Reuters – Key political risks to watch in Venezuela

By Daniel Wallis

CARACAS, Sept 2 (Reuters) – The uncertain pace of President Hugo Chavez’s recovery from cancer, falling oil output that could slow an economic recovery and rising tensions ahead of next year’s presidential election are the main risks to watch in Venezuela.


The 57-year-old socialist leader underwent a third session of chemotherapy in late August, but this time decided to have the treatment at a military hospital in Caracas.

He had traveled to Cuba for surgery and two previous rounds of chemotherapy, so the decision to stay in Venezuela is being interpreted as a sign he feels optimistic about the pace of his recovery. It also avoids giving more ammunition to the opposition, which had accused him of putting national security at risk by governing from a hospital bed in Havana.

The former soldier certainly appeared more healthy in August, hosting several hours-long televised cabinet meetings to launch government projects in infrastructure, agriculture and farming. Such populist plans will be at the center of his campaign as he seeks a new six-year term at the 2012 election.

But there are still few firm details about his condition. Chavez says all his recent medical tests have been positive, and that his doctors have not found any malignant cells. But he has not said what kind of cancer he is suffering from, so it is hard to know the likelihood of remission.

With about 50 percent support in opinion polls after 12 years in office, Chavez stands a good chance of being re-elected at next year’s polls if he can beat the illness.

The panorama changes if his health deteriorates, since he has no obvious successor in his ruling Socialist Party. Wall Street investors have pushed Venezuelan bond prices higher as they consider the possibility of a more market-friendly replacement for the tough socialist.

In the past, Chavez’s electoral success was underpinned by tireless campaigning and face-to-face contact with supporters across the OPEC nation — and that may not be possible now.

The opposition senses its best chance to unseat Chavez at the 2012 polls. It will hold its own primary vote in February to pick a single candidate to face him, posing a big test to the fragile unity of the coalition.

No date has been set for the presidential election, although it is expected to take place in December 2012.

Chavez appears firmly in control of his government. He has changed his lifestyle and has at times shown a more introspective side brought on by the illness.

What to watch:

— Further signs of Chavez’s strength recovering.

— Opposition candidates positioning for primaries.


Venezuela’s widely-traded bonds initially rallied on the news of Chavez’s sickness, with renewed interest from traders assuming a weakened president raises the chances of the opposition winning next year’s election.

Expect to see Venezuela debt trading on new developments in the health saga, with prices also being supported by a government program to buy back sovereign bonds and notes issued by state oil company PDVSA. After a $4.2 billion sovereign issue in July, PDVSA may yet try to raise another few billion after issuing $8 billion already this year.

In a typically dramatic move last month, Chavez announced that he was nationalizing the gold industry at the same time as repatriating some $11 billion in international gold reserves that Venezuela holds in Western banks.

The opposition accused his government of wanting to use the bullion to stock his electoral war chest, while the government said it was merely being prudent by moving its gold, and some $6 billion in liquid reserves, out of countries with mounting debt worries in Europe and the United States.

Risk indicators such as JP Morgan’s EMBI+ and CDI spreads consistently rate Venezuelan bonds as the highest default risk in the world, so investors will remain focused on whether the government can keep paying.

While some analysts feel Venezuela has been issuing too much debt too quickly, its overall debt burden is relatively low and its repayment schedule is manageable.

Only the most pessimistic observers predict a serious cash crunch any time soon, although falling crude production means South America’s biggest oil exporter needs a higher crude price than in the past to balance its books.

After two years of shrinking GDP, Venezuela moved out of recession and the government predicts up to 5 percent growth this year. That would depend on a sustained oil rally and high public spending. The central bank says the economy grew 3.6 percent in the first six months of the year.

Last month, Standard & Poor’s downgraded Venezuela’s credit ratings to B-plus from BB-minus based on a new methodology more heavily focused on political risk.

What to watch:

— More controversial economic announcements by Chavez following the move to repatriate Venezuela’s gold reserves.

— Possible new debt issuances by PDVSA.

— Movements in global oil prices which are significant to Venezuela’s income and overall economic picture.


Venezuela’s PDVSA remains one of the world’s largest oil companies, but exports and production are falling, partly because of the heavy load Chavez has put on the company as the main economic motor of his socialist “revolution”.

PDVSA is required to hand over so much revenue to the state that it has neglected investment in older oil fields.

A wave of nationalizations in 2009 has also hit production, with PDVSA struggling to take on wells and drilling services previously carried out by private companies.

In the latest scandal for the company, it has been hit by the loss of more $500 million to a U.S.-based hedge fund manager who admitted running a Ponzi scheme.

Venezuela’s oil output fell around 200,000 barrels per day (bpd) in 2010. PDVSA now plans to squeeze about 150,000 bpd more from the Orinoco heavy crude belt by the end of this year using horizontal wells and gas injection.

Venezuelan oil exports fell 6 percent to 2.32 million bpd in 2010, and output dropped even faster to 2.78 million bpd.

But with global oil prices rallying above $100, the industry is putting money in Chavez’s election war chest — and his government has decided to increase its take. Officials say new, higher windfall tax rates could bring in as much $16 billion this year if oil prices stay high. But analysts have cautioned the move could trim private sector investment and put pressure on PDVSA’s ability to fund more production.

A ruling could come soon in an arbitration case between Venezuela and Exxon Mobil Corp. related to the nationalization of oil projects in 2007.

A high compensation bill could weigh negatively on bonds.

What to watch:

— More details of investments in projects to exploit the huge reserves in the Orinoco belt.

— Impact of windfall tax hike on investment, production.

— Unscheduled maintenance, stoppages and outages at Venezuela’s refineries and heavy oil upgraders.

— Possible ruling in the Exxon arbitration case.

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