Chavez exploits oil to lend in Latin America, pushing IMF aside

by Christopher Swann; Bloomberg

Venezuelan President Hugo Chavez is squeezing the International Monetary Fund out of Latin America, the region that once accounted for most of its business.

IMF lending in the area has fallen to $50 million, or less than 1 percent of its global portfolio, compared with 80 percent in 2005. Meanwhile, Chavez has used his oil wealth to lend $2.5 billion to Argentina, offer $1.5 billion to Bolivia and hold $500 million out to Ecuador.

Chavez, 52, is promoting what he calls a “socialist” alternative to the Washington-based IMF and its biggest shareholder, the U.S. Treasury. The timing couldn't be worse for the IMF, whose global clout is diminishing as countries from Uruguay to the Philippines pay their debts.

“Chavez is the No. 1 enemy of the IMF in the region,” said Jose Guerra, a former head of economic research at Venezuela's central bank and now a professor at Universidad Central de Venezuela in Caracas. “He views the IMF as an agent in the service of the U.S.”

The international lender's worldwide portfolio has shriveled to $11.8 billion from a peak of $81 billion in 2004, and a single nation, Turkey, now accounts for about 75 percent. As its lending wanes, so does the fund's ability to influence government policies. The IMF and its sister institution, the World Bank, have used aid to promote free trade, unfettered investment flows and limited government.

“We don't accept the kind of development the World Bank and International Monetary Fund want to push on us to change our hopes, our souls, our pain,” Chavez told a summit of the Non-Aligned Movement in Havana last September.

Avoiding Conditions

Chavez has proposed creating Banco del Sur, or Bank of the South, to supplant international lenders. Such a bank would allow Latin American nations to avoid the policy conditions that generally come with IMF loans.

“Chavez's effort to undermine the IMF is also an effort to undermine the Washington consensus on privatization and liberal economics,” said Francisco Rodriguez, a professor of Latin American studies at Wesleyan University in Middletown, Connecticut.

Chavez's presidential press office said he was unavailable for comment. IMF spokesman Bill Murray declined to comment.

Chavez has used the wealth of Latin America's largest oil exporter to extend his financial influence. Oil exports last year rose 21 percent to $58.4 billion, according to Venezuela's central bank.

Oil revenue has helped Venezuela amass reserves of more than $34 billion. Chavez also controls an $18 billion pool of cash, known as the Fonden, transferred from the central bank and the state oil company Petroleos de Venezuela SA.

The bounty can't last, said Ted Truman, a former assistant U.S. Treasury secretary for international affairs.

‘Grave Risk’

“Chavez is at grave risk of running out of money,” said Truman, who is now a senior fellow at the Peterson Institute for International Economics in Washington.

Venezuela's budget deficit soared to 8.2 trillion bolivars ($3.8 billion) in the first 11 months of last year from 447 billion bolivars a year earlier. The bolivar has plunged 16 percent against the dollar on the black market this year, making it the world's worst-performing currency.

For now, Chavez shows no sign of slowing down.

Venezuela is offering to help Ecuador as its newly elected leader, Rafael Correa, threatens to default on $10 billion of overseas debt. On Feb. 22, Venezuela offered Ecuador as much as $500 million of “financial cooperation.”

Such offers allow Venezuela to take over the IMF's role as “lender of last resort” to governments, said Mark Weisbrot, an analyst at the Center for Economic and Policy Research in Washington.

Bond Sales

Venezuela is also backing bonds sold jointly with Argentina, Rodriguez said. Venezuela's Finance Ministry on Feb. 26 said it plans to sell $1.5 billion of the so-called “Bond of the South” this week following a $1 billion sale last November.

Venezuelan purchases of $2.5 billion of Argentine government bonds helped Latin America's third-largest economy replenish its reserves after it repaid $9.5 billion of debt to the IMF in late 2005. Chavez said he wanted to “help Argentina end its dependence on the IMF.”

Argentine President Nestor Kirchner, elected in May 2003, said IMF policies had “devastated” his country, which defaulted on $95 billion of debt in 2001. “There is life after the IMF, and it's a good life,” Kirchner said in Munich in April 2005.

IMF Managing Director Rodrigo de Rato defended the fund's record in Latin America in a speech in New York on Feb. 16, saying that the region's economy grew 5 percent last year, and “countries that liberalized trade and reformed the role of the state in the private sector have performed particularly well.”

Hard Times

Prosperity in Latin America means hard times for the IMF, which depends on income from loans. The fund projects a loss of $103 million this fiscal year and is considering selling and investing some of its estimated $6.6 billion gold hoard to cover losses.

“They're having problems, while here in Venezuela we're opening the Banco del Sur,” Chavez gloated during a news conference in Caracas on Feb. 24.

To contact the reporter on this story: Christopher Swann at cswann1@bloomberg.net .