Re-elected Hugo Chavez faces likely economic reckoning

CARACAS, Venezuela (Agencies) — During his re-election campaign, President Hugo Chavez promised to deepen the “21st century socialism” that has meant an ever-greater state role in the economy. That message won him a surprising 11-percentage point win in what many had thought would be a tight race.

Still, he’s set to start a fourth presidential term under challenging economic circumstances. The government’s free-spending ways, bankrolling the generous social programs that aided his re-election, may be seriously crimped.

Chavez faces immediate economic time bombs beginning with a rapidly expanding public debt, one of Latin America’s highest inflation rates and a weakening currency.

Many economists believe Chavez will have no choice but to devalue the currency, the bolivar, by about half early next year at the latest. That will make the money in people’s pockets suddenly worth a lot less and likely drive inflation while putting imported consumer goods out of reach for poorer Venezuelans.

“He’s going to have to deal with some very basic, mundane capitalist things, like reducing inflation,” which stands at 18 percent, said Eduardo Gamarra, a Latin American studies professor at Florida International University in Miami.

Price controls and government subsidies for basic foodstuffs have eased inflationary pressures but a major devaluation would drive prices higher and could worsen scarcities, economists say.

“Investment in social issues is great, but he needs to do other things as well that are going to make that economy more productive,” said Gamarra.

Venezuela’s economy grew by 5 percent this year but only because of government spending, primarily on raising salaries for many of the country’s at least 2.4 million public employees and paying for thousands of new homes that Chavez is giving away, said Joao Pedro Ribeiro, an economist at Roubini Global Economics in New York.

“We think the outlook for the short term is very bleak,” he said, with economic growth at about 2 percent next year and “inflation spiking to 30 percent.”

The black market value of the Venezuelan bolivar, whose official value is set by the government, was double the official rate in July. It is now triple the official rate.

At the heart of Chavez’s economic challenges is declining productivity in the oil industry, which accounts for 95 percent of exports and funds Chavez’s social programs. Governing the country with the world’s largest proven oil reserves has so far insulated Chavez from the fallout of his confrontational polices, including a drop in foreign investment.

But economist David Rees of London-based Capital Economics said the government has relatively few dollars left, “having utilized them to fund an import binge ahead of the ballot. That will add to the reduction in imports and increase in shortages.”

Some experts say oil production has stagnated due to insufficient investment and management problems in the state-run oil company.

One measure of investor confidence in Venezuela, the price of its bonds, took a hit Monday as they fell 5 percent to 7 percent, said Russell Dallen, a managing partner of the brokerage firm Caracas Capital Markets.

The bonds fell in value after Chavez defeated Henrique Capriles, who won 44 percent of the vote, giving the incumbent his smallest margin of victory ever in a presidential election.

The government has more than tripled its public foreign debt from $24.2 billion when Chavez took office to $88.7 billion in the first quarter of this year. Much of that foreign money has come from China, which has lent Venezuela more than $36 billion in exchange for oil shipments.

Even as he celebrated victory before thousands of jubilant supporters early Monday, Chavez appeared to acknowledge he has let down some Venezuelans. People are upset by a soaring homicide rate, power outages and crumbling infrastructure.

“I pledge to you, I repeat, to every day be a better president than I’ve been,” he said, while also promising greater effectiveness and efficiency from a government whose payroll is bloated by patronage.

The 58-year-old leader has said tests show he is cancer-free, but his illness has forced him to slow his pace and cut back on his frenetic days of late-night speeches and Cabinet meetings. He’s endured two rounds of surgery since June 2011 to remove tumors from his pelvic region as well as chemotherapy and radiation treatment.

Venezuela would have to hold a new election if Chavez were forced to step down during the first four years of his term. More health problems would make it even more difficult for Chavez to push ahead with his promised drive to expand the state’s role in the economy and provide even more entitlements.

“As long as Chavez remains as the key driver here, there might be far more inertia than change,” said Javier Corrales, a U.S. political science professor at Amherst College.

Venezuelans will choose state governors in December, and Chavez is likely to save any devaluation until after that election. Such moves are always hugely unpopular because they erode the value of salaries, which have already been hit hard by inflation in Venezuela.