Chavez Opts for Strong Medicine for Economy

Their oil-based economy on the brink of collapse, Venezuelans braced for tougher times Thursday as the government imposed a risky system of price and currency controls.

Most economists here say the controls offer little hope of staving off what’s shaping up as a disastrous year for the Venezuelan economy, one they say could include hundreds of thousands of jobs lost, double-digit inflation and a possible default on $19 billion in foreign debt.

The economic crash is the fallout from a two-month general strike, just now ending, by opponents of President Hugo Chavez. Led by 35,000 workers of the state-owned oil company, the stoppage failed to drive Chavez from office but paralyzed the economy and cut Venezuela’s crude oil production to a fraction of its normal level of 3.2 million barrels a day.

Economists in Venezuela and on Wall Street are predicting that the nation’s economy could shrink 8% to 22% this year, depending on how much of its oil production it can recover and how fast. Oil production and its indirect benefits account for roughly 40% of economic output.

“We are seeing a social tragedy in the making,” said economist Orlando Ochoa, who predicts that between 500,000 and 1 million jobs will be lost this year. Only war-torn or bankrupt economies like those of Bosnia-Herzegovina or Zimbabwe have had economic contraction as severe as what’s in store for Venezuela this year, he said.

Chavez announced the currency and price controls late Wednesday night, two weeks after he shut down foreign exchange altogether. He acted after about $9 billion in foreign currency left the country in the 13 months ended in mid-January, a seepage that was accelerating.

The latest controls, the nation’s third round of such policies since 1983, set a fixed value of 1,600 bolivars per dollar and limit prices for a group of essential goods. Although the controls may stop the outflow of dollars, they are expected to lead to higher inflation and a black market for scarce goods.

The drop in oil revenue means the federal government may have a $9-billion budget deficit, one reason that U.S. debt rating agency Standard & Poor’s downgraded Venezuelan debt to CCC+ in December, a sign that default in the near future is a strong possibility.

“It’s the worst rating we’ve given among the 92 governments we rate except Argentina, [which] is in default,” said S&P;’s John Chambers.

The dramatic drop in production has already plunged the economy into recession -- it shrank 7.5% in 2002 -- and nearly everyone here is feeling it.

“We’ve never seen a recession like this,” says Inaki Alverdi, general manager of the Alpitour tourist agency in Caracas, the capital. “If business only drops by 40% this year compared with last year, then that will be good. All of our customers booked for January, February and March have canceled. Nobody is traveling.”

Venezuela’s economic problems didn’t start with Chavez. In fact, Ochoa said per-capita income for Venezuelans dropped 25% over the 20 years before Chavez took power in 1999, a symptom of the corruption and inefficiency Chavez promised to fix during his presidential campaign.

But Chavez has proved unwilling or unable to develop a consensus among rival factions, especially since April, when a coup briefly unseated him. An example of his tactics are the legal proceedings he recently opened against four local television stations for allegedly misusing the airwaves. It was seen as a move to muzzle his critics.

“Venezuela is a catastrophe. You have the public sector in a major fiscal crunch, consumers hit by steep rises in unemployment and ongoing political uncertainty. Who is going to invest in this environment?” said Michael Gavin, an economist at UBS Warburg in Stamford, Conn.

The exchange rate for the bolivar set by the new currency regime is considerably lower than its last close of 1,853 to the dollar on the free market, and far from its black market value, which is about 2,500 per dollar.

Chavez also handpicked a five-member Currency Administration Commission to be in charge of distributing dollars among companies and individuals. Businesses say the government’s exchange panel will have discretionary powers that will favor friends of the government and penalize the opposition.

“Not one single dollar to the coup plotters,” said Chavez as he announced the controls Wednesday.

Apart from staple goods, price controls will also be imposed on medicines and house rents, to prevent exaggerated increases.

Sources familiar with the state-owned oil company, Petroleos de Venezuela, say the company will be slow to regain its pre-strike production levels for several reasons. The thousands of wells that shut down once the strike started must be redrilled or reworked, which will take money the government doesn’t have.

Second, 880 technical workers who are best qualified to restart production were fired this week by Chavez for having gone on strike.

Another discouraging note for Venezuela’s economy is that the divisions separating followers of the president and his opposition seem to widen by the day. Efforts by the Organization of American States, the so-called Group of Friends multinational mediators and ex-U.S. President Jimmy Carter to broker an accord are going nowhere.

Government and opposition forces made a series of preliminary goodwill agreements, including pledges of mutual respect, rejecting violence, and a plan to disarm the population, but failed to discuss an electoral way out until Carter put two proposals on the table last month .

The first of these, to cut Chavez’s term from six to four years by a constitutional amendment, is favored by the opposition. But the government has said it will discuss only the other option, that of a referendum on Chavez’s presidency in August, or halfway through his term.

The Group of Friends -- the United States, Brazil, Chile, Mexico, Spain and Portugal -- got into the act in late January by offering their full backing to OAS director Cesar Gaviria’s effort. He remains in the capacity of a mediator, unable to strongly advocate for solutions himself.

On Wednesday, Gaviria offered little hope of a short-term solution.

“People have every right to be skeptical about the results at the negotiating table because we don’t know if we are going to find an agreement,” he said. “I would be skeptical, because we have worked several weeks and not made a pact. I can’t say with all clarity that there is enough political will to come to an agreement.”