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.
Chavez probably won’t cut spending on the social “missions” that have brought services such as health care and adult education into some of the country’s most impoverished areas and which have been key to securing electoral victories.
Chavez says he has enough resources between the central bank’s US$39 billion of international reserves and other off-budget assets to weather the global economic slowdown sapping demand for oil and dragging down prices.
The Philippines yesterday said its coast guard would acquire 40 fast patrol craft from France, with plans to deploy some of them in disputed areas of the South China Sea. The deal is the “largest so far single purchase” in Manila’s ongoing effort to modernize its coast guard, with deliveries set to start in four years, Philippine Coast Guard Commandant Admiral Ronnie Gil Gavan told a news conference. He declined to provide specifications for the vessels, which Manila said would cost 25.8 billion pesos (US$440 million), to be funded by development aid from the French government. He said some of the vessels would
CARGO PLANE VECTOR: Officials said they believe that attacks involving incendiary devices on planes was the work of Russia’s military intelligence agency the GRU Western security officials suspect Russian intelligence was behind a plot to put incendiary devices in packages on cargo planes headed to North America, including one that caught fire at a courier hub in Germany and another that ignited in a warehouse in England. Poland last month said that it had arrested four people suspected to be linked to a foreign intelligence operation that carried out sabotage and was searching for two others. Lithuania’s prosecutor general Nida Grunskiene on Tuesday said that there were an unspecified number of people detained in several countries, offering no elaboration. The events come as Western officials say
A plane bringing Israeli soccer supporters home from Amsterdam landed at Israel’s Ben Gurion airport on Friday after a night of violence that Israeli and Dutch officials condemned as “anti-Semitic.” Dutch police said 62 arrests were made in connection with the violence, which erupted after a UEFA Europa League soccer tie between Amsterdam club Ajax and Maccabi Tel Aviv. Israeli flag carrier El Al said it was sending six planes to the Netherlands to bring the fans home, after the first flight carrying evacuees landed on Friday afternoon, the Israeli Airports Authority said. Israeli Prime Minister Benjamin Netanyahu also ordered
Former US House of Representatives speaker Nancy Pelosi said if US President Joe Biden had ended his re-election bid sooner, the Democratic Party could have held a competitive nominating process to choose his replacement. “Had the president gotten out sooner, there may have been other candidates in the race,” Pelosi said in an interview on Thursday published by the New York Times the next day. “The anticipation was that, if the president were to step aside, that there would be an open primary,” she said. Pelosi said she thought the Democratic candidate, US Vice President Kamala Harris, “would have done