Venezuela's President Hugo Chavez will seek to tough out the recent slump in oil prices and stick to his spending plans and socialist model despite slower world economic growth.
Risk-taker Chavez, who says his statist policies protect oil-dependent Venezuela from the worst of the global financial crisis, is gambling that prices will recover before the South American nation really feels the pinch.
For now, he has plenty of cash. A few days ago, flush Venezuela even launched its first satellite. But a sustained slump in crude oil prices could eventually drive Chavez to scale back lavish spending on arms and foreign aid or even to devalue country's the fixed-rate currency. With that in mind, Chavez and his energy minister have tried to talk up the price of oil. They want OPEC to reduce output further beyond a 1.5 million barrel-a-day cut agreed last month that did little to stop oil's decline.
Chavez, who has threatened to cut oil supplies to the United States in the past, also wants the exporters group to set a minimum price target of $70 or $80 per barrel.
Emerging markets analysts say Chavez needs more costly oil. Moody's said on Tuesday that with oil at $70 a barrel, Chavez would likely run out of savings within six months. Oil accounts for about 80 percent of Venezuela's exports and about 50 percent of the government's budget. Despite his concern, Chavez mocks Wall Street doomsayers and has no intention of slowing his socialist reforms just yet. He is using stump speeches for regional elections to proclaim that policies such as controls on capital flows and nationalizations insulate Venezuela from bank collapses and credit freezes hitting other countries.
"While in the north they are closing banks and holding up infrastructure projects, in Venezuela we are advancing at full speed," said Chavez, who teasingly called his long-time foe U.S. President George W. Bush "comrade" after the United States nationalized parts of its banking system. "While capitalism sinks, Venezuela's socialism grows and will keep on growing and developing."
Ten years from first being elected, the ex-para-trooper who was once jailed for trying to grab power by force has survived a coup, an oil industry strike and a recall referendum. He believes he can also avoid the fate of predecessors whose governments were weakened when oil prices fell, notably after the 1970s boom as Venezuela's oil income crashed. Popular for his health and welfare programs, Chavez has access to sufficient currency reserves and has saved funds to keep his spending promises for months. But he will face tougher times if oil plunges further and stays low for long.
Oil prices are now less than half their peak of $147 per barrel in July, but are still above the average for 2007, considered a boom year. Analysts say even with softening demand, oil is unlikely to drop below $50 a barrel for long. Venezuelan oil is below the $60 projected in the country's 2009 budget. Although partial, central bank data shows Chavez increased spending almost 50 percent in the first of the year.
Even though Chavez has warned the financial crisis could eventually seep into Venezuela's economy, for now he is promising to stick to all spending commitments and expects to cover shortfalls with loans promised by China and Russia.
INVESTOR FEARS
Foreign investors are less convinced of Venezuela's financial stability and have been fast shedding its bonds, along with other emerging market debt. That has sent the value of one of the world's top oil exporter's paper into junk territory.
While investors' fears may be overstated -- despite his anti-capitalist rhetoric Chavez has paid his country's debt -- such devalued paper reduces Venezuela's borrowing options.
With annual consumer prices rising by a third, Chavez has decreed a 30 percent pay hike for most government workers. "Expenditures almost always rise to meet revenues in petro-states during an oil boom. When the boom is over, they are locked into a new level of spending, and this means trouble," said Terry Karl, author of The Paradox of Plenty, a book examining boom-bust cycles in oil nations.
However, Karl sees a way out for Chavez if prices do not stay low for long, via cutting spending abroad and on unproductive and corrupt social programs, instead of following previous governments and borrowing more. "There is an opportunity for self-correction," Karl said. "Whether the government will take this opportunity remains to be seen."
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