Chavez Successor Must Pay Down Debt To Sustain Venezuelan Building Program
Venezuela’s new socialist leader hopes to continue the ambitious construction programs initiated by the late President Hugo Chávez, and the nation’s vast oil and mineral reserves will likely enable much—but perhaps not all—of the work to go on, said sources familiar with the political and economic conditiions in Venezuela.
“The construction programs of the Venezuelan government are largely sustainable” under Chávez’s successor, said George Ciccariello-Maher, assistant professor of history and politics at Drexel University, an expert on Venezuela and author of a new book, "We Created Chávez: A People's History of the Venezuelan Revolution.”
“However, the historic challenge for Venezuela and other resource-rich nations is to develop the capacity to engage in this construction through their own means, rather than being overly reliant on costly imported parts and supplies,” Ciccariello-Maher said.
Venezuela faces other challenges as well. Chávez for years borrowed heavily against the current and future value of Venezuela’s natural resources; as a consequence, the nation suffers from a high inflation rate and, after Chávez’s nationalization of several industries, a poor investment climate.
In a report issued before Chávez’s re-election last October, Morgan Stanley analyst Daniel Vorberg said the government’s financial mismanagement “may be taking Venezuela toward a crisis and potentially even a debt event"—that is, a default on some loans—“that could come as early as the second half of 2013.”
Volberg said Venezuela’s deficit, as a percentage of gross domestic product, is the largest in Latin American, and its international reserves have fallen sharply in recent years. The output of Petroleos de Venezuela, the state-owned oil company, is down as well.
Now, Venezuela’s new leader, Vice President Nicolás Maduro, must quickly prepare for a April 14 election. His likely opponent, Henrique Capriles Radonski, has questioned the country’s close ties with China, the leading source of money to support Venezuela’s building boom.
Chinese Connection
China’s financial support has been critical for Chávez’s capital-intensive construction initiatives, said Kevin Gallagher, a professor of international relations at Boston University who has tracked China’s growing interest nations—Venezuela and other Latin America countries, among them—that have the natural resources it needs.
“If the current regime maintains power, I don’t think Venezuela’s relationship with China changes much,” he said. However, an election win by Capriles Radonski could lead to at least a reworking of Venezuela-China ties.
Much of the financing for the building boom has come from China Development Bank in the form of loans and lines of credit tied to Venezuela’s emerging role as a leading oil supplier to China. Venezuela currently exports about 500,000 barrels of oil per day to China, making it China’s fourth-largest oil supplier. The Venezuelan government has indicated it plans to double those exports by 2015.
"Over the last decade-plus, China has built up a very substantial financial relationship with Hugo Chávez's Venezuela," said Matt Ferchen, resident scholar at the Carnegie-Tsinghua Center for Global Policy in Beijing.
"On the Chinese side, the China Development Bank [CDB] has been the key institution driving this relationship," Ferchen said. "China, through the CDB, has argued that Chinese-Venezuelan relations have been a natural outcome of Chávez's own popular support. In other words, Chávez was simply channeling the will of the Venezuelan people as he built up ever-deeper Venezuelan national debt to China. It remains to be seen whether the new leader of Venezuela will adopt such an unapologetically close relationship with Beijing."
Chávez’s multi-pronged construction initiative includes housing, railways, electric power, and water and wastewater systems. On housing, for example, Chavez promised construction of three million new homes, including 380,000 to be completed in 2013, for lower-income Venezuelans by 2019 at an estimated cost of more than $11 billion. Expanded housing opportunity is “the social priority” of the government, said Cicciariello-Maher.
Venezuela’s $100-billion-plus National Railway Development plan calls for building more than 8,000 miles of new rail lines to connect all key cities by 2030.
China Railway Engineering is building the biggest project currently under way: a $7.5-billion, 290-mile line that will link the cities of Anaco and Tinaco in central Venezuela. Three Italian construction giants—Impregilo, Astaldi and Ghella—are building the $4.3-billion, 70-mile Puerto Cabello-La Encrucijada line, 17 miles of which will run through new tunnels.
The Inter-American Development Bank (IDB), meanwhile, has helped Venezuela finance several electric-power, water and wastewater projects—all badly needed to repair and upgrade basic national infrastructure that has been crumbling during years of neglect.
Most recently, in September, IDB approved a $300-million load to help finance sewage projects in 12 sub-basins of the Guaire River in metropolitan Caracas. IDB also appoved a $100-million loan to finance improvements in water-quality management in communities of 5,000 to 500,000 inhabitants.
Further, IDB provided a key $700-million load for the rehabilitation and upgrade of turbines at the Simón Bolivar hydroelectric station, which supplies more than 40% of Venezuela’s electricity needs. That project is expected to be completed in 2016.
Asked if the IDB will continue to finance projects in Venezuela under the country’s new leader, bank spokesman Paul Constance said, “The IDB has a long history of financing projects in Venezuela that aim to improve quality of life while contributing to long-term social and economic objectives. We will continue to work with the Venezuelan government, but at this time IDB management has no further comment.”
International contractors active in Venezuela declined comment on the situation there. For example, Thais Rosa, spokeswoman for Odebrecht Venezuela, a subsidiary of Odebrecht Organisation, the Brazilian conglomerate, confirmed that the company "provides engineering and construction services in the country; all of its contracts remain operational under normal circumstances, within the terms and conditions."
