Uh Ah
By Andrés Cala
Venezuelans on Sunday overwhelmingly elected President Hugo Chávez for another six years –to many at expense of liberty and more clientilism, but to most to extend a long process of economic devolution and populist socialism (or socialism populism?).
With more than 1 million votes and a 10-point percentage point difference in an election with 80 percent voter turnout, Chávez crushed the most serious challenge to his perpetuation in power from left-of-center candidate Henrique Capriles.
An internal fracture is obvious. Both sides continue sparring –even after the elections- over what the future will be for one of the world’s biggest oil exporters.
After almost 14 years in power though, chavismo has become a domestic affair, hardly regional, because its geopolitical phenomena became irrelevant at the beginning of the decade.
Evidence of the latter is that the oil sector –the main reason that Venezuelan elections are relevant to world affairs- was indifferent to elections results.
There is no corporate panic; oil prices dropped instead of increasing as logic would suggest, and above all doomsday scenarios of economic collapse have been ignored.
And that’s because despite that fact that Venezuela’s political evolution (and to a lesser extent of South America) will be diametrically different to the vision espoused by Capriles, drastic reforms in the economy, and by extension in the energy sector, were not expected.
Beyond politics
Capriles is not the right-wing, neoliberal, rich elite that Chávez has made a habit of bashing, but a self described admirer of Lula Da Silva’s economic model that combines a free-market economy with increased social spending and economic devolution.
He proposed to extend many of the Chavista social gains, but without resorting to the political extremes, unchecked authority, and anti-Americanism that Chávez spouses. That would have translated into market reforms, a restitution of current weakened democratic institutions and civil liberties, and a diplomatic U-turn to realign the country with Latin America’s mainstream Brazilian model.
But Chávez, who has had two malign tumors removed and is undergoing radiation therapy, is basically forced to do much of what Capriles promised externally, even while internally consolidating his socialist revolution.
Ever since the costly recession in 2010, and coinciding with his health woes, Chávez has showed his more friendly side to capitalism and foreign investors and creditors. In fact, his diplomatic turnaround with Colombia has been instrumental in delivering regional stability and fighting insurgencies and the drug trade.
But the crude reality –no pun intended- is that more than a decade of unsustainable Chavista economist policies have limited his wiggle room. The country is pressed to revamp the country’s oil sector in the short term.
The oil imperative
Venezuela’s economy will grow 5 percent in 2012 on higher oil prices and growing government expenditure, beating the region 3.2 percent average, according to a report issued this month by the United Nations Economic Commission for Latin America and the Caribbean, ECLAC. In 2011 Venezuela beat all odds growing 4.2 percent, after a 1.5 percent contraction in 2010.
But since 2006, at the beginning of Chávez’s previous term, gross public debt as a share of GDP has almost doubled to 51 percent, and by 2017 it will continue climbing toward 80 percent, according the IMF. This doesn’t include at least $45 billion in loans from China paid for with long term oil contracts, although China pays about have the market rates for them.
Lending rates are currently around 11 percentage points more than the benchmark US bond, compared to Ecuador’s 8.9 percentage points, and Mexico’s 1.7 percentage points. Venezuela is in par with Argentina.
Inflation is 21 percent, the highest in the region and more than twice higher than Argentina’s. In addition, Venezuela is facing at least 18 cases filed in the International Center for Settlement of Investment Disputes against expropriations.
In this scenario only more oil can pay for save Chávez’s expensive nationalizations, social programs, and debts with markets and China.
The oil imperative
PDVSA, the state company, is not just one of the world’s biggest energy companies, but a state within a state. It’s involved in everything from fighting poverty to balancing the national budget.
Chávez inherited 3.5 million bpd production of liquids in 1999 that he hasn’t recovered. The recent increase in production offsets depletion in mature wells, despite increasing investments in 2011 and 2012.
In 2011 it produced around 2.8 million bpd of liquids and it is struggling in 2012 to reach the 3 million bpd target.
Venezuela’s oil production has not increased, but its public spending has, raising the required breakeven prices to balance the public budget to at least $100 per barrel, although some estimates suggests it could top $115 a barrel.
Bottom line, Venezuela’s economy is deteriorating, although to be fair it’s in better shape than most of Europe and not on the verge of collapsing, as many insist.
Little choice
Chávez’s ability to secure his legacy will depend on his ability to render his social revolution economically and politically stable, but that is only possible with more foreign investment, even if he remains anti-American at the core.
Either Chávez fails because he refuses to change and his support base erodes, or he implements a more effective model. Either way, Chávez does not have a repressive hold on power, like Gaddafi, the Ayatollahs or the Castro brothers. Without popular support, he’s doomed.
Furthermore, Chávez is already moving to attract more investment, and has been somewhat successful. He has offered better than market prices. Foreign investment has soared in 2012, after years of declines.
“The time of God will come,” Capriles said in his concession speech, but until then it will be up to Chávez to decide whether his legacy will endure or extinguish when he inevitably is replaced in 2020 or before in case his health deteriorates.