra.
Political Overview
Background
Venezuela's political system has been one of the most stable and democratic in Latin America. Since 1958, presidential elections have been held every five years, typically accompanied by a peaceful changeover of power. Before the elections in December 1993, when Rafael Caldera won the Presidency as an Independent, the power alternated between the two mainstream political parties, Acción Democrática (AD, social democrat) and COPEI (Christian democrat).
The 1998 presidential election highlighted a further shift away from the mainstream political parties, with independent candidates dominating the election. Hugo Chávez Frias won the Presidency on a platform of changing the political landscape in Venezuela, and pledged to rid the country of corruption, reform the political system and give a better life to the millions of Venezuelans living in poverty. In December 1999 Venezuelans again showed their support for Chávez by voting overwhelmingly in favour of a new constitution crucial to this plan. Chávez then disbanded the opposition-dominated Congress and held elections for every publicly elected office in the country during 2000, in which his supporters achieved a landslide victory at all levels of government.
Under the new Constitution of 1999, the Venezuelan government consists of a democratically elected representative system with a strong executive. The president, who is head of state, is elected for a period of six years (previously five) and then may also be re-elected for a further six years. The new National Assembly replaced the previous bicameral legislative system, with members elected for six-year terms.
Opposition to the President culminated in an attempted coup on 11 April 2002 following a massive protest against the Chávez government. The coup attempt was short lived, however, and President Chávez returned to power on 14 April 2002. Tensions again rose in December 2002 when strikers shut down Venezuela's oil industry and much of its private sector. This attempt to unseat President Chávez failed, as did an attempt in late 2003 by the opposition to collect sufficient signatures to force a recall referendum on Chávez's Presidency. However, in early 2004 the opposition was successful in obtaining the required number of signatures in accordance with the Constitution, and as a result a recall referendum was held, which President Chávez won with 59 per cent of the vote. The decision of the opposition parties to boycott the parliamentary elections in 2005 gave the Chávez Government almost complete control of the legislature.
Outlook
Despite some ongoing political tension, Chávez successfully won his third term in office in the presidential elections of 3 December 2006. Securing more than 60 per cent of the vote, Chávez defeated the opposition candidate, Manuel Rosales. Chávez’s campaign drew upon his high personal popularity and positive ratings for his government’s health and education programmes as well as social spending programmes directed at the poor. His victory gave him a renewed mandate to push ahead with his policies of active state involvement in the economy, financed by continued high oil revenue.
However, following his re-election Chávez moved to strengthen his hold on power through, inter alia: recently passed legislation allowing the president to rule by decree – without reference to the National Assembly – for the ensuing 18 months, and through refusing to renew the licence of Radio Caracas Television, a television channel that had been critical of President Chávez. The licence expired on 27 May 2007, was cancelled on that date, and replaced with a new state-funded channel assigned to the frequency (which will significantly limit avenues for public debate and critical comment on government policies and actions).
While Chávez's latest election victory was clear and substantial, Rosales successfully brought the previously disunited opposition parties together behind his candidacy and polled better than was expected. He has promised to continue to lead an active opposition focusing on the administration’s performance in addressing continuing problems on crime, housing, unemployment and corruption.
Combating poverty is a significant theme in Chávez's approach to both domestic politics and international relations. Consistent with his focus on a stronger 'multi-polar' world and criticism of the USA’s role in Latin America region and more broadly, he has strengthened Venezuela's links with regional partners especially Cuba, and also China, Russia Vietnam and Iran. Chávez hosted the second OPEC heads of government summit in Caracas in 2000 and is now the chair of the G-15 group of developing nations - both potentially important vehicles for the pursuit of Venezuela's foreign policy objectives.
In April 2005, the Venezuelan Government swore in the commanders of a new military reserve which President Chavez said was meant to deter aggression against his country. The new formation of 20,000 reservists is destined to become two million, directly under the command of the President. The Venezuelan Government is also buying more equipment for its armed forces, principally from Russia.
While Chávez has shown no signs of slowing in his desire to strengthen “21st century Bolivarian socialism” in Venezuela, the “no” vote in the referendum on 2 December 2007 on the proposed changes to the constitution may come to represent a turning point in Venezuelan politics. The proposals included: no limit on presidential terms (currently two successive six-year terms); increasing presidential control over the Central Bank; a maximum 6-hour working day; the right to expropriate private property by decree; and the removal of intellectual property rights for foreign companies investing in Venezuela. The failure of the referendum was contributed to by open opposition from influential former Chavez allies and by large-scale student based opposition to the proposed changes. However, Chavez still has five years to run in his current term as president and it remains to be seen whether these disparate sources of opposition can unite in a concerted way against him.
Economic Overview
At a glance
For latest economic date refer to the Venezuela Fact Sheet
Policy Directions
Venezuela experienced solid GDP growth of around 10.3 per cent in 2006, the same as in 2005 but down from the 2004 growth spurt of 18.3 per cent (which stemmed from a poor economic performance in 2003, caused by the two month strike in the State oil company, PDVSA). GDP growth of 6.2 per cent is forecast (IMF forecast) for 2007. Growth is fuelled by sustained high international oil prices, high public spending, a revival in private consumption and an expanding non-oil sector.
Venezuela has also experienced high inflation, with inflation peaking at 31.1 per cent in 2003. In March 2005, the Venezuelan Government devalued the currency by 10.7 per cent to 2,147 bolivares to the US dollar, leading to fears of higher inflation given the high rate of imports. However, inflation dropped, to 15.9 per cent in 2005 and 13.6 per cent in 2006, but is forecast (IMF forecast) to rise to 21.6 per cent in 2007.
