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FINANCE / Miguel Angel Santos thinks that the country risk is divorced from the private sector

A dual economy

Amidst the boom, businesspersons demand high return as a preemptive condition for investment. Public sector investment is inversely proportional to public expenditure as businesses fear to stake


Usually there is a link between the private sector and smooth operation in the public sector. However, Venezuela is the exception to the rule. While the Government enjoys a windfall of petrodollars that has made it a billionaire, businesses note high risk and hardly invest.

A way to assess country risk is by matching the yield paid by its notes with the yield offered by the United States. Such an assessment, along with the hike in oil prices, has hit a historical record of only 1.9 percent.

"The risk of private investors in Venezuela is increasingly far away from the country risk assessment," Miguel Ángel Santos, an economist and professor at think-tank Institute of Management Higher Studies (IESA), said.

The Caracas Stock Exchange is the thermometer that shows the unbalance. By looking at how many years of yield an investor is ready to pay for the companies quoted provides a vision of the future stake.

As of July 31st, it amounted to 5.8 years in Venezuela; 16.3 in Colombia; 10.7 in Brazil; 11.1 in Mexico, and 15.9 in Chile.

"This shows that moving the companies in the stock exchange listing would be enough for them to be more valuable," Santos explained, based on his case study to analyze the issue.

The trickle
While President Hugo Chávez' administration has triggered public expenditure at record levels for the last 20 years, the private sector keeps low investment rates.

As recorded by the Venezuelan Central Bank (BCV), the amount used for investment in the first quarter of 2006 was only 3.9 percent higher than in 1998. Another discouraging signal -over the last 12 months, only 275,000 jobs have been created.

"Businesspersons want high return in order to invest. If such a condition is not met, then you place the money abroad. The market tells you, for instance, that a project in telecommunications needs a return of 19 percent in US dollars. As for mining, it is 21.6 percent; 20 percent for banks, and 18.5 percent in the waste business."

"Legal insecurity and fuzzy signals that do not help create a good investment environment are among the issues that explain high risk in the private sector and, therefore, low investment," Miguel Angel Santos added.

In 2003, the World Economic Forum analyzed how effective are institutions to favor investment. Venezuela was 82 in a ranking of 102 countries.

In Venezuela, a businessman should wait approximately 119 days and complete 14 different proceedings to organize a business. In OECD countries, the average is 30 days and six proceedings.

Miguel Angel Santos estimates that as Venezuela is an oil economy, "the Government is independent from the private sector. It can spend more, and does not need the private business to be fine and pay for more taxes."

Translated by Conchita Delgado

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