FACTBOX-Key political risks to watch in Venezuela

CARACAS Feb 1 (Reuters) - Political rows over when President Hugo Chavez will give up decree powers, jockeying ahead of the 2012 presidential election and a weak economy are the main political risks to watch in Venezuela.

CHAVEZ DECREE RULE

Chavez infuriated opponents at the end of last year by asking the outgoing National Assembly for fast-track decree powers that would last until mid-2012, giving him a potential strangle-hold on the legislative process until his re-election campaign is well underway. [ID:nVEDECREES]

But the former soldier struck a more conciliatory note at a major speech before parliament on Jan. 15, calling for dialogue with the opposition and saying that, if reconstruction projects after floods progressed quickly, he could give up the decree powers as much as a year ahead of schedule. [ID:nN15220256]

Opposition parties tentatively welcomed the olive branch but cautioned that Chavez had made many such offers of talks in the past -- none of which had borne any fruit. [ID:nN16246202]

Since then, Chavez has lambasted his political rivals for demanding he give up his decree powers immediately, so expect more verbal fireworks from both sides going forward.

Chavez has vowed to use the powers to entrench his self-styled "21st century socialism" project. The outgoing parliament also increased state control by passing a host of laws covering areas like the media, the Internet and banking.

Marches by the opposition and Chavez supporters in January were peaceful, but that could change. In another conciliatory move, Chavez said he would not approve a contentious university law, seeming to mollify student protesters who clashed with security forces late last year.

What to watch:

-- Decrees by Chavez, including nationalizations.

-- More street protests could cause unrest.

-- All sides focused on 2012 presidential election.

ECONOMIC DIFFICULTIES

Chavez is expected to use his decree powers for more nationalizations. He has already said more private land needs to be turned over to build houses for the poor, and has warned banks that they must help finance his social programs or face expropriation. A new banking law passed in December made takeovers in the financial sector easier.

He recently threatened again to take over the local unit of Spanish bank BBVA (BBVA.MC)(BBVA.N) if mortgage seekers were not better served. [ID:nN26177772]

More than 200 companies passed into state hands last year. With the oil, heavy industries and telecoms sectors seeing major nationalizations in the past, the emphasis in 2010 was on increasing state control over food supply, which looks likely to continue. Chavez has threatened to seize brewer and food processor Empresas Polar, Venezuela's top private employer.

The government is supposed to compensate expropriated companies, but payment is slow. The growing bill may begin to weigh on public finances and the takeovers have chilled private investment, slowing recovery from a two-year recession.

The government devalued the bolivar currency on Jan. 1, and most local economists expect another devaluation could take place soon, almost certainly involving a weakening of the central bank's SITME exchange rate. [ID:nN12191898]

The economy should grow this year, but without a big leap in oil prices it will still feel a pinch in terms of spending. Inflation will remain a problem: in 2010 it rose to 27.2 percent, one of the highest rates in the world, although officials say it is now trending lower. [ID:nN06223104]

Risk indicators like Morgan Stanley's EMBI+ 11EMJ and CDI spreads VEGV5YUSAC=MP consistently rate Venezuelan debt as the highest default risk in the world, so Wall Street will remain focused on whether Chavez will keep paying.

In the short term, at least, he will. Almost no one thinks the Venezuelan government will default thanks to its large oil production and history of meeting its obligations.

It has healthy foreign reserves, massive crude reserves and access to credit from bilateral sources such as China, which gave Venezuela a $20 billion loan last year.

With Chavez set on increasing the state's role in the economy, combined with currency exchange red tape that makes imports of machinery difficult, the manufacturing base is likely to erode further, leaving Venezuela more exposed to oil price volatility.

What to watch:

-- Takeovers or increased controls throughout the economy.

-- Oil prices. Venezuela needs higher prices to meet its obligations.

-- More debt issues this year. Some investors are worried about over-supply affecting Venezuela bond prices.

-- Moves against the currency. A weaker bolivar in 2010 was a blow to foreign companies' profits.

OIL DEVELOPMENT

So far, higher global oil prices have been offset by falling output since 2009, and just 50,000 barrels per day (bpd) of new production is likely to come online in the vast Orinoco heavy crude region by the end of 2011. [ID:nN19236122]

One eventual outlet for Orinoco oil will be Venezuela's first refinery in China, which is expected to cost $8.7 billion, process 400,000 bpd and be completed around 2014/15. Beijing gave initial environmental clearance to the project in January, paving the way for final approval. [ID:nTOE70502W]

Venezuelan oil exports fell 6 percent to 2.32 million bpd last year, so all eyes will be on the government's certified monthly figures to see if there is any increase in output.

The authorities have hailed new figures showing the South American OPEC member had overtaken Saudi Arabia as the world leader in oil reserves, with certified deposits leaping to 297 billion barrels at the end of 2010. Analysts are now looking to see concrete steps toward tapping the Orinoco belt.

What to watch:

-- More details of investment in projects to exploit the huge reserves in the Orinoco belt.

-- Production and export figures for any signs of improvement, or continuing decline.

-- Chinese approval of new 400,000 bpd refinery project.

-- Unscheduled maintenance stoppages and outages at Venezuela's refineries and heavy oil upgraders. (Editing by Jack Kimball and Paul Simao)