Argentina, Venezuela face tough choices: analyst

NEW YORK (Reuters) - The populist governments of Argentina and Venezuela, already hammered by high inflation, face revenue shortfalls that will force them to cut spending or let their currencies devalue, a political risk consultant said on Tuesday.

The unpopular policy measures that loom in both countries do not threaten to destabilize either President Cristina Fernandez in Argentina or Hugo Chavez in Venezuela, both of whom enjoy considerable public support, said Chris Garman, director and practice head for Latin America at Eurasia Group.

But mounting macroeconomic imbalances in Argentina and Venezuela, which have the highest economic growth rates in Latin America but also the highest regional rates of inflation, could erode the popularity of Chavez and Fernandez, he said.

Soaring world oil and grain prices have boosted government revenues and have masked growing dislocations in their economies, including widespread food shortages in Venezuela, he said.

Both countries are also vulnerable to declining revenue streams as oil output slows in Venezuela and Argentina runs into opposition to its efforts to boost taxes on agricultural production.

"Venezuela and Argentina are the two countries that may face the greatest challenges in the next year or year and a half," Garman told the Reuters Latin America Investment Summit in New York.

The economic imbalances that are building in the two countries and rising inflation -- above 20 percent in Venezuela and about that in Argentina, according to unofficial estimates -- will cause some tough choices ahead, he said.

High raw material export prices have helped prime public spending, which has fueled inflation and caused both governments in Argentina and Venezuela to try to tamp rising consumer prices through price controls.

"There's no easy solution in Venezuela as well as Argentina," he said. "Both of them are in a context of not an acute crisis, but certainly marginal weakening, which could set up a larger crisis in 2009."

Argentina is the main market in Latin America that Garman is monitoring that has the potential of turning into a bigger crisis, although "it still doesn't look imminent," he said.

Argentina is benefiting from high grain prices and has high foreign currency reserves, giving the government a fair amount of leeway, he said. But a looming energy crisis because Argentina can't count on as much gas from Bolivia as it did last year may prove a test for the Fernandez government.

"The larger political risk for the government is in the winter, and the risk of an energy crisis. This will depend on rainfall and the severity of the winter," Garman said.

Whether Venezuela can sustain an overvalued bolivar following regional elections in the fall will be a key issue for the country, Garman said.

"If they are forced to devalue that will just generate more inflation," he said.

Inflation could be at 30 percent by year's end in Venezuela, according to JPMorgan Chase & Co, and the bolivar in traded at more than double the official rate.

(Reporting by Herbert Lash, editing by Walker Simon)