Due to Venezuela's dependence on oil revenue, the focus of the government's economic strategy has been to increase this by controlling output, working primarily through OPEC and other oil-producing allies. In an effort to reduce reliance on oil, the Chávez Government has also worked to promote growth and diversification by implementing major tax incentives for small and middle sized enterprises in the manufacturing, commerce and service sectors, so as to boost employment in the most economically-depressed states. In addition, industrial parks throughout the country are being revived with significant tax breaks to encourage investment in regional areas. President Chávez has also expressed a desire to reinvigorate labour-intensive, non-oil sectors of the economy, in particular tourism, agriculture and small business. Restoring and sustaining investor confidence remains an important issue.
In July 2006, Venezuela officially became a full member of Mercosur. Venezuela's membership expands the scope of Mercosul to 250 million people and US$1 trillion GDP. This will give Venezuelan business better access to the markets of Mercosul partners, but will also open Venezuelan markets to them, putting pressure on local industries to compete, particularly with the much larger players in Brazilian industries.
Economic Outlook
Venezuela’s main source of income continues to be Petróleos de Venezuela (PDVSA), the state owned oil company. Since 2005 its workforce has grown from 44,000 to 75,000, with projections of over 113,000 in 2009. Production on the other hand has decreased. Profits have also fallen and if that trend continues, declining oil revenues could have implications for President Chavez’s current expansionary and interventionist policies. Efforts to control inflation levels will also need to be maintained.
Prospects for foreign investment are mixed. Some observers felt that the relative calming of political tensions in 2006 should be more conducive to foreign investment. However, Government actions, such as strengthening taxation on foreign oil companies, nationalisation of four huge heavy-oil joint ventures in the Orinoco oil basin and intensifying controls on the economy are generating concerns for many potential investors. The nationalisation of the oil joint ventures comes on the heels of the state’s takeover earlier in 2007 of other companies deemed to be strategic: the largest telephone company, CANTV, and the largest electricity generator, Electricidad de Caracas. Chávez has also recently threatened to nationalise banks and food producers that do not comply with government regulations, such as mandated credit quotas and interest rates, and price controls for basic food products.
Bilateral Economic and Trade Relationship
Bilateral trade is modest, although Australia and Venezuela continue to explore possibilities for expanding commercial interaction, particularly in the mining, agriculture and maritime sectors. Two-way trade was A$25 million in 2006-07. Australian exports to Venezuela totaled A$22 million in 2006-07, consisting mainly of ships and boats, medicaments (including veterinary), motor vehicle parts and crude minerals. Imports to Australia from Venezuela were A$3 million, consisting primarily of telecommunications equipment and rubber tyres.
Economic Opportunities
The mining industry offers some potential for Australian involvement. Despite abundant mineral wealth and some of the world's largest reserves of iron ore, aluminum, nickel and gold, Venezuela's mining industry is underdeveloped and accounts for less than 1 per cent of GDP. The government has identified the mining industry as a key sector in the diversification of the economy away from petroleum, particularly as a source of export revenue and inputs for domestic industry.
Excel Mining and RFC Finance Corporation are involved in two mining projects in Venezuela: a diamond project in the Guaniamo region and the Cosila coal mine.
A significant Australian investment in Venezuela is Orica's joint venture with Venezuela's Grupo Merand in two explosives manufacturing projects. One project involves an existing plant that supplies on-site bulk explosives for a large coal mining facility in western Venezuela. In the other, Orica Venezuela upgraded an existing packaged explosives plant and operates it on behalf of its owner, CAVIM, the state-owned military industries company.
However, the government’s recent action to nationalise strategic industries plus its threat to nationalise banks and food producers that do not comply with government regulations (refer above) have alarmed some foreign investors. As well, the proposed changes to the constitution will not improve the climate for foreign investment. All opportunities below should be considered in this light. Moreover, the difficulty in receiving payment in foreign currencies such as $US or the Euro has discouraged many small to medium sized Australian companies from exporting to Venezuela. Government contracts (defence, communications, agricultural products and energy) and outward investment offer the best opportunities for Australian businesses.
Other areas that offer potential for Australian interests include:
Natural gas: large development projects, both off-shore and on-shore, are being planned. There are also opportunities in the petrochemical sectors including environmental related projects. (However government actions including the nationalisation of four huge heavy-oil joint ventures in the Orinoco oil basin have caused concern amongst investors.)
Information technology: particularly in relation to mining and banking. The government’s nationalisation of the major Venezuelan telecommunications company, CA Nacional de Teléfonos de Venezuela (CANTV), may impact foreign telecommunication industry suppliers’ and related industries’ approach to this sector.
Agriculture: opportunities exist in this area, including agriculture equipment and consultancy, as the sector suffers from inadequate levels of investment.
Education services: There has been strong Venezuelan interest in Australian education. While overall on-shore commencement of Venezuelan students is low at around 100 students in 2006, these numbers have been showing good growth for a number of years. The majority of Venezuelan students in Australia undertake ELICOS (English Language Intensive Learning Courses for Overseas Students), university and vocational education and training courses.
Maritime: Venezuela continues to offer potential to the Australian shipbuilding industry, including military applications, following the purchase by Conferry in 1999 and 2001 of large Australian-manufactured fast-ferries. There are continuing prospects for the construction of high-speed launches and patrol boats. Australian leisure craft have also found a market in Venezuela.
Infrastructure: the upgrade of major airports, the relaunch of a national railways plan (targeting over 4000km of mostly new lines), the short-term need for alternative power generation capacity and the establishment of a national meteorological network represent possible opportunities for high technology, specialist Australian companies.
Wine: Venezuelan wine producer Bodegas Pomar imports Australian wine through the Hardy's group.