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Crude awakening: Oil prices will dictate how much pain Venezuelans feel. (Outlook).

Like lots of Latin Americans, 47-year-old Caracas cabbie Agustin Gonzalez plays the lottery. Only these days he's betting it all on the U.S. immigration visa lottery. If he, his wife and three kids get papers, they'll be on the first plane out, he says.

"It's a shame," Gonzalez says. "When I was a small boy, thousands upon thousands of foreigners wanted to come to Venezuela to live and work here. We had oil. We were rich. But then politicians stole it all and left us with a country full of misery, unemployment and criminals. And the worst is yet to come.

Venezuela is in for a rough ride indeed. President Hugo Chavez's bet on social programs to grow the economy needs a steady oil price. State-owned Petroleos de Venezuela (Pdvsa) accounts for 80% of exports, half the government's income and nearly a third of gross domestic product (GDP). Sustained lower prices mean Venezuela's economy has precious little breathing room.

Oil analysts see lots of wild cards in the deck: Mexico and Russia could open the spigots, while an expansion of the U.S. war on terror to Iraq could strangle Middle East supply. Prices "in the high teens" are likely, says John Tobin, executive director of the non-profit Energy Literacy Project in Evergreen, Colorado. "But I can see prices going down into the low teens. The next two years are going to be very, very volatile."

Pressured, Chavez in October forced Pdvsa to double its normal US$2 billion payout to the government. There's still more than $7 billion stashed in a three-year-old price stabilization fund. As oil floated around $28 dollars a barrel, Chavez stuffed away the cash. But prices have since crashed back to earth. Anywhere below $14 a barrel means Venezuela's already meager GDP growth grinds to a halt. Venezuelan oil at press time brought $15.46 per barrel.

If the oil price misses the government target of $18.5 per barrel, Venezuela faces some hard choices: Hit Pdvsa for more cash or break into the piggy bank. But that bank has limits. If the country exports its normal 2.6 million barrels a day at $14 a barrel instead of the target price, the stabilization fund is wiped out in less than 12 months.

Exposed. International reserves--just more than $19 billion--will be needed to stave off speculative attacks on the bolivar. The currency has appreciated nearly 30% since Chavez took office in February 1999 and is, by some estimates, overvalued by as much as 50%. Foreign direct investment, steadily rising from less than a billion dollars annually in the early 1990s to a high of $4.5 billion in 1998, helped keep overvaluation from spiraling out of control. But investment cooled. Chavez's near doubling of royalties on private oil concessions to 30% last year isn't likely to help.

The real risk, though, lies in government debt, says Robert Bottome, editor of the Veneconomy newsletter in Caracas. Venezuela ran a deficit of $10.7 billion in 2001 and is set to repeat that figure in 2002. If oil hits Bottome's expected price of $15 a barrel, government debt in 2002 balloons to $20.1 billion, around 10% of GDP. The government has bought time by "ramming huge amounts of public-sector internal debt down the throats of the banks," says Bottome. "At some point, the banks are going to choke on it," he says.

"I feel like an idiot," says Malu Rodriguez, 34, a divorced caraquena with two children and the owner of a small stall at the popular Guaicaipuro market in downtown Caracas. Rodrigurez campaigned and voted for Chavez in 1998 and again--with a little less fervor--in 2000. "But he turned out to be a fraud, like everybody else," she says. Coming from a campaign worker, that's no endorsement.

[Graph omitted]
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Author:Rivas-Pita, Julio
Publication:Latin Trade
Date:Feb 1, 2002
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