CARACAS, May 3 (Reuters) - Tough new taxes on the oil industry, a weak economy and President Hugo Chavez’s pressure on opponents ahead of next year’s presidential election are the main risks to watch in OPEC member Venezuela.
Chavez is likely to step up public spending further while pressuring the opposition ahead of the election. In the past, his government has used allegations of corruption to block some opponents from running for office.
Higher income from soaring global oil prices, a brighter economic outlook and growing popularity after a tough couple of years mean the socialist leader is increasingly confident of winning another six-year term. [ID:nN18194681]
Chavez secured an advantage at recent parliamentary and regional votes by gerrymandering and other electoral tricks, but the voting system itself is widely seen as fair. Opponents say popular and military pressure mean the president will have no choice but to accept defeat if he were to lose.
But a loss is unlikely, with most polls putting his ratings above 50 percent, up several points since a recession drove his popularity down to its lowest point for years in 2010.
He has hiked spending in recent weeks, for example, saying he would raise public sector salaries by up to 66 percent.
On the downside for Chavez, milk and other goods are more scarce in recent months and the country was hit by electricity blackouts in April — issues that could fuel public anger.
He infuriated opponents at the end of 2010 by asking the outgoing National Assembly for decree powers. That would last until mid-2012, giving him a potential hold on the legislative process well into the election campaign. [ID:nVEDECREES]
Opposition parties are jostling to choose a unity candidate in primary elections next February. [ID:nN1399227]
Chavez survived massive protest marches in 2002 that led to a short-lived coup and the opposition is almost totally focused on beating him at the ballot box. Middle East-style protests are unlikely without major new economic woes.
What to watch:
— More public spending announcements by Chavez
— Opposition jockeying ahead of February primaries
PDVSA remains one of the world’s largest oil companies but exports and output are falling partly because of the heavy load put on it as the main economic motor of Chavez’s revolution.
PDVSA is required to hand over so much revenue to the state it has neglected investment in older fields. Nationalizations in 2009 hit output with PDVSA struggling to take on wells and drilling services previously handled by private companies.
Output fell around 200,000 barrels per day (bpd) in 2010. Just 50,000 bpd of new output is likely to come online in the Orinoco heavy crude region by the end of 2011. [ID:nN19236122]
Venezuelan oil exports fell 6 percent to 2.32 million bpd in 2010, and output dropped even faster to 2.78 million bpd.
But with global oil prices rallying above $100, the industry is putting money in Chavez’s election war chest — and his government has decided to increase its take.
Officials say new higher windfall tax rates could bring in as much $16 billion this year if oil prices stay high. But analysts caution the move could trim private sector investment and put pressure on PDVSA’s ability to fund more production at a time when it is trying to increase output.
Venezuelan authorities have hailed new figures showing the South American OPEC member has overtaken Saudi Arabia as the world leader in oil reserves, with certified deposits leaping to 297 billion barrels at the end of last year.
Analysts are now looking to see concrete steps toward tapping the Orinoco extra heavy crude belt, which is one of the biggest mostly-untapped hydrocarbon reserves in the world.
Separately, Washington is investigating whether Venezuela broke sanctions and exported gasoline to Iran, with a congressional committee due to hold hearings in May.
If Venezuela did, the United States could take a range of measures, but analysts doubt it would stop buying its oil.
A ruling could come as soon as May in an arbitration case between Venezuela and Exxon Mobil Corp. (XOM.N) related to the nationalization of oil projects in 2007. [ID:nN14161507]
What to watch:
— Details of investment in projects in the Orinoco belt.
— Impact of windfall tax hike on investment, production.
— Unscheduled maintenance, stoppages and outages at Venezuela’s refineries and heavy oil upgraders.
— Possible ruling in Exxon arbitration case.
After two years of shrinking GDP, Venezuela moved out of recession with 0.6 percent growth in the last quarter of 2010. But with the private sector reeling from years of scatter-gun nationalizations and an 8 percent drop in oil output last year, only a sustained oil price rally will bring back the boom.
Many economists predict a sluggish year despite the recent jump in crude prices. The government sees things differently and expects growth above a 2 percent estimate in the budget.
Risk indicators such as 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 can keep paying.
Concerns about Venezuela’s finances have diminished in line with rallying oil prices. While some analysts feel Venezuela is issuing too much debt too quickly, its overall debt burden is relatively low and its repayment schedule is manageable.
Only the most pessimistic predict a serious cash-crunch any time soon, although falling crude production means Venezuela needs higher oil prices than in the past to balance its books.
The government devalued the bolivar currency on Jan. 1 and economists say another could follow, perhaps a weakening of the central bank’s SITME exchange rate. [ID:nN12191898]
With Brent crude contracts LCOc1 currently above $125 per barrel, Chavez’s officials may hold off for now.
Inflation was 27 percent last year and the devaluation combined with higher food prices pushed inflation to 4.4 percent in the first two months of 2011. The government is pressuring importers not to pass on the cost of the devaluation, which has contributed to scarcity of some goods.
What to watch:
— The oil price. It more than anything defines Venezuela’s economic performance and the price of its assets.
— Oil output. Last year’s drop was partly due to bad weather, but output may weaken unless investment picks up.
— More debt issues this year.
— Moves against the currency. A weaker bolivar in 2010 was a blow to foreign companies’ profits.
Chavez will likely decree more nationalizations. He has said more private land needs to be turned over to build houses for the poor, and warned banks they must help finance his social programs or face expropriation. A new banking law passed in December made takeovers in the financial sector easier.
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. That looks likely to continue. Chavez has often 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. In addition to the ruling expected in Exxon’s case, similar arbitration proceedings with ConocoPhillips (COP.N) could land Venezuela with multi-billion dollar compensation bills. Such costs may begin to weigh on public finances and the takeovers have chilled investment.
The government says it has calculated it will pay no more than a combined $2.5 billion for both cases. [ID:nN31268640]
What to watch:
— Takeovers or increased controls throughout the economy, in health, finance, housing, insurance and food.
— A large arbitration bill. (Reporting by Frank Jack Daniel and Daniel Wallis; Editing by Kieran Murray)