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Economía y Finanzas  
 
23/03/2009 | Venezuela - Chavez's Revised Economic Outlook

Stratfor Staff

Venezuelan President Hugo Chavez announced changes to government economic policy March 21. The changes include a revised anticipated price of oil (on which the 2009 budget is based), a slight reduction in expected spending and an increase in both sales tax and the minimum wage. These limited changes are accompanied by further consolidation of central government control over the country, including a March 21 directive ordering the military to take control of four ports away from opposition governors.

 

In a much-anticipated speech March 21, Venezuelan President Hugo Chavez announced a series of reforms to the country’s economy. Chavez said the government will raise the sales tax along with the minimum wage, lower the expected oil price and increase Venezuela’s debt burden.

For Chavez, the announcement marks a long-anticipated move to shore up the Venezuelan economy in the wake of the global economic downturn. Venezuela generally relies on oil revenues to provide more than 50 percent of its budget funds, and the fall of oil prices from mid-2008 highs that topped $100 per barrel down to around $40 per barrel has taken quite a toll on the country’s net income. The question the government has been putting off dealing with is where to make substantial budget cuts, and Chavez’s March 21 announcement makes some important yet limited changes. The president likely calculates that any changes that would more thoroughly address the economic downturn — such as seriously trimming social spending to make up for budget shortfalls — might rattle his support base, the poor.

The first move Chavez outlined was a revision of the budget to rely on an oil price of $40 per barrel, instead of the $60 per barrel projected when the budget was first issued. Expected oil production levels were lowered from 3.6 million barrels per day (bpd) to 3.17 bpd. This change is in line with declining output that is a result of budget cuts at Venezuelan state-owned oil company Petroleos de Venezuela, as well as production cutbacks designed to bring Venezuela closer to the reduced quotas mandated by the Organization of the Petroleum Exporting Countries. Although revising the expected oil price is a necessary first step for figuring out how much the government will have to cut from its expenditures, the lowered oil output figure is still at odds with estimates from the U.S. Energy Information Administration and other international observers, who put expected total supply of Venezuelan petroleum at about 2.2 million bpd. This means even Caracas’ revised estimate appears to project a much higher level of income than might actually materialize.

Despite a one-third reduction in oil income, Chavez announced that the budget will be reduced by only 6.7 percent. An increase in borrowing may close the gap, bringing 2009 government borrowing from an initially projected $5.6 billion to $16 billion. With a very low credit rating, Venezuela likely will not find many takers for government-issued debt on the international markets, and might have to rely on the local market to generate the extra $10.4 billion in credit. The country’s commercial banking sector is one possible source of domestic financing.

The plan Chavez announced also will raise the sales tax from 9 percent to 12 percent, a move that will make some headway in compensating for lost oil income. The sales tax will not apply to food, and thus will not affect the lower class as much as the middle class. Along with the increased sales tax came a promise to raise the minimum wage by 20 percent while freezing higher salaries — a move clearly designed to satisfy worker demands for a pay boost and blunt the impact of the economic downturn on the poor. Both the salary hikes and the sales tax increase bring with them the danger of heightened inflation, a serious problem in a country that already has the highest annual inflation rate (more than 30 percent) in Latin America.

Although Chavez has waited to make these limited changes to the government’s economic plan, in other matters he has been far from idle, rapidly ramping up his consolidation of central government control over the country.

An uptick in government activity has included the nationalization of some food production; a decision to go through with the nationalization of the Bank of Venezuela (with Venezuela paying a lower price than originally discussed); redistribution of private lands; and the issuing of an arrest warrant against prominent opposition leader Manuel Rosales. A number of reorganizations have taken place within the government as well, with plans afoot for Chavez to appoint handpicked regional “vice presidents” that would outrank state governors.

The Venezuelan National Assembly’s modification of a decentralization law gave the central government the ability to seize infrastructure — like ports and airports — that the government regards as strategic. The move effectively took control of key transportation hubs out of the hands of opposition mayors and governors around the country. It also sparked a political showdown between Chavez and opposition leaders, with Chavez threatening to imprison rebellious governors. The Venezuelan military moved into four different ports March 21, just before Chavez’s speech. In light of what is clearly a very tight economic situation, Chavez is using every tool at his disposal in an apparent effort to hamper the opposition’s ability to take advantage of certain economic hardship by stirring up grassroots support.

A key threat to Chavez, however, would be a successfully organized uprising among the poor that could destabilize the country and the government. If public unrest swells in response to increasing hardship, the security situation in Venezuela could deteriorate significantly. In the event of such a destabilization, Chavez would have to rely on the military to put down the unrest. But there is a distinct possibility that the military could decline to protect Chavez — or could even support a coup — if it were clear that the Venezuelan population had completely rejected Chavez as a leader.

At this point, Venezuela clearly has not yet devolved into such instability. But the reality is that Chavez is very carefully balancing the need to maintain social spending (and thus public support) with the need to cut down on government expenditures to match shrinking revenues. The limited nature of the economic changes announced March 21 may indicate that Chavez and his advisers see very few good options for achieving this goal, while the consolidation of political and physical control over the country serves to hedge against possible moves by the opposition to stir up discontent.

Stratfor (Estados Unidos)

 


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