Riding Out the Storm

As oilmen say about the price of oil, the only thing you know for sure is that next week, it will be different. The same could be said of Venezuela. That’s not only because, as the western hemisphere’s biggest oil producer, the country is so much at the mercy of international oil markets. As the first half of 2002 came to an end, Venezuela was living out one of the most turbulent periods of its extremely turbulent recent history.

Ever since President Hugo Chávez was briefly thrown out of office in April, the country has been tearing itself apart. On the one hand are the reformers, among them Felipe Pérez and Tobías Nóbrega, appointed in May to head the key planning and finance ministries, respectively. If they prevail, Venezuela is likely to take the orthodox road to fiscal responsibility and achieve sustainable growth.

On the other hand are the more radical members of Chávez’s Fifth Republic Movement (MVR) party, known by detractors as the talebanes. Among them is Diosdado Cabello, the former vice president, replaced following the April coup in what looked like a gesture of reconciliation. Cabello, however, has reappeared as minister of justice and the interior, and plays a leading role in organizing the so-called “Bolivarian circles.” These quasi-militias were accused of shooting and killing demonstrators during anti-government rallies before the April coup. Cabello recently warned that if democracy were threatened, they would take to the streets again. If he and his kind prevail, the outcome seems certain to be more violence.

The tension between the two groups and their supporters is palpable on the streets of Caracas, most obviously in the ubiquitous graffiti: where one group has scrawled “Fuera Chávez,” another has crossed out the “Fuera” and written over it “Viva” – and vice versa.

When Chávez returned to office after the April coup, it seemed there was a chance of reconciling the two sides. The president, apparently chastened, established a “dialogue commission” to bring together government and opposition representatives. The appointment of Pérez and Nóbrega was welcomed as a sign that the president’s Bolivarian revolution would take second place to getting public finances and the economy back on track. Indeed, Nóbrega wasted little time in announcing that he would ask the National Assembly to increase value added tax to 15.5% from 14.5% and raise the financial transactions tax to 1.0% from 0.75%. He said the moves would bring the primary budget deficit (before interest payments) down to 1.9% of gross domestic product – or about $3 billion – from 2.7%.

Nóbrega hopes to trim the deficit further by making spending cuts of between 10% and 12% of GDP. However, it is not clear where these savings will be made.

There are many who fear the changes could merely plunge the country further into recession. The economy is expected to shrink by at least 3% this year, but it could do a lot worse: GDP fell by 4.2% during the first quarter alone. Announcing the tax increases, Nóbrega sought to calm fears that they would dampen hopes of recovery even further. “This is not a draconian plan or a recessive plan,” he said. “We’re taking the middle path.”

Multilateral Help
Nóbrega also said the government would turn to multilateral agencies such as the International Monetary Fund and to international capital markets to raise part of the $6 billion it needs this year to meet interest payments on existing debt. Andrés Santeliz, of the National Assembly’s economic and financial advisory committee, says the government will seek $4 billion from multilaterals and the debt markets, and will try to raise between $3 billion and $4 billion in bond issues during the second half of 2002 and the first half of 2003. “We’ve been luckier issuing in Europe and Asia in the past, but we will try to issue in dollars as well,” he says.

One problem Nóbrega nneds to tackle concerns FIEM, the macroeconomic stabilization investment fund set up in 1998 in an attempt iron out the effects of volatile oil prices on the Venzuelan economy. It is supposed to receive half the revenue of oil sales priced above $9 a barrel, plus a percentage of non-oil revenues collected by the federal government and state-owned entities. By the end of last year, the fund had grown to $7 billion.

But then President Chávez decided to stop making contributions and began drawing on the part of the fund reserved for the federal government, now nearly exhausted. Says Oscar García, chairmam and chief executive of Venezolano de Crédito. “The government should have put $4 billion into FIEM last year. That $4 billion has simply disappeared, with no explanation at all.” Santeliz says the government will overhaul the fund to make contributions less ambitious and to exert greater control over how and when its monies are used.

No matter how reasonable the reform proposals sound, the government may have trouble getting them past the National Assembly. The climate of reconciliation that followed the April coup has quickly reverted to one of growing rancor. Former members of Chávez’s MVR party who defected to the opposition before the coup have been harassed. One of them found a bomb in his office at the end of May. Says James Barrineau of Alliance Capital in New York, “The gap between the two sides has become like a nasty divorce. The opposition is so focused on getting rid of Chávez that there will be great difficulty getting the reforms through. Even if the opposition likes the reforms, they will find them very hard to swallow if they help Chávez.”

