For Chávez’s Heir, The Economy Looms Large

Inflation, a big budget deficit, and a decimated oil industry defy an easy solution | Chávez was “virtually the only governing authority in the country”

Charlie Devereux, Corina Pons, Indira A.R. Lakshmanan, and Matthew Philips

Maduro salutes Chávez shortly before ElPresidente’s death


Hugo Chávez died without completing his Bolivarian revolution — a vaguely defined utopia where workers ruled, the state was ever-generous, and the landowners and industrialists were in permanent retreat. Instead, Venezuela faces political infighting and the risk of unrest after the death of Chávez, who leaves behind a polarized society, a high homicide rate, and an economy in need of help.

The former paratrooper’s demise after 14 years as president opens up a void, even though the cancer-stricken leader urged supporters to elect Vice President Nicolás Maduro to succeed him. “He dominated politics so thoroughly that it is impossible to forecast what comes next,” says Peter Hakim, former president of the Inter-American Dialogue in Washington. “He was the commanding political presence, virtually the only governing authority in the country.”

The question is whether Chávez’s supporters can continue to afford Chavismo. Chávez bolstered his popularity among Venezuela’s 9 million poor by subsidizing food and housing, expanding education and health care, and reducing poverty. As government control of the economy spread, Chávez’s critics blamed him for the nationalization of more than 1,000 companies or their assets, as well as currency controls and price caps, which they said discouraged investment, created food shortages, and fueled inflation. Above all, his critics condemned Chávez’s use of Petróleos de Venezuela (PDVSA), the state oil company, as a source of nearly unlimited funds for social programs.

After years of shelling out dividends to the government and spending little on new technology and equipment, PDVSA can’t come close to producing the amount of oil it managed easily before Chávez’s ascent to power. According to the BP Statistical Review of World Energy, from the start of the Chávez era through 2011, Venezuela’s oil production decreased 13 percent, despite discoveries that gave the country the largest proven oil reserves in the world. The announcement in June 2011 that Chávez had cancer prompted investors to speculate that his departure could pave the way for the opposition to win power and introduce more market-friendly policies, which would help bolster oil production. Venezuela’s dollar bonds returned 46 percent last year, according to JPMorgan Chase.

If, as is likely, Maduro is elected president sometime this year, even that ardent Chávez supporter will have to face the need to restore PDVSA. The quickest way to upgrade the state oil company would be to cut its dividend to the government and recruit outside partners to help repair its fields. This could be an opportunity for big oil companies to invest in Venezuela, though they may not be U.S.-based. ConocoPhillips and ExxonMobil still have arbitration cases pending against Venezuela for seizing their oil fields and offering what they say was inadequate compensation, so they are unlikely to jump back in soon (page 24.) The big advantage of investing in Venezuelan oil is that extracting it doesn’t present high-tech engineering problems. “It’s the sort of thing where you could increase production largely by throwing money at it,” says Citigroup oil analyst Tim Evans.

Chávez’s successor will have to deal with the consequences of the late president’s heavy expenditures on new social programs to guarantee his reelection in October. The spending spree resulted in a budget deficit estimated by Moody’s Investors Service to be about 11 percent of gross domestic product. The government devalued the currency by 32 percent in February in the hope of closing the budget gap by bringing in more bolivars per dollar of oil exports. The devaluation could also drive inflation as high as 35 percent this year, as imports become more expensive, according to Nomura Securities. At the same time, the economy may lose momentum after the binge spending of the campaign: Growth will slow to 1.7 percent this year, according to the median average in a Bloomberg survey of 10 analysts.

A market-friendly president would probably cut the costly subsidies many Venezuelans enjoy for gasoline and food, seriously trim the ranks of the bloated civil service, and woo back the $150 billion in capital that has fled the country since Chávez’s government fixed the exchange rate in 2003. That probably won’t happen, even if opposition leader Henrique Capriles Radonski becomes president.

Beneficiaries of Venezuelan programs such as the Petrocaribe, which allows its 18 member countries to take out 20-year loans at 1 percent or 2 percent interest to acquire Venezuelan crude, may lose out, says Giovanna de Michele, a professor in international relations at the Universidad Central de Venezuela. The Petrocaribe program has dispensed oil worth more than $14 billion since 2005, oil minister Rafael Ramirez said last year. Cuba, too, depends on Venezuelan largesse. The Cubans get 97,000 barrels of oil a day from their ally, and they repay by sending doctors to work in Venezuelan community clinics.

Regardless of whether Chávez’s party remains in power, his influence will continue through his supporters in the judiciary, congress, and the armed forces. Although the style of government would change if the opposition takes over, Chávez’s focus on social issues will live on, says Gregory Weeks, a professor of political science at the University of North Carolina at Charlotte. “It took years for the opposition to realize that a lot of what Chávez did, Venezuelans liked. The emphasis of the state’s role in the economy is something that will be long-lasting.”

The bottom line Under Chávez, oil production fell 13 percent, while inflation, food shortages, and crime sapped the economy’s strength.


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