FACTBOX-Key risks to watch in Venezuela

CARACAS Feb 5 (Reuters) - Elections that may weaken President Hugo Chavez, new nationalizations, a floundering economy, anger over power and water rationing and tensions with Colombia are all risks to watch for in major oil exporter Venezuela this year.

LEGISLATIVE ELECTIONS

Elections on Sept 26 will weaken Chavez's grip on the National Assembly and give the opposition its first substantial voice in the legislature since it boycotted the last vote for lawmakers in 2005. Chavez's socialist party will likely keep control of the Assembly but with a reduced majority that would make it harder to push through major legislation. If the opposition manages to take control of the Assembly, it will create serious headaches for Chavez before the 2012 presidential election and could lead to political instability.

Chavez's popularity is being hit by water and electricity rationing, a recession combined with high inflation, and perceptions of government corruption [ID:nN11174237]. But he has the best organized political party, a healthy campaign war chest and he remains Venezuela's most popular politician. Critics accuse his government of changing electoral districts to its favor and say electoral laws favor his left-wing party.

Chavez's main challenge may be to mobilize his supporters, who have in the past expressed their dissatisfaction by abstaining rather than voting for the opposition.

What to watch:

- Instability caused by street protests, particularly over an electricity and water crisis that looks set to get worse before the rainy season starts in May.

- An opposition majority in the Assembly could be a game changer in Venezuela's deeply-polarized politics.

RECESSION-HIT ECONOMY

Venezuela is likely to be mired in recession for several months despite a boost to government spending enabled by a currency devaluation last month [ID:nN10131274]. Currency risks are still high, with many foreign companies taking a cash hit this year because of the weaker bolivar, and a continuing lack of clarity about the exchange rate regime. The devaluation was seen as favorable to Venezuela's widely traded foreign bonds, such as the benchmark Global 2027 debt VENGLB27=RR, because it improves its fiscal situation. Despite wide spreads over U.S. Treasuries and the world's highest sovereign CDS prices VEGV5YUSAC=MP, most investors believe the risk of default is low because of Venezuela's large oil output and history of meeting debt obligations. Oil prices remain the key variable, with any large, sustained drop threatening government stability and fiscal health. CDS prices shot up when oil prices fell in 2008 and dropped as oil recovered.

What to watch:

-- Further nationalizations, perhaps in health care and insurance, along with increased regulation of the financial sector after a series of small bank failures.

- Chavez hinted last month he could take over a larger bank but that would rock the financial system so is seen as unlikely.

OIL SECTOR

Venezuela is one of the United States' top five oil suppliers but exports are pressured by shutdowns at aging refineries and rising domestic demand for fuel, partly triggered by problems at its hydroelectric dams which have increased reliance on thermoelectric plants [ID:nN17132901]. In 2010, Venezuela's largest refinery, Amuay, is programmed to close for maintenance that could take months and domestic fuel consumption will rise as the government installs new electricity plants. [ID:nN22153260]

Last month's devaluation means state oil company PDVSA receives more bolivars for each dollar of income, which company officials says adds up to an equivalent of 800,000 extra barrels of oil per day. The company's finances will still be tight this year, however. PDVSA finances much of Chavez's social spending and its obligations will increase as the elections loom. The company is also in arrears with service companies and must pay down its debt to them.

What to watch:

- Further outages in refineries and upgraders

- A sharp drop in oil prices hurting PDVSA's finances

DIPLOMATIC TENSIONS

A leading voice of the left in Latin America, Chavez could lose allies after elections in Brazil this year and in Argentina in 2011. The region is already less friendly toward him after right-of-center presidents won power in Panama, Honduras and Chile in recent months [ID:nLDE60H1T7].

Relations with neighboring Colombia are very tense. Mutual accusations of border incursions from both sides mean some kind of violent incident cannot be ruled out, although a wider conflict is unlikely. The tensions could be manipulated in the campaigning for Colombia's presidential election in May and Venezuela's legislative elections.

What to watch:

- Worsening relations if Colombia's President Alvaro Uribe does not run for a third term and is replaced by his harder-line ally Juan Manuel Santos. (Additional reporting by Patricia Rondon and Marianna Parraga; Editing by Kieran Murray)