* Devaluation stalled as Chavez recovers from surgery
* Chance of new vote creates policy paralysis
* State finances stretched by blowout campaign spending
By Brian Ellsworth and Eyanir Chinea
CARACAS, Dec 17 Venezuelan President Hugo
Chavez's battle with cancer and the possibility of a new
presidential election look likely to delay key economic policy
decisions including a sharp currency devaluation needed to shore
up public finances.
Chavez spent heavily this year in giving new apartments,
home appliances and cash payments to poor Venezuelans to ensure
his re-election, weakening the South American OPEC nation's
Economists have widely predicted the devaluation would come
this month or in early 2013 because the spending spree expanded
a yawning fiscal deficit. Devaluing eases fiscal pressure by
giving the government more local bolivar currency for each
dollar brought in by oil exports.
But devaluation plans, along with potential cuts to enormous
subsidies that also weigh heavily on state finances, now appear
to be on hold as Chavez - famous for his micro-managing style -
recovers from his cancer operation in Cuba.
Policy paralysis may continue in the coming months if Chavez
has to step aside and a fresh presidential election is called,
because his anointed successor could seek to avoid an unpopular
currency adjustment in mid-campaign.
"We believe (recent) developments make it highly likely
Venezuela will have presidential elections early in 2013," said
Francisco Rodriguez of Bank of America.
"Key economic policy decisions such as FX (foreign
exchange)devaluation will likely be delayed until after those
After winning re-election in October with 55 percent of the
vote, Chavez is due to begin his third term on Jan. 10.
Officials have conceded, however, that he may not be in
condition to so do.
That would trigger a new presidential vote within 30 days,
with Vice President Nicolas Maduro - who Chavez this month named
as his successor - running as ruling Socialist Party candidate.
Even if Chavez remains in office, policy decisions could
remain stalled if his health does not improve.
A devaluation is seen as crucial to slowing capital flight
as dollars sold on the black market - in violation of currency
controls created by Chavez - now fetch more than four times the
official rate of 4.3 bolivars per dollar.
It would also help boost the flow of dollars to the economy,
ensuring merchants have dollars to import basic products such as
wheat flour that have in recent weeks disappeared sporadically
from supermarket shelves.
"The exchange rate adjustment is necessary to partially
reduce the fiscal and monetary imbalances, but most of all it is
needed to avoid a crisis created by shortage of dollars and
(imported) goods," said Caracas-based economic consultancy group
Economists already predict that economic growth will slow in
2013 from this year's estimated rate of 5 percent as public
spending declines. The government forecasts growth next year
will rise to 6 percent.
Leaving the exchange rate fixed, on the other hand, steadily
reduces available resources because inflation of nearly 20
percent means the cost of building schools, hospitals or roads
goes up while oil income in bolivars remains the same.
While ratings agencies have maintained a generally positive
view of Venezuela's debt, most analyses have been based on a
sizeable devaluation to help close the 2013 fiscal deficit.
A prolonged delay in the currency adjustment could pressure
Venezuela's credit rating if it does not put its financial house
in order, though Venezuela's global bonds have rallied on
Chavez's illness on hopes of a more market-friendly government.
Officials are believed to be considering a number of
responses to the "economic hangover" created by the campaign
spending binge, including politically unpopular cuts to the
subsidies for electricity and fuel.
Gasoline is so heavily subsidized that service stations
sometimes do not bother charging drivers, a policy that costs
the state billions of dollars each year.
Finance Minister Jorge Giordani recently said the state
needs to stop "giving things away" in the form of subsidized
services, a sentiment echoed by Maduro in his first speech since
being designated successor. Little progress is expected on any
of those thorny measures with Chavez in recovery.
Officials have declined to comment on devaluation rumors.
In the meantime, Venezuelans are struggling to obtain
foreign exchange through a currency control system that sells
dollars at the official rate of 4.3 bolivars.
Dollar sales by an alternate government-backed currency sale
mechanism known as Sitme, which uses Venezuelan global bonds to
provide currency to importers and travelers, have declined
considerably in recent months.
A new bond issue is stalled by Chavez's health, as well as
rumored plans to revamp or scrap the bond-swap system.
State oil company PDVSA had prepared a dollar-denominated
bond issue for the end of the year, as a private placement to
the central bank, but that was on hold due to the government
paralysis over Chavez's situation.
"The issue was ready months ago, but we are waiting for
approval from the finance minister," said a PDVSA source.