Nationalisation plan unnerves foreign investors

Nationalisation plan unnerves foreign investors.

By NEW YORK TIMES REPORTERS

FOCUS / VENEZUELA

Caracas, Venezuela _ Verizon Communications had been looking to lighten its exposure to Latin America for some time when it struck a deal in April to sell investments in three properties in Puerto Rico, the Dominican Republic and Venezuela.

Now, it probably wishes it had disconnected its Latin lines even sooner.

The company could possibly lose up to several hundred million dollars, thanks to President Hugo Chavez of Venezuela, who threatened to nationalise the country's main telephone and electricity companies.

Investors reacted with alarm here and in markets in the United States and throughout Latin America on Tuesday as they measured the impact of the plan by Mr Chavez to nationalise crucial areas of the economy. Flashbacks of past nationalisations during another turbulent era in places like Cuba and Chile helped drive down the Caracas stock exchange's main index by almost 19 percent.

Markets across Latin America declined on Tuesday, but the drop was modest in most other countries, with the Bovespa index in Brazil and the Bolsa index of Mexico each falling 1.9 percent. The measured reaction appears to reflect the belief of investors that Mr Chavez, in spite of his rhetoric, has limited influence on the economic policies of other governments in the region.

''It has not turned into a widespread contagion,'' said David Riedel, president of the Riedel Research Group, which follows emerging market stocks. Compared with the 1990s ''you have a more sophisticated base of investors that understand that Mexico is different from Venezuela.''

Still, investors sold shares in American, Argentine and Mexican companies vulnerable to the move by Mr Chavez to take control over entities privatised by previous administrations.

Owners of Venezuelan steel, banking, cement and hotel companies _ even the cable car operator that takes tourists to the top of the Avila mountain here in Caracas _ could be affected by the push toward nationalisation, analysts said.

''Chavez is deepening his revolution, but in doing so, will he follow the law and compensate the companies whose assets will be nationalised?'' said Miguel Octavio, executive director of BBO Servicios Financieros, a brokerage firm, who calculated the costs of taking over companies in the telecommunications, electricity and oil industries, as well assuming their debts, at more than $15 billion.

''It doesn't seem like the government has thought this project out yet,'' Mr Octavio said.

Tony Snow, a White House spokesman, said on Tuesday, ''Nationalisation has a long and inglorious history of failure around the world. We support the Venezuelan people and think this is an unhappy day for them.''

Mr Chavez further intensified worries with his request for vastly enhanced presidential authority from Congress. If successful, those new powers would allow him to decree measures into law for one year, bypassing any debate in the legislature, where in any case, all 167 deputies are his supporters. On top of that, he made a request to abolish the autonomy of Venezuela's central bank. The Venezuelan government did not immediately contact the American companies, which refused to discuss details.

''There are many ways in which the Venezuelan government could proceed,'' said Peter Thonis, a spokesman for Verizon. ''Since they have not discussed specific plans, it would be premature for us to comment now.''

In April, Verizon agreed to sell its 28.5 percent stake in Compania Anonima Nacional Telefonos de Venezuela, or CANTV, to America Movil and Telefonos de Mexico, for $676 million; the deal has not closed, so Verizon still owns the stake, and it is unclear how much the Chavez government might be willing to pay to take control. Neither America Movil or Telefonos de Mexico would comment.

Since taking power eight years ago, Mr Chavez has imposed stronger political control over the state oil company and has ordered the government to exert greater authority over several ventures with foreign oil firms.

Stopping short of Mexico's nationalisation of foreign oil companies in the 1930s, the Venezuelan government has aimed to reach partnership agreements with foreign oil companies while raising its tax rates and royalties on foreign oil companies.

At the very least Mr Chavez's pledges on Monday to nationalise companies in the telecommunications and electricity industries represented another retreat of the trend toward more private control of national economies and free-market policies that swept Latin America in the 1990s.

Mr Chavez has led that reversal, which has taken hold to one extent or another, in Argentina, Ecuador and Bolivia.

''We have said for a while that if you are operating a domestic business in Venezuela, you are chronically at risk for something like this happening,'' said Thierry A. Wizman, a managing director and global emerging market strategist at Bear Stearns in New York. ''This is not the first time he has changed the rules for domestic businesses.''

Still, Mr Wizman notes Mr Chavez cannot afford to seize assets brazenly without compensating corporate owners, because Venezuela owns assets in the United States like Citgo, the energy company, that could be frozen by US courts. ''He is unlikely to give a fair price, but it won't be outright seizure without compensation,'' Mr Wizman said. ''He doesn't want to offend everybody simultaneously.''

Not all investors are as sanguine, and two American companies, Verizon and the AES Corp of Arlington, Virginia, suddenly face the potential of hundreds of millions of dollars of losses. AES declined to comment on Tuesday.

The abrupt jolt in Caracas came amid surging interest in Latin America, Asia and Eastern Europe by investors around the world. Last year, investors in the United States poured $20.3 billion in emerging market funds, up 47 percent from 2005 and accounting for 15 percent of all the money invested in stock-based funds, according to AMG Data Services.

Investors note that even with the recent troubles in Russia, Venezuela and Thailand, conditions remain favourable in Brazil, Chile, China and India. That may explain why stock markets did not buckle across Asia and the declines in Latin America were fairly modest outside Venezuela.

Some investors and business experts expressed optimism that while risks and trepidations were on the rise for business in the region, Mr Chavez had sometimes stopped short of his rhetoric in the past.NYT

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