Chavez Pleads for Investment as Falling Output Fuels Inflation

By Daniel Cancel and Matthew Walter

July 18 (Bloomberg) -- Venezuelan President Hugo Chavez wore a suit for the occasion, and, grinning at about 300 business leaders he usually calls ``oligarchs,'' asked for help relieving a drought in investment.

``Those of you who have money abroad, bring some home,'' he implored company executives gathered June 11 at the former Caracas Hilton, a hotel taken over by the government last year. ``Let's ally ourselves, let's elevate production as much as we can,'' he said to scattered applause.

After squeezing the private sector for almost a decade with nationalizations and foreign exchange controls, Chavez is holding out the lure of lower taxes and $1 billion of loans to spark growth and combat spiraling inflation that only ramped up production can solve.

Investment fell for the first time in four years in the first quarter and state spending, the driving force behind four and a half years of economic expansion, is showing diminishing returns as output growth lags behind a boom in oil-fueledconsumption.

``The vocabulary the government has used over the past two years, above all the president, includes expropriation, confiscation, and it isn't well-received by the private sector,'' said Alejandro Grisanti, an economist at Barclays Capital Inc. in New York. ``There's less investment, this means less supply, and that's going to keep driving up prices.''

Inflation Leader

Annual inflation quickened to 32.2 percent in June, a five- year record and the fastest increase in prices among the 79 economies tracked by Bloomberg.

Total investment in Venezuela, the biggest oil exporter in the Western Hemisphere, shrank in the first quarter after growing at an average of 35.5 percent each year since a national strike against Chavez ended in 2003, according to Moody's Economy.com.

Foreign direct investment has dropped 90 percent since 1997, the year before Chavez was elected, to $646 million last year from a record $6.2 billion, according to the central bank.

That puts Venezuela, a country of about 28 million people and a gross domestic product of $182 billion, on par with Guatemala, a nation without any oil and an economy less than a quarter the size.

Roaring Consumption

While output and growth flagged in the first quarter, consumption is roaring, up 85.5 percent in real terms in the past 10 years, according to Chavez.

``The only thing that's driving economic growth is public spending,'' said Gustavo Garcia, a professor at the Institute of Higher Administration Studies in Caracas. ``What's growing is the fat. There's not going to be investment here for a while, because the government has hurt the credibility of institutions.''

Central government spending, which soared more than five- fold between 2000 and 2007, has beefed up budgets of slum health clinics, classrooms and subsidized supermarkets. Chavez has raised the minimum wage 565 percent to $372 a month, putting money in the pockets of the working poor.

State oil company Petroleos de Venezuela SA contributed $13.9 billion last year to social spending. This year, it formed a subsidiary to import and distribute rice, beans and milk and other items in short supply.

SUV Gridlock

Higher-income consumers create gridlock in Caracas with Toyota Land Cruisers and Ford Explorers that run on subsidized fuel costing as little as 8 cents a gallon. Car buyers were waiting six months for delivery last year as sales surged more than 43 percent to 491,899 units before pulling back in the first half of this year on government import restrictions.

Bank lending jumped 41.5 percent in June from a year earlier, as interest rates caps made credit card spending cheap.

``During the last few years we saw a consumer boom rarely seen in Venezuela even with high oil prices,'' Miguel Carpio, an economist at Banco Federal CA in Caracas said.

Meanwhile, the private sector, which still accounts for more than two-thirds of economic output, shrank 2.3 percent in the first quarter as the government ballooned 22 percent. Manufacturing growth fell to 1.4 percent in the period from 6.8 percent last year, according to the central bank.

Foreign exchange controls make it hard to get imported supplies and parts, causing bottlenecks and deterring investment, said Pablo Baraybar, a division chief at the country's biggest food company and brewer, Empresas Polar SA.

`Idle Capacity'

``We keep investing, but we could end up with idle capacity because we don't have the primary materials we need,'' he said in an interview.

Price controls have also cut into retailers' profit, said Juan Carlos Goncalves, who owns the Distribuidora Felix butcher store in the low-income Catia district of Caracas. Small business owners willingly risk fines to sell above the money- losing regulated prices, he said.

``I have no plans to expand or invest because with these pressures I'm only covering half my costs,'' Goncalves said.

Victor Brito, a rancher in Monagas state, said seizures and programs that allow squatting on land deemed ``underutilized'' discourages rural investment and contributes to food shortages.

``Public policy is the problem,'' he said in a telephone interview. ``Private property isn't respected.''

To contact the reporters on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net; Matthew Walter in Caracas at mwalter4@bloomberg.net

Last Updated: July 18, 2008 00:30 EDT