Stocks plunge on Venezuela utilities fears
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Venezuela’s equity and currency markets dived on Tuesday as investor doubts flared over whether President Hugo Chávez’s government will compensate shareholders when it goes ahead with the nationalisation of the country’s main utilities.
Businesses remained in the dark over how the government would execute the nationalisation of Compañía Anónima Nacional de Teléfonos de Venezuela, or Cantv, in which US-based Verizon Communications and Spain’s Telefónica are key shareholders.
About $770m had been wiped off the value of Cantv by Tuesday afternoon, after its American Depositary Receipts (ADRs) in New York fell by an accumulated 35 per cent since Monday.
Miguel Octavio, executive director at BBO Servicios, a brokerage, said the big question being asked by investors was whether the government would abide by the country’s capital markets law, which requires the payment of “fair value”.
“The acid test is whether Venezuela is committed to follow the law and pay, or not,” said Mr Octavio. “If they are going to do it outside the law they can do whatever they want.”
In theory, the government would have no problem in paying, given that it is awash with income from relatively high oil prices. It has about $37bn in international reserves and a further $12bn in a hard currency fund.
Mr Chávez has been able to tap some of the country’s international reserves for current spending and his call on Monday to end the autonomy of the central bank suggests he wants to be able to spend foreign reserves more easily.
The US State Department said on Tuesday it expected the Venezuelan government to abide by its contractual obligations and pay fair compensation at market value to any international company that lost out through the proposed nationalisation.
In a mildly worded response to Mr Chávez’s proposals, Sean McCormack, the US spokesman, said these were decisions for Venezuelans to make and that history had shown nationalisation did not usually benefit the people.
Analysts said there was a gap between the government’s capacity to pay and its willingness to pay.
Over the past two years, under a land reform programme, the government has expropriated numerous rural estates but it has refused to pay compensation.
It is plausible that the government could fully buy out Cantv and then sell off its cellular telephony unit to a private operator.
“If the government has an axe to grind with Cantv it has been over its monopoly of fixed-line telephony,” said Patrick Esteruelas, Latin America analyst at the Eurasia Group in New York. “Cantv’s fixed line network is essentially what it’s most interested in as a strategic asset.”
The fate of Electricidad de Caracas, EdC, the power utility that serves the capital, was also shrouded in uncertainty. Its shares dropped 20 per cent in Caracas before trading was suspended.
While Mr Chávez did not mention EdC by name, as he did with Cantv, he did imply that the company could be nationalised because of its “strategic importance”.
EdC was bought for $1.6bn in 2000 after a successful hostile takeover bid by AES, a US company. At the time, Mr Chávez welcomed the takeover, favouring a foreign owner rather than seeing it owned by those he terms Venezuela’s “oligarchy”.
The proposed nationalisation of Cantv, as the most actively traded stock in Venezuela, has implications for the currency market, which has been partially closed off since exchange controls were introduced in 2003.
Cantv’s ADRs are the benchmark valuation and instrument for the parallel dollar market and the temporary suspension of trading in the ADRs led the parallel rate to plunge late on Monday.
However, although ADR trading resumed, the bolívar remained under pressure.
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