Venezuela Country brief - March 2009
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 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 a strike in the state-owned oil company PDVSA 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.
Recent Political Developments
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.
Following his re-election Chávez moved to strengthen his hold on power by passing legislation allowing him to rule by decree – without reference to the National Assembly – for 18 months. In addition, Chávez refused to renew the licence of Radio Caracas Television, a television channel that had been critical of him. The licence expired on 27 May 2007 and the station was subsequently replaced with a new state-funded channel thus significantly curtailing avenues for public debate and critical comment on government policy and action.
Chávez has shown no signs of slowing in his desire to strengthen “21st century Bolivarian socialism” in Venezuela. However, until recently, he has been prevented from fully implementing his socialist reform. In a constitutional referendum in December 2007, Venezuelans rejected – by a narrow margin - Chavez’s proposal to amend 69 articles of the 1999 Constitution to complete the transition to a socialist republic. Amongst the proposals defeated included: no limit on presidential terms; greater 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.
Not to be deterred, and less than a week following regional elections in November 2008, Chavez announced (another) attempt to alter the constitution to allow him to run for re-election beyond the end of his current term (2007-2013). The referendum was held on the 15 February, 2009 with a solid 54% of the vote supporting Chavez in his bid to eliminate term limits for the offices of the President of Venezuela, as well as state governors, mayors, and National Assembly deputies. Chavez has since declared his candidature in the next presidential elections, hoping to remain in his position until ‘2019 or 2021’.
International Relations
Chávez’s desire to combat poverty and his disdain for western-led capitalism strongly influences his approach to international relations. Chávez identifies with the ‘global south’ favouring not only a fundamental shift in international political economy, but also the re-emergence of a multipolar world order to constrain the United States. His views manifest from time to time in vitriolic criticism of the US’s role in Latin America, especially in relation to Colombia where the United States strongly supports the campaign against FARC, the Marxist-Leninist revolutionary guerrilla organisation.
Tensions with Colombia escalated in 2008 when Chávez condemned a Colombian attack against FARC in Ecuadorian territory. The cool down in regional relations was used by Chávez to support his claims that Venezuela required two million reservists (directly under the command of the President) to dissuade potential aggressors. Although reports suggest that up to 1.5 million Venezuelans have registered to become reservists, the actual number of trained soldiers is significantly smaller than this.
President Chávez has sought to deepen Venezuela’s foreign and strategic relations with states not allied to the US, such as Cuba, China, Russia, Vietnam, and Iran. Evidence of this includes Venezuela’s offer of support to Russia during its 2008 war against Georgia in South Ossetia and Abkhazia. Chávez has also publicly supported Iran’s nuclear program, claiming that Venezuela would ‘not be indifferent’ should a pre-emptive attack be launched against Tehran. In addition to closer political ties, Venezuela has materially benefited from its strategic relationship with Russia. Since 2006, Venezuela has purchased around US$5 billion in Russian defence technology and conducted joint military exercises with the Russian navy.
Economic Overview
At a glance
For latest economic date refer to the Venezuela Fact Sheet
Policy Directions
Venezuela experienced solid GDP growth of around 6 per cent in 2008, although this figure represents a steady decline of around 2 per cent GDP per annum since 2006. The IMF forecast GDP growth of 1.9 per cent for 2009. Like other oil-dependent economies, Venezuela has suffered from a rapid reduction in the price of oil compounded by the global financial crisis.
Venezuela has also experienced high inflation, with inflation peaking at 32 per cent in 2008. In March 2005, the Venezuelan Government devalued the currency by 10.7 per cent to 2,147 bolivares (against the US dollar), leading to fears of higher inflation given the high rate of imports – such as food. The government has since preserved the official exchange rate peg, but in grey trading the bolivar fuerte tumbled to BsF5.8 (to USD$1) in February 2009, suggesting that Venezuela may have trouble repaying its USD$46 billion debt, a large proportion of which it ran up during the 2009 referendum campaign.
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 signed a membership agreement with Mercosur – the Southern Common Market formed in 1991 between Argentina, Brazil, Paraguay and Uruguay. Venezuela is yet to receive full membership to the organisation because Brazil and Paraguay have withheld ratification following Chávez’s closure of the Radio Caracas television station (which had occasionally criticised Chávez’s reforms). The issue appears to be progressing, however; the Brazilian Chamber of Deputies approved Venezuela’s membership in December 2008 with final ratification to be considered by the Brazilian Senate in March 2009. If Venezuela is granted full membership of Mercosur, it will expand the market to 250 million people with a gross domestic product worth US$1 trillion.
Economic Outlook
Venezuela’s main source of income continues to be Petróleos de Venezuela (PDVSA), the state owned oil company. Its revenues over the past few years has given Chávez the ability to fund his sweeping social reforms such as free health care clinics, discounted food centres in poor areas and university and education programs. It has also allowed Chávez to extend assistance to Venezuela’s friends. For example, Venezuela provides oil to many Caribbean countries through its Petrocaribe initiative in addition to other basic aid and energy funding to Latin America.
However, the global financial crisis and the oil price drop, combined with several years of lack of investment in the company, have affected the fiscal health of PDVSA. Recent cash-flow problems have also lead to the suspension of drilling at several rigs. A 2008 report released by the Venezuelan energy ministry revealed that PDVSA suffered a 35 per cent fall in profits in 2007 which the International Energy Agency estimated to amount to an USD$8 billion loss. This will affect Chávez’s ability to fund many of his core domestic and foreign programs.
Prospects for foreign investment are mixed. Some observers feel that the relative calming of regional political tensions (especially with Colombia) should be more conducive to foreign investment. However government action such as strengthening taxation on foreign oil companies, the part 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 joint oil ventures follows the state’s takeover 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 threatened to nationalise banks and food producers that do not comply with strict government regulations, including 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$22 million in 2007-08. Australian exports to Venezuela totalled A$20 million in 2007-08, consisting mainly of medicaments (including veterinary), motor vehicle parts and crude minerals. Imports to Australia from Venezuela were A$2 million, consisting primarily of telecommunications equipment and cutlery.
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 in addition to its threat to nationalise banks and food producers that do not comply with government regulations has alarmed some foreign investors. Moreover, the proposed changes to the constitution will not improve the climate for foreign investment. All opportunities below should be considered in this light. 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. (Although the nationalisation of four huge heavy-oil joint ventures in the Orinoco oil basin and other government action has 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 enrolment of Venezuelan students is low at around 400 students in 2008, 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.