The lights are dimming on Chavez

Hugo Chavez will hold his congressional majority in September’s legislative elections in Venezuela. His support base remains strong. His government still exerts plenty of influence in rural regions of the country that are disproportionately represented in congress. A new electoral law will maximize the value of every pro-government vote. Majority control of congress will allow Chavez to dominate the legislative agenda in the run-up to a presidential election in December 2012.

But beneath the surface, his popularity across the country is headed downhill as Venezuela’s economy buckles beneath the weight of its internal contradictions and an overloaded electricity grid leaves much of the country in the dark.

Venezuela’s GDP shrank by 3.3 percent in 2009 — and by 5.8 percent in the last quarter of the year — according to latest central bank estimates. The country remains mired in recession while its Latin American peers have begun to recover. The government is spending freely on the back of higher oil prices in a bid to stimulate the economy, but growth prospects are limited by supply-side bottlenecks and strong disincentives for private investment. Venezuela’s mix of heavy government spending with strict price and foreign exchange controls continues to feed inflation, which hit 26.2 percent on an annual basis in March. To keep a lid on the problem, the government has taken over or threatened to nationalize retailers that pass higher import costs to consumers. This strategy will probably make scarce goods still scarcer and prove unsustainable.

But the single biggest challenge to Venezuela’s economic health may well come from strains on the country’s power grid. Power demand has risen 6 percent a year over the past decade, outstripping the rate of expansion in generation capacity. Officials began rationing power at the end of 2009 and implemented a plan in February to cut electricity for up to four hours every other day across the country (with the exception of Caracas). Nationwide outages will weigh heavily on the country’s ability to recover from recession by slowing production for the manufacturing and service industries, which together account for more than 25 percent of GDP and more than 30 percent of jobs in the formal sector. A state takeover of the last three privately run power generation companies in 2007 has reduced incentives to add capacity.  

Hard times are already taking a political toll on the president. According to respected local pollster Datanalisis, Chavez’s popularity slipped from 61 percent following his February 2009 referendum victory to 43 percent in February 2010. More than 65 percent of respondents in the latest monthly poll think that Venezuela is in a "critical situation." Chavez’s approval ratings remain well above the lows of 2003, when he survived a coup attempt and his support dipped to around 30 percent. But with Venezuela’s economy running on fumes and the government unable to turn things around, Chavez’s numbers will probably sink further.

Chavez still has formidable political advantages. He holds a virtual monopoly on Venezuela’s resources and will take advantage of both higher oil prices and the fiscal boost provided by January’s devaluation of the country’s massively overvalued currency to increase government spending in ways that limit the economic pain for low-income voters. His government has a formidable patronage-based reach into Venezuela’s sparsely populated rural areas, which are disproportionately represented in congress. The government approved an electoral law last year that favors Chavez by weakening the proportional representation system and allowing the largest single group to effectively sweep the elections. Meanwhile, the government-dominated national election council recently redrew electoral boundaries to maximize the impact of government supporters’ votes and limit potential opposition gains.

After the September elections, Chavez and his United Socialist Party of Venezuela will no longer have the full control of congress they’ve enjoyed for the last five years. In 2005, the opposition boycotted legislative elections. With Chavez weakened, his rivals won’t make that mistake again, and if they can present a (more or less) unified front this time, they will probably make some limited headway at the ballot box. But they’re unlikely to win more than 35 percent of seats. Even a weakened majority in congress will allow Chavez to run the government with few checks or balances, but his political standing will become steadily more precarious as the recession drags on.

The country’s oil wealth won’t help as much as it used to. Production, now between 2.2 million and 2.3 million barrels per day, will likely stagnate or continue to decline in the next several years as state-owned oil company Petróleos de Venezuela, S.A. (PDVSA) sinks under the burdens of its spending obligations and poor management. In addition to transferring a growing share of its revenues to the government in royalties, transfers, and direct social payments, PDVSA is being tasked with buying and distributing food to combat shortages, on top of financing recent power infrastructure upgrades.

Given Chavez’s tendency toward confrontation with foreign oil companies, multinationals are unlikely to make major investment commitments, despite the Venezuelan government’s latest efforts to court these firms to develop new projects in the Orinoco region. With the country’s oil production in decline, price hikes will yield diminishing returns. In 2006, the government needed to spend about $2.5 billion to generate a single percentage point increase in GDP growth. By 2008, it needed to spend more than $13 billion to generate the same increase.

With less revenue to dull the economic pain, a rising cost of living, and shortages of vital goods, apathetic voters who support neither the government nor the opposition — and who make up half the electorate — could step off the sidelines and return to the polls for the first time in years. Chavez will resort to authoritarianism as his popularity sinks, setting the stage for a volatile 2012 election campaign.

It will be harder than ever for Chavez to control what happens next.

Patrick Esteruelas is an analyst in Eurasia Group’s Latin America practice.