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07/03/2009 | Venezuela - Voting Over, Focus Returns to Finances

Stratfor Staff

Venezuelan President Hugo Chavez has announced the state’s takeover of two rice production facilities and budget cutbacks for state-owned Petroleos de Venezuela. These are the government’s opening moves in response to the global economic downturn.

 

Venezuelan President Hugo Chavez has ordered the nationalization of a rice plant owned by U.S.-based Cargill Inc. The expropriation order, announced March 4, was the government’s second move in the past week to solidify control over rice producers: Chavez also ordered a raid and takeover of Empresas Polar rice facilities on Feb. 27. In both cases, the rationale has been that the companies were not producing enough rice and were selling it at too high a price. Chavez has argued that food processors marketing “specialty products” — with added flavors, for example — are making end runs around price controls on staple items such as rice.

The recent announcements signal that — having won approval of an amendment that abolishes term limits for elected officials — Venezuela’s government is resuming its policy of nationalizations. With this and forthcoming changes to the energy sector, Caracas’ strategy for dealing with the global economic crisis and declining oil revenues is becoming much clearer.

The nationalization announcements coincide with other government statements — especially concerning the energy industry — that signal a renewed focus on financial management in Caracas.

Of particular note is an order for state-owned Petroleos de Venezuela (PDVSA) to pay off debts owed to contractors — an amount that reportedly totaled $7.8 billion in the third quarter of 2008. Last month, PDVSA paid $3 billion in back taxes to the government. Once the contractor debts have been paid, the company plans to cut spending by 40 percent, by revising (and probably eliminating) some of the operating contracts.

Clearly, Caracas is beginning to occupy itself with financial matters again after a period of intense political campaigns that surrounded local and municipal elections in November and then the constitutional amendment over term limits. While Venezuela was enmeshed in political struggle, however, the world economy was plummeting and the price of oil — Venezuela’s main export and chief source of government revenue — collapsed. Chavez was forced to maintain high levels of government spending to protect his popular social welfare programs, and in many sectors, such as food subsidization, spending actually increased.

But now that the campaigns have ended, Chavez is being forced to make some difficult choices. Still reluctant to cut into social welfare programs — which take up 48 percent of the national budget and secure his popularity with Venezuela’s poor — he is looking elsewhere for sacrificial lambs.

The strategy thus far appears to be increased government control over food production — and for PDVSA to essentially take one for the team by cutting operational costs while continuing its contributions to government coffers. The inherent risks of this are clear. The government already controls about half of Venezuela’s rice production — and with more of the food industry being nationalized, Chavez will be able to set prices at any level he wants and subsidize production. This could help to counter Venezuela’s inflation, which, at 31 percent in 2008, was the highest in the region. But government control over the industry also means food processing is likely to become less efficient.

Even greater risks come with the decision to put the onus of spending cuts on PDVSA while still relying on the company for revenue. PDVSA is already in a shaky position, and according to most international energy observers, actual production is about 1 million barrels per day (bpd) less than the 3.6 billion bpd the government reports. There have been reports that Chavez is attempting to secure contracts with foreign energy companies that would help to increase production — and Spain’s Repsol YPF has shown some interest. But financial indicators do not bode well for such a strategy: Not only are the international capital markets extremely shy right now, but the majority of energy companies will be wary of investing in a country that has Venezuela’s track record with nationalizations.

Nevertheless, if oil prices stay low, Chavez may eventually have no choice but to start cutting back on social spending and subsidies.

 

Stratfor (Estados Unidos)

 


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