FACTBOX-Key political risks to watch in Venezuela

CARACAS, June 1 (Reuters) - A floundering economy, anger over power and water rationing, elections that may bolster opposition to President Hugo Chavez, new nationalizations and diplomatic tensions with neighboring Colombia are all risks to watch for in South America's biggest oil exporter this year.

RECESSION AND ENERGY CRISIS

Venezuela is likely to be mired in recession for a second year running in 2010 after a 5.8 percent GDP contraction in the first quarter. Some economists forecast the damage could also spill into 2011. Consumer prices jumped more than 5 percent in April -- one of the highest rates in the world -- and on May 18 the government took control of all currency trading, blaming speculators for undermining the bolivar and fueling inflation. [ID:N18157031]. The new government-run market is unlikely to fully meet demand for currency and a new black market may emerge, further weakening the bolivar. That would create more inflationary pressures and could increase cash hits for foreign companies repatriating profits. That said, the government has allowed some foreign firms to send 2009 profits home at last year's better rates.

Electricity rationing has been dampening recovery in the private sector, while hammering output at energy-hungry, state-run heavy industries like steel. Rains have brought some hope in the heavily hydropower-reliant country in recent weeks, but structural problems mean Venezuela is likely to continue suffering an energy deficit until at least next year.

A devaluation of the bolivar in January 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 but the price has plunged in the last month as economic woes deepen. Yields are close to 15 percent, up from 12 percent in April.

Despite the wide spreads over U.S. Treasuries and frequently the world's highest sovereign CDS prices VEGV5YUSAC=MP, the risk of default is low in the short-term because of Venezuela's large oil output and history of meeting its debt obligations. [ID:nN16107974].

Oil prices and output remain the key variables, with any large, sustained drop in either threatening stability and fiscal health. CDS prices shot up and bonds plunged when oil fell in 2008. Output fell 10 percent between 2008 and 2010.

What to watch:

-- Chavez lashing out at the private sector, which he blames for economic troubles. He recently said the recession was the death of capitalism in Venezuela. [ID:nN26225239]

-- Further nationalizations, perhaps in food, healthcare or mining [ID:nN25163924], along with more regulation of the finance sector after chaos in the currency market, and growing imbalances in the economy.

LEGISLATIVE ELECTIONS

Elections due on Sept. 26 are expected to 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 probably keep control of the Assembly, but with a reduced majority that could make it harder to pass major legislation. In the unlikely event the opposition takes control, it will create serious headaches for Chavez before the 2012 presidential election and increase political instability.

Chavez's popularity has been dented by water and electricity rationing, the 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 remains Venezuela's most popular politician.

Critics complain Chavez is becoming more authoritarian as his popularity slips, which could raise political volatility ahead of the elections. They point to the imprisonment of a judge [ID:nN14178911] and the sentencing of a former defense minister and Chavez critic [ID:nN08152911], among others.

Political risk consultancy Eurasia Group has predicted that a fragmented opposition could gain 40 percent of the Assembly seats because Chavez is increasingly being held responsible by voters for Venezuela's problems.

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

What to watch:

-- Increasing rhetoric from both sides, but especially Chavez, ahead of the elections. While mostly noise, Chavez's campaigns have in the past led to market-shaking threats against foreign investors and other governments. Political uncertainty is mostly factored in to bond prices -- the bolivar is the main barometer.

-- Although unlikely, an opposition majority in the Assembly would be a game changer. It would likely bring a short-term boost for financial markets, but that could quickly reverse if a political crisis ensued.

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.

According to government figures, output fell by 10 percent between 2008 and 2010 on OPEC cuts and refinery repairs.

Venezuela's largest refinery, Amuay, is closed for maintenance that could take months. The Carabobo bidding round wrapped up in February brings billions of dollars from companies such as Chevron (CVX.N), Repsol (REP.MC) and a consortium of Russian companies [ID:nN31225561] to develop new extra heavy oil fields in the vast Orinoco belt.

The projects are likely to run behind schedule and new oil output may only replace that lost at older fields. On the positive side, a flood of money linked to Orinoco investments including a $20 billion loan from China will boost the government's and PDVSA's coffers starting this year.

The devaluation in January meant 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 elections loom. The company is also in arrears with service companies and must pay down its debt to them. PDVSA's troubled international image took another blow on May 13 when a natural gas exploration rig operated by the company sank in the Caribbean sea. [ID:nN13256518]

What to watch:

-- Further outages in refineries and upgraders, such as the troubled Curacao Isla refinery [ID:nN13183239] and the latest fire at the Cardon refinery [ID:nN11117169] , or output issues from power shortages in the Lake Maracaibo region.

-- Tension between PDVSA and the oil majors and foreign state companies who are developing new areas.

-- A sharp drop in oil prices or output hurting finances.

DIPLOMATIC TENSIONS

A leading leftist voice 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] [ID:nN07174400].

Relations with neighboring Colombia are very tense after the first round of a presidential election that makes it likely Chavez foe Juan Manuel Santos wins office on June 20. For full Colombia election coverage, click [ID:nCOLOMBIA]

Santos was the staunchest critic of Chavez in the Colombian government when he was defense minister and Chavez calls him a danger for masterminding a 2008 bombing raid in Ecuadorean territory that shook the Andean region. A border clash cannot be ruled out, but wider conflict is unlikely.

It is less clear how Santos' opponent, the quirky Antanas Mockus, would react to Chavez, who he says he "respects."

The U.S. approach to Chavez is often confusing, with the Pentagon recently saying Iran's Qod paramilitaries had a presence in Venezuela, only to be contradicted by the head of Southern Command days later [ID:nN27106312]. Chavez has moved to warm relations, sending his oil minister to a Washington summit in April.

What to watch:

-- Worsening relations with Colombia ahead of June 20 elections and if hard-line favorite Juan Manuel Santos replaces outgoing President Alvaro Uribe.

-- Tensions with the United States ratcheting up as legislative elections approach. However, with tougher economic times, Chavez may be more cautious than in the past, not wanting to chase off large investments that foreigners have in Venezuela [ID:nN15237215]. (Additional reporting by Patricia Rondon, Marianna Parraga and Daniel Wallis; Editing by Kieran Murray)