Venezuela: regulations, diminished investment flow and more regulations
Fred Aarons
Aarons & Asociados Abogados
Caracas
While the Chavez administration has made steadfast moves to impose regulations aimed at promoting social development, it has also limited the involvement of the private sector by restricting its ability to compete with the public sector. In doing so, the Chavez administration has prompted a substantial reduction of private sector investments in the economy as a whole, in which the financial sector has not been an exception.
Law amendments
The banking law has been amended three times over the last year while more than 20 banking institutions have been the subject of intervention and have been liquidated. The capital markets law has also been amended, in the midst of a major intervention of brokerage houses, aiming to crack down on bond transactions that could have prompted implicit exchange prices in a parallel market for the acquisition of hard currency. As a result, more than 60 brokerage houses went down the tubes amid alleged non-compliance with market regulations. The insurance sector law was also amended while several insurance companies suffered from the turmoil created as a result of the banking interventions on affiliates.
From a public policy perspective, there is no real partnership between the public and the private sectors. On the contrary, the private sector - used to the overwhelming protection of the Venezuelan state of the past - has found itself without any alternative but to play by the rules imposed by the government, hoping that such an approach will help them survive the massive wave of expropriations or similar administrative acts that have increasingly taken place over the recent years.
If we take a look at the latest events in the financial market in Venezuela, we could certainly conclude that an exceptional opportunity has been lost to readjust the functioning of the market for the benefit of the majority of the population, while ensuring that the rules are sound and sustainable to promote its growth, which in turn could have trickled down to the general population as a result of greater investment, enhanced access to not only better services but also increased and improved financial products, and ultimately overall customer satisfaction.
Banking
The banking sector has been recently affected by the wide-spread intervention in banks owned by people that should not have been part of it in the first place because of the dubious origins of some of the funds and lack of banking expertise. Therefore, if the banking authorities were seemingly right in acting against such banking institutions, they should have avoided the entry in the first place of such players in this type of business where people's money and trust are at risk.
The number of banking institutions has recently reduced, which is not necessarily a negative outcome, considering the limited banking penetration in the country and the size of its economy. However, there is no consistency in the policies applied to the sector, and the rules of the game may be perceived sometimes as skewed and misaligned with regard to much needed sustainable development.
Capital markets
Until recently, the capital markets have artificially increased due to market distortions, prompted by the juggernaut exchange control regime in place since 2003. However, after eliminating the exchange of bonds as an alternative to legally procure foreign currency, the market has collapsed and has shown its true colours. The reality is that with the disappearance of these OTC transactions, the market is virtually non-existent and declared defunct with the elimination of more than 3000 jobs, and the liquidation of the vast majority of brokerage houses. These circumstances do not mean that there was no need for regulation. On the contrary, regulation in the capital markets has been much needed for years - regulation based on sound policies aimed at promoting savings as a mechanism to generate real and long term investments in the economy.
Insurance law
At the other end of the financial spectrum, a new insurance law was approved last year to promote greater access to insurance coverage in the midst of a non-performing public health system. Private-owned hospitals have been swamped by an influx of patients employed by both the public and private sector alike. As a result, insurance requirements are now less restrictive, thus increasing the financial burden on insurance companies that are mostly ill-prepared for such a surge in coverage.
Regulation in the Venezuelan financial market has dramatically changed before, but the supposed main beneficiaries of such policies have noted little real change. Indeed, there is not a real culture of service in Venezuela, which may contribute to such perception. Thus, the entities that play a role in the financial sector have found themselves between 'a rock and a hard place', due mainly to the constant changes that they have introduced as a result of newly adopted legal requirements and the limited long term benefits that such policies bring to the population as a whole. In some instances, they are even perceived as responsible for the poor or limited results of such policies.
Conclusion
A move should be made to establish the required consensus to promote rational goals and an appropriate legal and institutional framework. It is not an easy task for developing countries - ask the most developed countries and we could ascertain that there is no single answer whether in a socialist framework or in a fierce capitalistic one - but all the parties must ponder about the proposed long-term goals and determine from there the different alternatives to attain them. Irrespective of the political, economic and social models that are apparently applied, a much needed partnership between the public and private sector is needed in Venezuela to achieve sustainable economic and social development. Time is of the essence to attain critical results in favour of the population based on new investments, an invigorated labour force, preservation of human capital, sound monetary policy, and promotion of savings to allow all social classes access not only to basic goods and services but also to a better living standard resulting from sustainable policies over time.