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Tuesday, January 09, 2007

Chavez's Broad Nationalization Plans Shake Venezuelan Markets

Jan. 9 (Bloomberg) -- Venezuelan President Hugo Chavez's plans to nationalize the nation's largest phone company and utilities, gain greater control over the oil industry and seek authority to make laws by executive order are sending investors racing for the exits.

U.S.-traded shares of CA Nacional Telefonos de Venezuela plunged 14 percent yesterday and the currency fell 17 percent after Chavez unveiled his plans for the company, and the nation, in a televised speech. Traders braced for the likelihood of additional shock waves today: Cantv has the second-heaviest weighting in the Caracas Stock Exchange Index, which had more than doubled last year and was up an additional 19 percent this year before yesterday.

Chavez signaled his ambition to remake his oil-rich nation along socialist lines both before and since his Dec. 3 re- election. Even so, the sweep of his plans -- which include stripping the central bank of its autonomy and also possibly nationalizing heavy-oil joint ventures in the Orinoco region -- went beyond what many had anticipated.

``Chavez seems bent on modeling Venezuela after the old Soviet economy, where the state controls everything,'' said Robert Bottome, an analyst with Caracas-based research company Veneconomia. ``If his intentions weren't clear before, they are now.''

`Let's Nationalize It'

Chavez, speaking after the close of stock trading in Caracas, declared that ``all those sectors that are so strategic, such as electric power, everything that was privatized, will be nationalized.'' Venezuela, he said, ``will recover the strategic means of production. Cantv, let's nationalize it.''

``We all expected some radical announcements after his swearing-in, but this took markets completely by surprise,'' said Richard La Rosa, a stock trader at Activalores Sociedad de Corretaje CA. ``We never imagined that he would name a company specifically. It left all of us in shock.''

Chavez, in his speech, attacked the role of foreign companies in the Orinoco heavy-oil industry. ``International companies have the control of the upgrading of heavy crude. No! This should pass to be property of the state,'' he said.

His energy ministry said in a statement that the four joint ventures may be nationalized; the government has been negotiating to give majority control of them to state-run Petroleos de Venezuela SA while leaving a minority stake with the foreign owners, including Exxon Mobil Corp., Chevron Corp., Total SA and ConocoPhillips.

AES Unit

Among the utilities that may be affected by his call for nationalization is Electricidad de Caracas, a unit of Alexandria, Virginia-based AES Corp.

In his speech, Chavez also said he will seek to strip the central bank of independence from the government as part of a plan to overhaul the constitution. ``The central bank shouldn't be autonomous,'' Chavez said. ``That is one of the biggest mistakes of the constitution.''

He also called for a full overhaul of the current commerce code, among other measures, to accelerate the transition to socialism.

Chavez's move to assert state control over the economy mirrors his efforts to cement his political control; with Cuba's President Fidel Castro ailing, the speech amounted to a claim of leadership of the Latin American left.

In his speech, he said he will ask the Venezuelan congress to allow him to rule by decree, a power he enjoyed for a year in 2000-2001. Last month, the 52-year-old president said he would seek to change the constitution to end presidential term limits.

`Disconcerting' Announcements

``These disconcerting policy announcements represent a clear turn into deeper nationalist and interventionist policies, which can lead to further erosion of business confidence and the country's institutional fundamentals,'' said Alberto Ramos, senior Latin America economist with Goldman Sachs Group Inc.

Chavez, who last year raised royalties on oil companies and forced some into joint ventures with the state, has stepped up his calls to regulate corporate profits and speed seizure of ``underutilized'' farms and factories since his re-election. Chavez's control of the congress, courts and state governments will help push through those plans.

Chavez imposed restrictions in foreign-currency trading in early 2003 to stem an outflow of dollars after a two-month national strike aimed at ousting him cut oil exports and drained international reserves. Venezuelan banks operate under interest- rate caps; phone and power rates and rents are also controlled.

The Bolivar's Plunge

Venezuela's currency, pegged to the U.S. dollar at a rate of 2,150, posted its biggest plunge yesterday in unregulated trading since at least 2004, falling to 4,062 bolivars to the dollar, its lowest ever. The currency shed 54 percent in the past six months.

Cantv American depositary receipts fell 14.2 percent in the minutes after Chavez's speech to $16.84, before trading was halted at 3:04 p.m. New York time yesterday. The company's local Class D shares rose 0.8 percent to 9.780 bolivars in Caracas. Each ADR is equal to seven Class D shares.

``The big question in the marketplace is how are we going to be compensated?' said La Rosa. ``No one doubts of Chavez's intentions at this point.''

New York-based Verizon Communications Inc. owns 25 percent of the company. Cantv's ADRs more than doubled in the past 12 months on speculation Cantv would be sold to Mexican billionaire Carlos Slim's Telefonos de Mexico SA.

Cantv is aware of the announcement but hasn't been yet contacted by authorities, the company said in a statement released last night in Caracas.

`Fair Value'

``Venezuela's capital-markets law says that shareholders should be paid a fair value for their shares in any buyout,'' said Miguel Octavio Vegas, executive director at BBO Servicios brokerage in Caracas, which holds Cantv shares in its mutual fund.

``Slim was offering $21 an ADR, and I believe a fair value is between $22 and $25 an ADR,'' Vegas said. ``I don't think the government can get away with paying less. I think of Cantv will open lower tomorrow -- a little lower. The government has lots of money now to do this.''

The bolivar's value in unregulated trading is calculated by comparing the domestic and foreign prices on shares of Cantv. Each American depositary receipt is equal to seven local Class D shares.

Cantv shares became the reference rate for street traders after investors realized that buying the company's local shares, converting them into ADRs and selling them abroad was a legal way to buy dollars.

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