FACTBOX-Key political risks to watch in Venezuela

CARACAS, July 1 (Reuters) - A floundering economy, elections that may bolster opposition to President Hugo Chavez, new nationalizations and diplomatic tensions with neighbor Colombia are all risks to watch for in major oil exporter Venezuela this year.

LONG, DEEP RECESSION

Venezuela will almost certainly be mired in recession for a second year in 2010, making it the only Latin American country not in recovery. With risk indicators such as Morgan Stanley's EMBI+ 11EMJ and CDI spreads VEGV5YUSAC=MP consistently rating Venezuela's debt as the world's highest default risk, the burning question is whether Chavez will keep paying. In the short term, yes. Almost nobody thinks Venezuela will default because of its large oil output and history of meeting its debt obligations [ID:nN16107974]. And while some analysts are now cautious about how the OPEC nation's finances will hold up in the medium term without a sustained rise in oil prices and production, tens of billions dollars in oil investment planned for the next few years should help avoid disaster.

With Chavez determined to keep increasing the state's role in the economy, Venezuela's manufacturing base is likely to erode further, leaving the country even more exposed to world oil price volatility. The government is closing brokerages and recently took over some oil rigs -- triggering a new jump in risk ratings.

The economy is a political problem for Chavez, who has been embarrassed by a scandal over rotting food that critics say shows the state is a bad administrator [ID:nN16174036]. The public is feeling the double-digit inflation more now that economy is shrinking. The government has stopped a 40 percent dive in the value of the bolivar currency on a free-floated market for now, but price rises and attacks on the private sector mean the bolivar remains under pressure.

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For more on the recession, click here [ID:nVENEZUELA]

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Currency risks are high, with many foreign companies taking a cash hit this year because of the weaker bolivar.

Rains have brought a temporary end to widespread electricity rationing due to falling levels in hydro-electric dams, but structural problems mean the country is likely to suffer an energy deficit until at least next year.

Oil prices remain the key variable, with any large, sustained drop threatening stability and fiscal health. CDS prices shot up and bonds VENGLB27=RR plunged when oil fell in 2008.

What to watch:

-- Further nationalizations, perhaps in food, healthcare or mining [ID:nN25163924], and more regulation. A government clampdown on brokerages may fuel a currency black market.

-- Growing imbalances in the economy.

LEGISLATIVE ELECTIONS

Elections on Sept. 26 will weaken Chavez's grip on the National Assembly and give the opposition its first big voice in the legislature since it boycotted the last vote for lawmakers in 2005. Polls suggest Chavez's socialist party will likely keep control of the Assembly, but with reduced numbers that could make it harder to pass major legislation. The socialist party may not even win the majority of the vote, a symbolic blow to Chavez's standing. In the unlikely event the opposition takes control of the Assembly, it will create serious headaches for Chavez before the 2012 presidential election and increase political instability.

Chavez's ratings have been dented by electricity rationing, economic woes and dissatisfaction with how the government is running public services [ID:nN17255157]. But he has the best organized political party and remains Venezuela's most popular politician.

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

Critics complain Chavez is becoming more authoritarian as his popularity slips, which could raise political volatility ahead of the elections. Media freedom is a perennial concern. The government has lately piled pressure on emblematic opposition TV station Globovision, and two of its owners have recently fled international arrest warrants criticized by the United Nations.

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:

-- Increasing rhetoric from both sides but especially Chavez ahead of the elections. While mostly noisy rhetoric, Chavez's campaigns in the past have led to market-shaking threats against foreign investors and 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, partly triggered by a growing reliance on thermoelectric power plants. [ID:nN17127861]

Part of Venezuela's largest refinery, Amuay, is closed for maintenance that could take months.

Refinery outages have kept production below normal levels of 3 million bpd. 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 firms [ID:nN31225561] to develop new extra heavy oil fields.

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.

A looming ruling in a World Bank court could see Venezuela landed with a bill of several billion dollars to compensate the takeover of ConocoPhillips (COP.N) property in 2007.

January's devaluation of the currency means 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 funds much of Chavez's social spending and its obligations will increase as elections close in. 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.

-- New nationalizations in the oil sector. The take-over of 11 U.S.-owned rigs triggered a new CDS price spike last week.

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

-- 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 tense after the election of his foe, former defense minister Juan Manuel Santos to be the next president. Chavez gave Santos a lukewarm welcome but a history of problems mean a violent border incident cannot be ruled out, although wider conflict is unlikely.

Chavez has moved to ease constant tensions with Washington though, sending his oil minister to a U.S. summit in April. That could change as elections approach. [ID:nN15237215]

What to watch:

-- Friction with Colombia as ideological and personality clashes with Santos emerge. Santos' will likely cool his previously brash approach to Chavez once he takes office.

-- Tensions with the United States ratcheting up as elections approach. However, now that economic times are tougher, 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 and Marianna Parraga, editing by Anthony Boadle)