Tweedle dumb and Tweedle dee

The news that Argentina’s President, Christina Fernandez de Kirchner, was undergoing surgery to cure a minor brain hemorrhage got me thinking about the post-Christina era and comparing it to my expectations for the post-Chavez era in Venezuela. I don’t wish her ill, but it serves as a timely reminder that there will be a change in leadership by end 2015. Venezuela is obviously already in the post-Chavez era, but these are early days, so what comes next?

Argentina and Venezuela seem to have taken delight in taking a less-than-orthodox path to Economic management over recent years, both seem quite happy to take very populist positions, and regularly poking their detractors in the eye. There are many similarities between the two countries, but also striking differences.

Both economies suffer from major distortions that are slowly crushing them. Inflation is excessive by today’s standards, and Argentina actively fixes the official numbers to make it appear lower. Real CPI will be slightly under 30% this year in Argentina, and 50% in Venezuela. Predictions for next year are around 35% and 40% respectively.

Both countries suffer from a lack of foreign investment – Buenos Aires is still embroiled in a number of disputes over the 2001 default, whilst Caracas has actively discouraged FDI, often making foreign companies scapegoats for policy failures.

Infrastructure is failing due to lack of investment; they both suffer from increasing brown and even blackouts due to the failing generation and distribution capacity not being able to keep up with growing demand. In Venezuela, there have been several bridge collapses, most famously causing the closure of the Caracas – La Gauiria Highway that links the city to its airport.

Transparency International ranks Argentina 102^nd ex 174 with a score of 35, whilst Venezuela ranks 165th with a score of 19, so we can consider them corrupt and very corrupt.

The Tax Justice Network, together with Britain’s Guardian newspaper, ranked both in the top 10 countries for accumulated Flight Capital in 2010. They estimated Venezuela had suffered a total flight of $405 Billion (120% of GDP), with Argentina close behind at  $399 Billion (130% of GDP). There do, however, appear to be significant differences in why capital leaves the two countries.

Capital flight is almost a national sport in Argentina. The Uruguayan capital of Montevideo is a day trip away, and many ordinary inhabitants of Buenos Aires maintain bank accounts there – frequently with the same bank they use back home. Whenever I have questioned people about their accounts, they always told the same story – we know the Government will steal our savings, we just don’t know when.

My impression has always been that Capital Flight is more of a rich man’s hobby in Venezuela, as the Government had less of a history of expropriation and hyperinflation. Even current wheezes like “The Scrape” appear designed to get dollars into the country rather than out.

Under Chavez, people have gotten very rich purely because of their connections to the regime, and they know that their wealth is safe only whilst they remain in favour. The use of the pejorative phrase “Boligarch” shows the similarities to those Russians who made out like bandits both under Yeltsin and Putin (Russia actually ranks #2 for Capital Flight according to the TJN). Like their Russian mentors, Boligarchs have a strong incentive to invest their dollars outside of the country as a hedge.

Argentina does not suffer from the same shortages of basic goods, especially food, the way Venezuela does. Argentina’s status as a major agricultural producer helps in this regard, especially when it comes to putting beef on the table. Venezuela is more import dependent making it vulnerable to the national shortage of dollars.

Argentina is firmly under civilian rule despite all the bluster over the Falkland Islands. Venezuela on the other hand is not only highly militarized, but even has the Cuban Military deeply embedded into its structure, most notably Intelligence; few people realize the key role Castro played in defeating the 2002 coup against Chavez.

The Venezuelan Government is highly ideological and everything is about promoting Bolivarianism and 21^st Century Socialism, whilst the Kirchners both seemed more interested in power for power’s sake, and getting themselves reelected, rather than a messianic vision of what should be. “Peronism uses ideologies as though they were suits in a wardrobe, which it changes depending on the season,” said Ricardo Alfonsín, an opposition leader quoted in the FT. “In winter, of course, you wear a winter suit, and in summer a summer suit.”

There are Municipal Elections later this month in Argentina where the Peronists are expected to lose their majority. As the 2015 Presidential Elections approach, Fernandez will increasingly become a lame duck.

In Venezuela, President Nicolas Maduro is seeking the power to rule by decree whilst recently bolstering his revolutionary credentials by replacing the somewhat moderate Finance Minister Nelson Merentes with the more ideologically sound Rafael Ramirez. He faces considerable opposition from within the ranks of the PSUV, especially from Diosdado Cabello, Leader of the National Assembly. Meanwhile we have seen rallies of loyal troops supporting Maduro and the struggle. Because of his weak position, Maduro seems forced to be more Chavismo than Chavez, and is backing himself into a corner he cannot get out of; shortages are increasing, such as the near total disappearance of toilet paper, but to deal concretely with any of the problems risks he himself getting blamed for those shortages and being seen to be abandoning the revolution.

As Argentina’s oil imports soared earlier this year, Chevron announced a $1.24 Billion deal with Argentina’s YPF following changes to the regulatory regime that make it possible for foreign firms to make profits and to keep those profits abroad. Other firms have also signed smaller deals in apparent anticipation of a more business friendly atmosphere.

So the Argentine economy appears to be in better shape than Venezuela’s, and seems to be moving into the post-Christina era. Peronists have never been afraid of executing a volte-face. If her party takes a beating in the October 27^th elections, Fernandez is likely to use her illness to duck out of farther politics, blaming Vice President and acting President Amadou Boudou for the defeat, with Sergio Massa being the most likely beneficiary. If he makes significant gains I think his business friendly approach should lead to opportunities in both infrastructure and the local stock market should he go on to win the 2015 Presidential Elections. Even if he does not make such gains, the overall approach is becoming less business antagonistic, and selective infrastructure investments are likely to become attractive in the next 3-5 years as the next administration seeks to correct many of the problems currently plaguing the economy.

I was more optimistic about Venezuela earlier in the year; there appeared to be signs of rapprochement between Maduro and some of the important business leaders. Since then, he seems to have lurched farther left again, and his pronouncements more hysterical. Although he has made some progress on obtaining limited funding from the likes of Rosneft and Chevron, they are not sufficient to reverse the decline.

I think the window for an easy transition in Venezuela is closing rapidly. The changes at the Ministry of Finance suggest that the corrections to the FX regime will be mishandled. Ramirez is more likely to validate the obvious overshoot that is taking place rather than address the root cause. Thus it would not surprise me if inflation continued to accelerate.

There is little hope of any material change to supply, meaning that shortages will continue to get worse. At some point, even the staunchest of Chavez supporters are going to notice the empty shelves. If he is lucky, this is the point Maduro will be replaced and forced into exile. If he is unlucky, he will get to stay in power and preside over a very traumatic transition. This is also the point street demonstrations could turn violent. This time, the old Baron Rothschild aphorism of “Buy when there is blood on the streets” probably won’t apply, and I say that having used it to great effect when Chavez first burst upon the scene.

In conclusion, I am much more confident about the transition in Argentina. I believe we are already seeing positive signs of a more business friendly environment under the next administration. In Venezuela, however, I think the more likely scenario is that it gets even worse before it gets better, and the longer the process the worse it will be.

I hope I am wrong.