Venezuela’s 20% economic contraction in the past two years might
suggest banking sector disaster. But while it has dried up private
credit demand, it has left the government desperate for financing. And
the banks, gorged with deposits and with few other credit customers,
have been happy to oblige, buying up close to $7bn in government bonds
and Venezuelan Central Bank papers – substantially more than its
private sector credit holdings. The relationship has been fruitful for
the banks, as the nation’s 30 universal and commercial banks have
enjoyed a return on assets of nearly 6% and on equity of 40%.
But some say the soaring budget deficit puts the nation in a fiscal
bind and the banks in an ethical one, by threatening a disastrous
devaluation next year.
“[The banks] are taking food from the children of the barrios in order
to make the bankers richer,” says Oscar García Mendoza, president of
Venezolano de Crédito SA Banco Universal, the nation’s eighth-largest
bank, which does not buy government bonds.
The government began selling large amounts of bonds domestically in
2001 as leftist President Hugo Chávez’s anti-capitalist rhetoric fed
international concerns about the future of Venezuela’s economy and made
Venezuelan papers a risky investment.
“Not having access to international markets, which had a very high
cost, the state turned to the internal market,” says Ignacio
Salvatierra, president of both the National Banking Council and
stockbroker Inverunion.
Catalyst for collapse
Two years of political turmoil and economic collapse intensified the
credit trend by further drying up demand from private borrowers. In
April 2002, a military coup temporarily unseated Mr Chávez and, in
December and January, a two-month oil industry strike devastated
exports, further weakening the government’s finances. As a result,
since 2000, commerce has shrunk by 23.6% and construction has plummeted
66%.
In February this year, with foreign reserves at $14bn and the bolivar
falling, the government imposed exchange controls. To date these have
distributed only about $2bn, according to the Venezuelan-American
Chamber of Commerce (Venamcham) – little more than the $1.3bn that
Venezuelan companies spend on imports each month in ordinary times. The
controls have also blocked the use of credit cards overseas, trapping
bolivars inside Venezuela, pushing up liquidity and swelling bank
accounts. At the same time, the nation’s economic nosedive has caused a
dramatic rise in economic informality, slashing banks’ credit markets.
With cash on their hands and private businesses on their knees, the
government’s financing needs came as a godsend for banks: a high
income, high liquidity and tax-free investment.
The government papers’ low administrative cost is particularly
attractive for a banking system like Venezuela’s with its high
operating costs. Expenses are high in part due to services such as the
24-hour call centres that banks operate to allow retailers to confirm
customers’ checks, and in part due to the existence of many small banks
that lack economies of scale.
In recent years, however, consolidation has improved efficiency
somewhat, reducing the number of banks from about 160 before the 1994
banking crisis to 52 now.
Moral imperative
But the investment in government papers has concentrated the banking
system’s risk – and in the eyes of some has created a moral failing, if
not a financial one. Banking analysts agree that there is virtually no
chance of oil-rich Venezuela defaulting on its bonds but they warn that
the government might carry out a severe devaluation to pay its debts in
cheaper bolivars.
While such a move would be another blow to the import-dependent
economy, it would not send Venezuela down Argentina’s path because
depositors’ accounts are bolivar denominated. Still, even Central Bank
president Diego Luis Castellanos recently cautioned Finance Minister
Tobías Nóbrega to guard the system’s liquidity when selling bonds. And
others ask what would happen if banks suddenly needed to unload.
“There’s some risk,” says Pedro Coa, Banesco’s vice-president for
economic studies. “If everybody decides to sell [government bonds],
who’s going to buy?”
Sense of betrayal
The harshest criticism of the banks’ policies is that by concentrating
on government papers, Venezuela’s banks are betraying their
responsibility to the nation’s economy. For example, Mr Mendoza says
the government cannot afford its $31.2bn 2004 budget and that added
indebtedness will force a disastrous devaluation of the already
battered bolivar.
Even some executives whose banks have invested heavily in government
bonds see a problem. By focusing on government bonds, the banks lose
their intermediation role, or “banking’s essence”, says Mr Coa, whose
bank holds about twice as much in government papers as in private
credit.
Bankers also say that they are trying hard to sell private credit, and
point out that the interest rates are negative in real terms. The
demand, they say, is simply not there.
