Chávez Wins – Venezuela Loses
On February 15 the Venezuelan electorate voted in favour of the constitutional amendment that allows the indefinite re-election of all elected government officials. Crucially, the vote enables President Hugo Chávez to run in the 2012 presidential election, and beyond, providing him with a mandate to accelerate his socialist revolution, which he believes will take until at least 2019.
The vote passed with 54.3% support, a larger majority than polls had suggested, which may allow the government some room to enact much-needed but highly unpopular economic adjustments over the coming months. Chávez’s acknowledgment that the economy faces difficult times in his victory speech could indicate that a change in policy will be made sooner rather than later, which would be a positive development for the economy and would likely be met by a rally in local assets. At this stage, though, there has been no talk of tax hikes or spending cuts, which would be needed to rein in inflation and support private sector economic activity over the medium term.
The country’s medium-term economic outlook remains unchanged by the result. A sharp contraction in economic output will ensue this year and next (5.6% in 2009 and 1.7% in 2010) as will a continued deterioration in the country’s business environment as the government continues to increase its control of the economy, squeezing out private sector enterprise. While large-scale nationalisations may be too expensive for Chávez to go through with at this time (as evidenced by the recent announcement that the government may not take over local banking group Banco de Venezuela), he is likely to look for other ways to accelerate his plans and to meet the demands of his supporters. Handing out more land to poor farmers could be an option.
Even if the government enacts some serious austerity measures, inflation is still likely to rise as the parallel exchange rate depreciates and domestic production deficiencies persist. Having said that, dealing with the problems in the short term should prevent a hyperinflationary spiral. The official exchange rate peg is likely to be adjusted weaker over the coming months from its current level of VEF2.1500/US$ to VEF3.0000/US$. The biggest risk to this, though, comes from the possibility of the government continuing with its ‘stealth devaluation’ policy of restricting dollar access at the parallel rate. In such a scenario, I would expect to see the parallel exchange rate (already at VEF5.8000/US$) depreciate further.
Venezuelan Exchange Rates, VEF/US$
Chávez’ Grip On Power Will Be Hard To Break
Over the longer term, the political situation will largely dictate the country’s economic outlook, and the removal of presidential term limits seriously raises the prospect of Venezuela taking a similar path as seen in Cuba. It is Chávez’s aim to remain in power indefinitely (until 2049 to be exact), and this is looking increasingly possible at this point. The government has an extremely tight grip on power, and traditional opposition parties, demoralised by the defeat, could find it difficult to make inroads into the Chavista-dominated political scene, particularly as the president aims to strengthen the power of loyal grassroots groups that may undermine the opposition.
Weakening Economy Will Be An Obstacle
The biggest challenge facing Chávez is the impending economic crisis, which could limit his ability to provide direct financial support to his closest supporters, who rely heavily on state handouts. Sharply declining government revenues would make this policy difficult to sustain, increasing the possibility that his support base will deteriorate. However, even if his support base does dwindle as the economy worsens, there would be no guarantee that the opposition would be able to capitalize, given that Chávez has the courts, the legislature and the electoral council all answering to him. Should Chávez be successful in his plan to transform Venezuela in line with the Cuban economic model, we could see further atrophy of the country’s non-oil private sector and the reliance on oil revenues increase even further.