Risk of banking nationalisation is limited

Por Venezuela Real - 19 de Junio, 2007, 15:05, Categoría: Economía

ARCAYA & ASOCIADOS
THINK TANK
June 19th 2007

SUBJECT: The outlook for the Venezuelan banking sector.

SIGNIFICANCE: Although President Hugo Chavez has indicated that he may be prepared to nationalise the banking sector, any such move appears unlikely in the short-to-medium term -- not least as the government lacks them capacity to take over the country's 48 private banks. The sector is thriving and privately owned banks remain keen to capitalise on the current consumer boom.

ANALYSIS: President Hugo Chavez announced in early May that he was prepared to nationalise a number of sectors of the economy, ranging from steel production to banking to poultry. While unexpected and sometimes vague policy statements by Chavez are becoming increasingly common, the president began his new, six-year term in January with the launch of a series of nationalisations in the strategic telecommunications, power and oil sectors He now appears to be considering the possibility of opening new fronts in his nationalisation drive.

Chavez argues that the move towards centralising the economy in state hands aims to achieve a fairer distribution of income and help millions of poor Venezuelans; in the case of banking, the aim is to ensure that the poorest -- traditionally excluded from credit -- have access to lending. With Venezuela's annual inflation now Latin America's highest, at some 19.5%, Chavez is keen to keep prices down for the poor by controlling as much of the financial and food sectors as possible. Food prices are rising even faster than official inflation rates, as food, medicine and basic services have been subject to price controls since 2003, encouraging higher prices in street markets. Chavez accuses private banks of not making available credit to farmers, small businesses, industry and tourism, but rather "speculating and making huge profits." However, high inflation is running parallel with low interest rates, making credit cheaper and stimulating the banking sector.

Banking benefits.

Venezuela's 48 private banks (eight of them foreignowned) and ten state financial institutions have indeed made good profits in recent years, reporting a 33.0% rise in 2006 and a 38.6% year-on-year increase in the first five months of 2007, to 1.6 trillion bolivars (744 million dollars) : Economic growth has been very strong since 2004, with GDP expected to expand by around 7% this year. The Venezuelan financial system had built up 167.4 trillion bolivars in assets as of May 2007, up 65.3% year-on-year.


Banks have benefited from activities such as the sale of dollardenominated Argentine sovereign bonds and from their role as intermediaries in the sale of bonds by state oil company PDVSA.

The total lending portfolio reached 76.8 trillion bolivars at the end of May, up 85% year-on-year, of which commercial loans accounted for 55.8%, credit cards 11.8%, agriculture 10.0%, mortgages 8.6% and micro-finance 4.1%, according to the Superintendence of Banks. According to the Superintendence, savings deposits rose by 52.8% year-on-year in May, to 30.0 trillion bolivars, while term deposits rose by 15.4% to 14.5 trillion bolivars.

Despite this substantial rise, credit levels remain relatively low, with domestic credit accounting for only 17% of GDP last year.

Nationalisation risks.

Chavez has already demonstrated this year that nationalisation risk remains real: The entire power industry is now in state hands following the February acquisition of an 82% stake in Electricidad de Caracas from US-based company AES for 739 million dollars. Also in February, the government agreed to pay 572 million dollars for US-based Verizon's 28.5% stake in telecommunications company CANTV, privatised in 1991.


On May 1, state-owned oil company PDVSA took control of four heavy crude joint ventures in the Orinoco Belt, previously majorityheld by foreign firms such as ExxonMobil, BP, Statoil, ConocoPhillips and Total.

Doubts over future economic policy have arguably increased since the National Assembly adopted a law at the end of January giving Chavez authorisation to rule by decree over an 18-month period, with powers extending to the economy, defence and the energy sector in particular.

According to Chavez, the so-called enabling law is designed to expedite "revolutionary" reform, a position that has encouraged some fears that the government is heading towards communism. However, in the case of the banking sector, nationalisation would only appear likely to occur if banks were unwilling to take measures such as giving the poor greater access to credit and low-interest loans; making available more low-cost loans for domestic industry; paying more tax; and reinvesting profits into new domestic loans rather than in equity or overseas ventures.

No action imminent? To judge by Chavez's earlier nationalisation moves, any state takeover of private banks, were it to occur, would probably take some time and could even come at the end of his 18-month period of rule by decree: Chavez threatened CANTV with nationalisation several times before announcing its takeover in January; while a full-scale nationalisation of the mining sector was announced in 2005 but so far has not materialised.

Banking regulation.

A takeover of all or part of the banking sector would be an unusual step even for Chavez, considering that the sector is already tied down by strict regulations. By law, banks must grant 21.0% of their loans to agriculture, 10.0% to housing, 3.0% to micro credit and 2.5% to tourism. Mandatory credit allocation accounts for 41.5% of total lending.


Banks also face limits on the interest rates they can charge, as well as on commissions and fees, and they face fines for not meeting any of the stipulated targets. The state has imposed foreign exchange controls and seriously curtailed the central bank's independence.

Greater regulation is more likely that outright nationalisation, with Chavez expected to sign a new banking law this year to increase the obligatory loan portfolios, raise taxes and control interest rates at preferential levels: Banks are likely to be pushed to loan to potentially riskier, lowincome borrowers and companies; they will also face a new tax on inter-bank lending from September.

State banks created by Chavez, which are flush with cash from high oil prices, will also compete more aggressively with private banks -- meaning that even if banks are not nationalised, they will need to face the challenge from the state-owned entities. Venezuela's leading private banks are Spanish-owned (Banco Provincial by BBVA and Banco de Venezuela by Santander), and Chavez has little potential political capital to gain by increasing frictions with Spain through nationalisation. The government will be unable to sustain preferential bank loans in a state-run sector if oil prices fall.

Taking over a banking system is difficult because of the complexity of the task; the Venezuelan state does not have enough expert bankers to acquire and manage 48 banks.

 Attempts to nationalise the banking sectors in France, Mexico and Peru in the 1980s were unsuccessful, undermining the economy and deterring investors.

CONCLUSION: A perceived risk of bank nationalisations would erode economic prospects. However, the government is likely to prove unwilling to undermine the sector's stability. Greater banking regulation is a more likely course, though banks must still be allowed to generate reasonable profits if the country is to maintain a credible financial sector.






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