NEWS ANALYSIS : Venezuelan President’s Corruption Trial Threatens Economic Reforms : Latin America: Nation’s strong growth rate is likely to slow, experts say.

The suspension and impending corruption trial of President Carlos Andres Perez threatens to stall the economic modernization program that has made Venezuela one of the Western Hemisphere’s most attractive investment targets and fastest growing economies, according to diplomats and business sources.

At less risk, at least in the short run, these experts say, is a policy that has permitted gradual but increasingly important foreign investment in Venezuela’s once-isolated oil industry.

Perez’s program for eliminating massive, deficit-causing subsidies, privatizing huge state-owned industries and services and opening the economy to the free market had moved Venezuela from negative growth when he took office in 1989 to a 9% expansion last year.

The roots of the discontent that ultimately led to the downfall of the 70-year-old president were in the negative, if short-term, side of his plans.

To reduce the deficit, Perez introduced an austerity program that curbed subsidies, eliminated featherbed jobs and devalued the currency.

These steps cut the standard of living for many Venezuelans, but the reforms attracted new investment and the decline was being reversed.

Thus, even with the turmoil of the last year, including two failed military coup attempts and a revolt by Perez’s own political party, Venezuela is maintaining a 7.2% growth rate.

That is bound to change, the experts now say. “There will still be some growth this year,” a European diplomat said. “But it will be in the 2% range.”

Even that low figure could look good if the reforms are halted or reversed.

“In the last year, the outlook for (completing Perez’s program before presidential elections in December) was never positive, the odds were always low,” a Western diplomat said after Friday’s decision by the Senate to suspend Perez from office and order his trial by the Supreme Court for alleged misuse of $17 million of government funds. “Now, there is no mandate, no real chance.”

In fact, the greatest danger during the next nine months until a new president takes office, the sources said, is the chance of backsliding in gains already made under Perez.

Under Venezuela’s constitution, the government will be run for the next 30 days by Senate President Octavio Lepage, a former Perez Cabinet officer who broke with the president and has opposed the economic reforms.

If, as is virtually certain, Perez’s trial lasts too long for him to be restored to office even if he is acquitted, the country will be led by an interim president to be named by a badly divided Congress.

“There is no question there will be a weak government for the next nine months,” said an American businessman living here, “one that won’t be able to resist the pressures of people seeking political advantage by promising to give people jobs and subsidies.”

Still, said a Western diplomat, “I don’t expect any outright reversal, but backward steps.”

He pointed to the possibility that price controls could be restored. Perez had reduced from thousands to fewer than 20 the number of products and services subject to government price controls four years ago.

“We could also see control and manipulation of currency exchange rates and renewed restrictions on imports,” the diplomat said.

The implications for foreign investment are dark, the sources said. “Most forward-looking investment already has stopped,” said the Western diplomat. “The money that is coming in is due to the Central Bank’s policy of keeping interest rates higher than inflation.”

Until Perez’s troubles deepened into crisis two months ago, the spread between interest rates and inflation was about 30%. The gap widened last week to as high as 45%.

“That can’t last,” said the American businessman, noting that not only does the policy discourage both foreign and domestic investment, it also drains the country’s foreign reserves.

According to some diplomats and economists, the vital oil industry stands the best chance of weathering the uncertainty of the near future. Venezuela is the world’s sixth-largest producer of oil and is second only to Saudi Arabia in exporting petroleum to the United States.

This year, oil will earn $14 billion for the government and finance 70% of the national budget.

“The impact on oil will be negligible,” said the Western diplomat, “unless the interim government changes the policy” on foreign investment.

The opportunities here in the oil business “are so great that there is almost a frenzy” by foreign companies “to take advantage of (Perez’s) decision to allow a step-by-step penetration” into the once totally government-owned industry.

But one oil industry analyst said two massive joint ventures are in danger because of the loss of government direction.

The first is a $2.2-billion project involving Japanese firms for development of the almost limitless heavy-oil reserves in the country’s Orinoco River basin.

“That still needs Cabinet and congressional approval,” one oil analyst said, “and even if the guys against foreign involvement aren’t that strong, it is going to be hard just to make the process work.”

The other uncertain project is the gigantic $5.6-billion Cristobal Colon joint venture with Exxon, Shell and Mitsubishi to develop liquid natural gas. It remains under congressional review and might be shunted aside in expected legislative deadlock in the months ahead.

Any change in the oil strategy, even if it is simply the result of political and legislative inaction, would “be tragic,” said a Western diplomat.

“If you get rid of the fear Of outside investment, the opening up on oil policy would bring in billions almost overnight,” he said.

The country already has proven oil reserves large enough to last for more than 80 years, he said, and if the heavy oil can be developed commercially, “they could have the largest oil reserves in the world by 2010.”