As oil prices plummet, Venezuelans likely to suffer

McClatchy NewspapersOctober 23, 2008 

CARACAS, Venezuela — They line up early, before sunrise, beside a massive metal fence to wait for a government grocery store named for a 1960s Venezuelan revolutionary to open.

These poor Venezuelans come for food, made cheap by subsidies from their nation's immense oil wealth. If residents of the Venezuelan capital's impoverished Catia neighborhood wonder whom to thank, murals of President Hugo Chavez watch over them as they wait.

"The government pays for the subsidies, and that's why we elected the president, and that's why we love him," said Medarda Romero, 66, setting down a black garbage bag full of food. "He cares about the poor. Previous presidents didn't."

Venezuela's government gets 50 percent of its income from oil revenues, however, and now falling oil prices threaten to force Chavez to scale back the food subsidies and other government programs he's used to lift millions of Venezuelans out of poverty.

Not only could this make life harder for the poor but it also could threaten Chavez's political power, because his popularity depends at least in part on his free-spending anti-poverty programs.

"Shortages of food won't help Chavez," said Pedro Atencio, a 40-year-old factory worker, as he waited in line outside the "mercal," as the grocery store is known in Venezuela. "People would become unhappy. That wouldn't be good for him."

International oil prices peaked at $147 a barrel in July but have dropped to below $70 amid the worldwide financial crisis. Venezuelan oil generally sells for about $10 per barrel less than the international price.

Ramon Espinasa, formerly the chief economist for the Venezuelan state oil company, now consults for the Inter-American Development Bank in Washington, which promotes development in Latin America and the Caribbean. He estimates that the government's profits from oil exports will drop to $41 billion this year from $52 billion last year.

Forecasters expect Venezuela's economy to begin weakening shortly after the Nov. 23 state and local elections. Chavez has boosted government spending in advance of the elections to keep the economy buoyant.

J.P. Morgan estimates that national income will grow by 2.5 percent next year, down from 6 percent in 2008 and 8.4 percent last year. Barclays Capital projects anemic 1.5 percent growth in gross national product in 2009.

"He has to reduce spending," said Alejandro Grisanti, who heads Barclays' Latin America research department in New York. "There's no other way. It will hurt his popularity."

What happens in Venezuela has wide ramifications. It's the fourth biggest supplier of oil to the United States.

Chavez has used oil as a strategic tool to win influence throughout Latin America with his anti-globalization and anti-Bush administration message.

Venezuela provides subsidized oil to Cuba and a dozen Caribbean countries, and Chavez also regularly gives cash or loans to friendly leftist governments in Bolivia, Argentina and Ecuador.

He's dismissed suggestions that the declining oil price will hurt Venezuela's economy.

"Should the oil price stabilize between 80 and 90 dollars — more than enough," he said last Saturday. "In the face of the global crisis, I guarantee Venezuelans the country will not be held back. . . . Venezuela has enough social, financial and technological resources to march on with economic growth."

In other comments, Chavez has said that Venezuela can tap into savings or get loans from friendly governments if necessary. He's said that Venezuela has $40 billion in foreign reserves and another $60 billion in other banks, but most analysts think that he's vastly exaggerating that figure.

Still, "there's something of a cushion in the medium term," said Roberto Sifon, who tracks Venezuela for the rating agency Standard & Poor's in New York.

Most Venezuelans seem to realize that international oil prices have fallen, but they continue to flock to restaurants and shopping malls in a consumption binge fueled by the record-high oil prices.

Buying a sandwich at lunch at Subway in Caracas requires a 25-minute wait in line. In shantytowns on the weekend, men drink ice-cold beer in doorways left open to the breeze in the humid weather.

"The president will have to decide what it means," said Jose Briceno, a 51-year-old shoemaker, as he sought the shade of a tree after buying his subsidized groceries. "He's done a lot of things to help my family."

Franklin Rojas, a Caracas-based economic consultant, thinks that Chavez has no choice but to reduce spending and accept an economic slowdown in the face of the declining oil price.

The inflation rate in Venezuela is 35 percent, the highest in Latin America.

The government already was running a budget deficit and a balance of payments deficit this year, "at a time when oil prices were their highest," Rojas said. "The situation will be serious for the country."

Likely to go on the cutting block first: plans to buy more than $1 billion in weapons from Russia, and the billions spent assisting other Latin American countries, Barclays' Grisanti said.

Chavez has a 58 percent approval rating, according to Venezuelan pollster Leon Vicente Lopez. The president is banking on his personal popularity pulling gubernatorial and mayoral candidates to victory on Nov. 23, Leon said.

Along with his undeniable charisma, Chavez has built his popularity among the poor through government food handouts, free health care and programs that educate illiterates and those who never graduated from high school. The state oil company has taken on tasks far afield from producing and selling oil, such as sending trucks to poor neighborhoods to offer subsidized food.

Poverty has declined from 50 percent of Venezuela's population when Chavez took office in 1999 to 33 percent last year, according to government statistics.

"Some 3.9 million schoolchildren — about half of the population between 3 and 17 years of age — now receive lunches in school," reported Mark Weisbrodt, a co-director of the Center for Economic and Policy Research in Washington. He added that the government has created more than 15,000 mercales that provide subsidized food.

Chavez continues to ride high in shantytowns such as Catia.

"Thanks to the president, things have improved," said Julio Cesar Lozada, a 59-year-old construction worker, as he waited for government workers to renew his national identity card without charge.

At the mercal, 2.2 pounds of powdered milk cost 4.7 bolivares ($2.35 at the official exchange rate), compared with 16 bolivares at a private market. The same kilogram of lentils costs 1.25 bolivares at the mercal versus 9 bolivares elsewhere.

However, residents have to wait as long as four or five hours on the weekends to enter, and the stores frequently run out of subsidized chicken.

Demand for the chicken is so high that when it's available, "the line stretches around the block," said Maribel Lopez, a 35-year-old maid, who was waiting on a day when the mercal had no chicken. "But Chavez doesn't know that that is happening. He doesn't know how we suffer trying to buy chicken."

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McClatchy Newspapers 2008

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