Canada's Connection to Chavez
by Steve Visscher, Mawer Investment Management
Venezuelan President Hugo Chavez succumbed to cancer this week. He was a polarizing figure – admired by many for his fervent pride in his country, but despised by others for his confrontational personality and questionable policies. We don’t invest in Venezuelan companies, and are not experts on the region's politics, so we won’t debate the accomplishments or failures of Chavez’s rule. Instead, we bring to light a risk we have discussed in recent years – events that could be detrimental to Canada’s well-being.
What does Canada have to do with Venezuela? Caracas is almost 4,000 miles away from Calgary. We are not significant trading partners. Our histories are not intertwined. What’s the connection?
Venezuela has oil. And lots of it. By some estimates, Venezuela has more oil reserves than any country in the world. But the state controls much of these reserves and therefore foreign companies and private investors have been reluctant to invest in Venezuela’s energy sector due to the unpredictability of the Chavez government. Why spend billions of dollars investing in energy infrastructure in a country crippled by corruption, currency controls, and a government that has been known to seize assets…for the good of the people of course.
But what if Chavez’s passing ushers in a new era in Venezuelan politics? What if a government emerged that attracted foreign capital and expertise rather than repelled it? What if the government adopted capitalist, pro-business policies and invested heavily in the Venezuelan energy sector? What if they fostered a healthy relationship with the United States?
If this were to occur, we could see Venezuela bring an abundance of new oil supply to global markets, which would lower prices, and specifically compete with Canada in terms of supplying heavy oil to the U.S. Gulf Coast refineries. This would generally be a very positive development for countries that import oil and companies that heavily consume it. Specifically, the U.S. would be a beneficiary of this development, particularly the companies in their manufacturing and industrial sectors. A net loser in this scenario may be Canada. As oil prices decline, projects with the highest cost of production (i.e. Canadian oil sands) may no longer be economically viable. Projects are shelved. Jobs are lost. Government tax revenues fall. Demand for our currency wanes. And it isn’t just Canada’s energy sector that suffers. What about the financial sector offering banking and financial services to the energy sector? What happens to vacancy rates and real estate prices as jobs are lost? What happens to the service sector as consumers face hardship? The trickle-down effect on the Canadian economy may be far-reaching.
Early indications suggest that Chavez’s passing will not usher in dramatic change in Venezuela. Elections are forth-coming but Chavez had already publicly endorsed a successor most likely to carry on his vision for the country. We are unlikely to see foreign capital and expertise suddenly flood into the country and unleash their supply of oil to global markets. But situations like this are fluid and Canadians should pay close attention to this developing story.
What is Mawer doing about this? Investing globally. Something we continue to urge our clients to do. By constructing portfolios of companies located all over the world, we can build greater resilience to unexpected events such as a regime change in Venezuela. Because should that scenario unfold, Canada’s economy may slow and our equity markets could lag those of other countries. Readers that are solely exposed to Canadian equity markets should consider a more diversified approach.
Steven Visscher
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