Chavez Tightens Hold on Venezuela Economy With Nationalization

By Matthew Walter and Daniel Cancel

Aug. 1 (Bloomberg) -- Venezuelan President Hugo Chavez is set to tighten his government's grip on the economy by taking over his first bank, the local unit of Spain's Banco Santander SA.

Plans to nationalize the country's third-largest bank, announced yesterday, will give the state access to Banco de Venezuela SA Grupo Universal's 285 offices and $9.46 billion in deposits. It follows nationalizations in the oil, steel, cement, electricity and telecommunications industries.

Chavez is using a surge in oil revenue to increase his control of the economy and move the South American country closer to his goal of ``21st-century socialism,'' even as government takeovers scare off investors. The economy expanded at its slowest pace in more than four years in the first quarter as private investment contracted.

``With this price of oil, the government has the capacity to buy, and it seems they're upsizing to control new sectors of everyday life,'' said Alejandro Grisanti, an economist at Barclays Capital Inc. in New York.

Chavez said he will pay fair compensation for Banco de Venezuela, which Santander bought from the government in 1996. He said he has been in touch with the bank's local president, and that he is interested in seeking a ``friendly agreement.''

``I want to get it back because it's the bank of Venezuela -- that's its name,'' Chavez said yesterday in comments on state television. ``We'll put it at the service of Venezuela, because the bank was very profitable.''

Politically, the takeover may be less popular than Chavez's other nationalizations, said Miguel Carpio an economist at Banco Federal CA in Caracas. Quickening inflation and rising crime have hurt the president's approval rating since he was re- elected in 2006. In December voters handed Chavez his first electoral defeat when they rejected his plan to rewrite the constitution.

``The government's taking over a company where people keep there money, so it's more delicate,'' Carpio said. ``Certainly there's going to be doubts about the state's capacity to manage a big financial entity.''

Economists forecast the government will have to pay $1.2 billion to $1.9 billion to take control of the local Santander unit.

Negotiations

``I don't think the government is going to be irrational here,'' Carpio said.

Last year, Venezuela paid $1.32 billion to take over the country's biggest telephone company and $739 million to buy the main electricity company from Arlington, Virginia-based AES Corp.

Chavez is still in negotiations with Luxembourg-based Ternium SA over compensation for its stake in the country's biggest steelmaker, and has yet to announce agreements with cement companies Cemex SAB of Mexico, France's Lafarge SA, and Switzerland's Holcim Ltd.

Venezuela, the biggest oil exporter in the Western Hemisphere, is benefiting from a more than 60 percent increase in crude prices on international markets during the past 12 months. Venezuela is the fourth-biggest oil supplier to the U.S.

A spokesman for Banco Santander in Spain and a spokeswoman at the bank's Caracas office declined to comment when contacted by telephone.

Profit Contribution

Banco de Venezuela, founded in 1890, was nationalized in 1994 and then sold to Banco Santander two years later. The Spanish bank paid $351.5 million for a 93.4 percent stake at the time, according to its Web site.

The Venezuelan bank contributed 109 million euros ($170 million) to its parent company's income in the first half of 2008, 2 percent of the Santander, Spain-based bank's profit.

Chavez said he decided to nationalize the bank after blocking Santander's bid to sell the subsidiary to private investors in Venezuela.

Banco de Venezuela holds 11.8 percent of all outstanding loans in the South American country and 10.7 percent of deposits, according to Banco Santander's first-half earnings report. The Venezuelan unit has 3 million clients nationwide.

Banesco Banco Universal is the largest bank in Venezuela, with a 14.2 percent share of deposits. Banco Mercantil is the second largest, with an 11.5 percent market share.

Banking Industry

The takeover may be a blow to the banking sector at a time when Venezuela's economy is slowing, Carpio said. The government may move more of its cash into the public banking sector, resulting in a loss of deposits for private banks.

The financial services sector contracted 6.4 percent in the first quarter, after expanding 29 percent in the same period a year earlier, according to the central bank. Policy makers have raised interest rates twice this year in a bid to cool a consumption boom that's fueled the fastest inflation in Latin America.

``If they nationalize Banco de Venezuela, it will give the government a greater possibility of regulating the rest of the sector,'' said Cesar Aristimuno, an analyst at Caracas-based Aristimuno, Herrera y Asociados.

-- With reporting by Charles Penty in Barcelona. Editor: Brendan Walsh, Andrew Barden

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.netDaniel Cancel in Caracas at dcancel@bloomberg.net;