Tue, Oct 28, 2008 - Page 7 News List

Falling oil prices may cut Chavez spending spree

BLOOMBERG

The same tumbling oil prices that led OPEC to slash output last week threatens to send Venezuela’s economy into a tailspin, and put an end to President Hugo Chavez’s ambitions to expand his socialist revolution at home and abroad.

To cope with plummeting oil revenue, the source of half the government’s spending, Chavez may have to cut domestic handouts and foreign aid.

The first items likely to go will be arms purchases from Russia, oil subsidies for Cuba, and job-creating local projects such as bridges and subways, economists say.

“You have a country with an oil boom, that doesn’t know how to save, doesn’t know how to set up productive industries that generate jobs, and goes into debt,” said Elsa Cardozo, a professor of political science and international relations at the Universidad Central de Venezuela. “Then oil prices fall and the party ends.”

Venezuela may be poised to repeat the economic collapse it suffered in the 1980s at the end of its last oil boom. Former president Carlos Andres Perez, employing policies similar to Chavez’s, lavished petrodollars on public works projects, foreign aid and nationalizations in the late 1970s, setting the stage for a 1983 currency devaluation and spending cuts that sent millions of Venezuelans into poverty.

“Venezuela is now more dependent than ever on oil,” said Jose Toro Hardy, a former board member of state oil company Petroleos de Venezuela.

“Venezuela is the most vulnerable country in all of Latin America to a falling oil price,” he said.

Chavez is already spending beyond his means, posting a US$7 billion budget deficit in the first half of this year, a period of unprecedented oil prices, on a US$63.9 billion budget for the year.

Economists’ estimates of the minimum oil price Chavez needs to sustain his economic policies range from US$120 a barrel to US$65. Oil settled on Oct. 24 at a 16-month low of US$64.15 a barrel in New York.

Below US$80 a barrel, it’s likely that Chavez will devalue the bolivar for the first time since 2005, sparking a surge of inflation and a drop in real wages because of Venezuela’s reliance on imports, said Gustavo Garcia, an economics and public finance professor at the Instituto de Estudios Superiores de Administracion, a Caracas business school.

Slashing foreign aid and arms purchases, while diminishing Chavez’s influence in the region, will have the smallest political cost domestically, said Alejandro Grisanti, director of Latin American analysis at Barclays Capital.

Venezuela spent US$4.4 billion on 12 contracts for Russian weapons, the Kremlin said. The agreements include deals to buy 100,000 Kalashnikov rifles, 50 military helicopters and 24 Su-30 fighter jets, a US Defense Intelligence Agency report said. Russia last month offered Venezuela a US$1 billion line of credit to buy more weapons.

Chavez has also used his oil-fed largesse to offer subsidized financing for poor countries in the Caribbean and Central America to buy Venezuelan oil products. As of July, the 18 countries in his Petrocaribe alliance were receiving up to 200,000 barrels of oil a day.

Domestically, Chavez may have to end his drive to nationalize businesses in the so-called strategic sectors, Grisanti said.

The government so far has swept up the country’s biggest telephone, electricity and steel companies, among others, at an estimated cost of US$11 billion, said Ecoanalitica, a Caracas-based economic consultant.

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