“We’re doing our work,” says Francys Rugeles, executive vice-president
for marketing at Banco Provincial, owned by Spanish Bank BBVA and the
second-largest bank by assets and the largest holder of government
papers with about bs2500bn ($321.7bn) compared with bs1000bn in private
credit. Ms Rugeles says: “What else are we to do with [depositors’]
bolivars?”
Others are looking at their investments with concern. “We don’t want to
have a portfolio of more than one-to-one (government bonds to private
credit),” says Alejandro Grisanti, vice-president for research at Banco
de Venezuela, the third-largest bank by assets, owned by Spain’s SCH.
“We are in the process of reactivating the [private] portfolio.”
As at September 2003, Banco de Venezuela held government papers worth
about 20% more than its private credit portfolio, making it one of the
more conservative players.
Bankers say the government papers are a safe bet, however. “We feel
very comfortable with the internal debt,” says Ms Rugeles. “The
government, whoever it is, has to take care of the market.” The
government is using the banks’ credits to restart the economy, which in
turn will generate private loan business, she says.
Support and criticism
Venezuela’s business community overwhelmingly wants Mr Chávez out.
Nevertheless, many business leaders defend the banks’ role in financing
the government.
“The [economic] situation is terrible,” says Venamcham vice-president
Tony Herrera. “And it’s not the fault of the banks. They are simply
surviving.”
But others say the banks are not trying hard enough to lend to the
private sector. Without aggressive bank lending to private business,
the critics contend, Venezuela will take much longer to recover from
its current economic crash.
“[The banks] are not lending to people like me,” complains Robert
Bottome, editor of business newsletter Veneconomia. Banks demand “three
different kinds of guarantees” before making loans, he says.
The banks’ credit policies are particularly important in Venezuela
because of the lack of alternative credit sources, such as a pension
fund system, and corporations’ traditional wariness about going to the
stock market for financing.
No end to trend
The current trends appear likely to continue in the immediate future.
Between August and September, the banking system’s stocks and bonds
holdings grew 3.5%, to 151% of the private credit portfolio, which held
steady, while the system’s net income rose 22% over the previous year,
the Superintendency of Banks reported. That asset situation is a
reverse from last year, when the banks held bs1.5 in private credit for
each bolivar in securities, and a huge turnaround from six years ago,
when Venezuelan banks held bs2.43 in private credit for each bolivar in
securities. Then, however, the banks also had more ordinary profits of
3.81% on assets.
Meanwhile, the exchange controls have pushed foreign exchange reserves
up to nearly $20bn and helped to lower Venezuela’s country risk. But
the controls have also repressed inflation and set Venezuela up for a
huge outflow of dollars when the controls are finally lifted. With a
major currency devaluation almost inevitable, observers do not expect
private investment and credit demand to restart any time soon.
“Nobody in their right mind is going to go into debt because everybody
knows there will be a maxi-devaluation,” says Aurelio Concheso, who
heads a Caracas business think tank.
Analysts predict growth of around 7% for next year as election-year
spending helps the economy to rebound from 2003’s disaster. But, with a
recall vote set for early next year, the future will also depend on
Venezuela’s unpredictable economic and political course.
Oil dependence
While the government managed to restart oil production faster than
expected, international analysts say it is still running substantially
below normal production. A drop in oil prices combined with continued
instability and continued chavismo (populism) would keep demand for
private credit low and further increase banks’ dependence on government
papers.
Business people can take comfort from the fact that things can hardly
get worse. Unemployment is at about 20% and about 70% of Venezuelans
live in poverty. Per-capita gross national product, which began sliding
long before Mr Chavez was elected, has fallen 27% since 1992.
The long-term outlook for the banks is also grim. The economic debacle
of recent years is only the climax of a two-decade economic slide that
has hit banks particularly hard. Banking and insurance’s share of gross
domestic product dropped from 12% in 1992 to 5.9% a decade later. Not
only has Venezuela failed to invest its oil wealth effectively in human
development, but the oil-induced economic fluctuations have also
prevented economic diversification. About 40% of people in highly-urban
Venezuela do not use banks, providing the industry room to grow, but
the recent instability has given the middle class more reasons to send
its savings and investments overseas, if not to emigrate altogether.
Nevertheless, bankers remain optimistic about the future. As the
world’s fifth-largest oil exporter, they point out, Venezuela has an
extraordinary capacity to rebound. “We have had other crises,” says Mr
Coa. “And in another two years the economy can move forward again.”
