Page last updated at 19:32 GMT, Monday, 26 May 2008 20:32 UK

Chavez in pre-election cash spree

By Robert Plummer
Business reporter, BBC News

When it comes to running the economy, no-one could ever accuse Venezuela's President Hugo Chavez of being a hostage to conventional wisdom.

Supporters of Hugo Chavez at a May Day rally in Caracas
May Day pay rises went down well with Chavez supporters

With the country's most recent statistics showing consumer price rises of 29.1% in the 12 months to the end of March - the highest rate of increase in Latin America - now might not be the best time for inflation-busting pay deals.

But on 1 May, Mr Chavez gave public sector workers an across-the-board salary increase of 30%.

He said maintaining people's purchasing power was a more pressing priority than getting inflation down.

At the same time, he put up Venezuela's minimum wage by the same percentage, to the local equivalent of $372 a month. This, too, is now the highest in Latin America, according to the president.

Why the sudden largesse? Well, Mr Chavez's United Socialist Party of Venezuela (PSUV) is in the process of selecting its candidates for state and municipal elections due to be held in November.

The last time regional polls were held, in 2004, was a high-water mark for the president and his followers, who ended up with 20 of the country's 23 state governorships - although a couple have since defected to the opposition.

These regional elections are the most important in the history of Venezuela
President Hugo Chavez

But since then, Mr Chavez has suffered his first electoral setback. In December 2007, his plans for constitutional changes, including the removal of term limits on his presidency, were narrowly rejected by voters.

If the next elections follow that same voting pattern, pro-Chavez candidates will be left with just 15 governorships, analysts say.

The president is well aware of the danger, and has even gone so far as to describe the forthcoming round of voting as the most important regional elections in Venezuela's history.

As a results, many observers expect Mr Chavez to ramp up public spending in the run-up to November, in order to secure his support among poorer members of Venezuelan society.

Outlook uncertain

No problem, you may say. Venezuela can surely afford it. After all, the country is awash with oil, which continues to fetch ever-higher prices on world markets.

But a closer look at Venezuela's macro-economic performance suggests that the government has less room for manoeuvre than it would like to think.

The oil sector contracted sizeably as a result of inefficiencies and chronic under-investment
Consensus Economics

About 50% of government revenues come from oil, mostly from the state petroleum company PDVSA. But as world oil prices have been climbing, Venezuelan economic growth has been slackening.

GDP grew at a rate of 10.3% in both 2005 and 2006, but this slowed to 8.4% in 2007, while the respected survey organisation Consensus Economics forecasts that it will grow by just 5.6% in 2008.

Even more seriously, Consensus Economics predicts that this year, the government will go from running a budget surplus of 3% to a deficit of 1.3%.

"The strong outturn in the 2007 fiscal accounts belies the fact that the oil sector contracted sizeably as a result of inefficiencies and chronic under-investment," says the organisation's latest survey.

Oil pump in Lagunillas, on the west coast of Lake Maracaibo
The oil industry has suffered from under-investment

Instead of investing in PDVSA to increase production, the government has used the firm as a cash cow, milking its funds to finance social programmes.

Thanks to the president's nationalisation drive, PDVSA now controls all Venezuela's oilfields, but a new windfall tax will see it handing over even more money to the government.

The tax, which will take 50% of oil revenues above $70 a barrel and 60% of revenues over $110 a barrel, also applies to PDVSA's foreign partners, who are now restricted to minority stakes in Venezuelan ventures.

Shunned by investors

There is strong evidence that Mr Chavez's nationalisation programme, which has also extended to electricity, telecoms and the cement industry, is frightening off foreign investors.

Sign protesting against Exxon Mobil's court battle with Venezuela
Exxon Mobil's compensation battle attracted some hostility

One firm, Exxon Mobil, is seeking $12bn in compensation from Venezuela after its oilfields were nationalised last year.

But many companies are now staying away altogether. Figures from the UN's Economic Commission for Latin America and the Caribbean (Eclac) show that Venezuela attracted $646m of foreign investment in 2007, while Colombia and Peru pulled in $9bn and $5.3bn respectively.

Venezuela was even eclipsed by relative economic minnows such as El Salvador and the Dominican Republic, which attracted about $1.5bn each.

None of this appears to be doing ordinary Venezuelans any good. The lack of investment has left industry unable to keep up with growing consumer demand, while price controls imposed by Mr Chavez on about 400 basic goods have led to food shortages.

The president has put up wages for his country's poorer citizens. Now all he has to do is make sure there is enough in the shops for them to buy.

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