The president’s dialogue commission quickly evaporated into nothing. While some members of the government work towards reform, others seem to be working towards conflict and division. The threatened mobilization of the Bolivarian circles is one example. The government’s apparent disdain for public opinion is another. A protest march in Caracas at the beginning of June to demand the resignation of the attorney general for failure to take any action against alleged corruption and other abuses attracted several hundred thousand people, but resulted in nothing. Says García, of Banco Venezolano de Crédito, “No attention is paid to the will of the people. Instead of dialogue, the country has been divided between those with some education and ambition, and the rest. Venezuela used to be a classless country, and now we have created a society of hatred.”

Chávez seems increasingly determined to get his revolution back on track. He has once more been sounding off against “oligarchs,” globalization and “neo-liberalism,” which he again described as “the road to hell” during a European Union and Latin American summit in Madrid in May.

The result is a climate of deep uncertainty. Many middle-class Venezuelans feel personally threatened by his rhetoric. Says Alejandro Grisanti, head of research at Santander Central Hispano in Caracas, “The message he’s sending to his supporters is, ‘If you don’t have anything to eat, go out on the streets and steal it.’ ” Others talk of being harassed by members of the Bolivarian circles on motorcycles. “They drive around the more expensive residential areas in groups of 10 or 15, threatening us,” says one businesswoman. “They’re making it clear that they know where we live.” Many middle and lower middle class Venezuelans talk of leaving the country.

Typical of the uncertainty that plagues Venezuelan life is the controversy over a package of 49 laws introduced by Chávez last November under special enabling legislation granted a year earlier by the National Assembly. Many of the laws are designed to grant protection and opportunities to the poorest sections of Venezuelan society. But Chávez’s opponents say that they do so by undermining the rights of other citizens. The land law, for example, appropriates unproductive agricultural land. The coastal zones law nationalizes all land and property within 80 meters of the coast. The fishing law requires industrial fishing boats to operate at least six miles off the coast, as opposed to three miles previously.

Says García, “Because of the 49 laws, people are not willing to invest, they are afraid that there is no rule of law. It’s a kind of tragedy. The laws themselves affect private property rights, and there is always the threat of other laws that could affect other sectors in other ways.”

In the mood of reconcilliation that followed the coup, 17 of the 49 laws were put up for discussion and possible amendment or repeal. But with tensions increasing between government supporters and opponents, there is no guarantee that progress will be made.

Desperation Devaluation

That is not to say, however, that nothing can be done. Indeed the devaluation of the bolívar in February came as a surprise to many who expected Chávez to cling to the strong currency – he had often threatened to implement currency controls rather than devalue. Alejandro Grisanti at Santander says, “Chávez has been more orthodox that you’d think. He accepted the political cost of devaluation and although he has threatened to use price controls he has never implemented them.”

The short-term cost of the devaluation will be inflation and recession. The currency lost 42% of its value against the dollar between February 12 – the day Chávez devalued the currency – and early June. But the move was desperately needed. The overvalued bolívar had made it almost impossible for Venezuela to export anything other than oil, and had exposed local manufacturers to devastating competition from imports. The result has been bankruptcies among local firms, and migration by multinationals.

The devaluation was not the only incidence of free market orthodoxy from Chávez. He has been known to welcome private foreign capital when it is seen to create jobs and investment. He gave his personal approval to the hostile takeover by US utility AES of Electricidad de Caracas in May 2000, calling AES chief executive Dennis Bakke a “revolutionary entrepreneur.”

James Barrineau, at Alliance Capital, says, “Chávez has walked the line between revolutionary rhetoric and sound market principles. They’re likely to make some of the fiscal savings they want.”

However, even with the political will to get the reforms done, it will be at least a year before they have much effect. In the meantime, the country must struggle along under a fiscal deficit likely to exceed 8% of gross domestic product this year, and with a monetary policy based on ad hoc measures.

Still Popular
The opposition, meanwhile, has failed to take advantage of the growing resentment towards Chávez. The traditional political parties, whose fall from public favor helped Chávez to victory, remain discredited and unpopular. Despite his diminishing support, Chávez is still the most popular politician in the country. According to a recent poll conducted by the Venezuelan firm Datanalisis, between a third and two fifths of Venezuela’s population still side with the president. There is no obvious opposition figure who could muster that kind of support.

“That’s the problem for Venezuela,” says Barrineau. “The general disdain for Chávez hasn’t coalesced around any opposition figure. Chávez managed to demolish the previous party system, and the opposition has failed to generate support for any potential unifying candidate.”

That means that Venezuela must continue to get along with a president whose personal whim could overturn hard-won policy initiatives over night. As the constitution stands, the first chance Venezuelans will have to vote him out of office is at a referendum in 2004. Unless of course something less predictable happens.

“It seems clear that what happened in April was the eighth inning, not the ninth,” says one executive at a multinational company in Caracas. “The last innings is still to come. What’s not clear is who the big players will be – whether it will be the military, the National Assembly, or someone else.” W