From my crystal ball on Venezuela

I think that the world crisis is now here to stay and thus it might be time to speculate a little bit on how it will affect Venezuela. But before the leftist peanut gallery cheers even though the lion has not been skinned or even killed, it is important to remember that capitalism has always managed to reinvent itself because, simply put, it is the system that best fit basic human nature: the wish to improve your lot and the lot of your family based on your work and your values. Socio-communism has always failed because it has always tried to impose values on people without allowing people to exert at least some of their own values on the side. Thus as a first conclusion to this post, no matter what Chavez is saying these days, history is against him. If you disagree with this paragraph then you are off the hook, stop here and go read other blogs.

The Venezuelan reality today

We import most of our food. We are in no position to develop food production fast for several reasons:
Many of the candidates that have the skills or the desire to develop food production in large scale are either out of the country or have nothing to do anymore with food production.
The countryside is in chaos, from crime to landless peasants, to peasants with land but nothing else, skills or finances or even a property certificate, not forgetting the wreck of our road system and the unaccountable delays of rail road building.
Any new development in the next two years will be tied to credit that has become this past month scarce and expensive.
As a consequence, even though food imports will lower some in the next months it will be due to lower consumption of the people more than any significant production increase of food stuff.

We import most of our manufactured items. Comparable situation as in agriculture. We have the workers, we have the managers, but we do not have the finances nor the will to produce. Today the industrial park of Venezuela is roughly half of what it was in 1999. Even if many were willing to reopen they need to retool, they need credit, they need a decent work environment with less harassment from the state. And forget about foreign investors interested in Venezuela for the time being: they are either out of cash or scared of Chavez, or both.
As a consequence Venezuela imports will continue as long as consumption levels and income persist. But they will go down and will not recover as long as other economic equilibrium does not return, in particular as long as Venezuela does not produce at least 80% of the food it eats. We can expect even a decrease of local production before production starts again. The commerce and financial sectors which have driven the growth these past few years upon their ability to import whatever will be now unable to sustain themselves as they cannot rely on internal production to pick up where imports drop.

The government has spending out of control. Chavismo has spend liberally on social programs, some good but with too many dead ends financed for electoral purposes. In addition for political reasons sustained by Chavez ego Venezuela supports Cuba and props Bolivia, Nicaragua and helps a few other people. And I will not discuss the cost of corruption, mismanagement and inefficiency.
At 80 USD a barrel it is clear that this level of spending cannot be sustained over time. The current crisis has accelerated the decrease of oil prices and today the 80 USD level has been reached, which implies an even lower price for Venezuelan crude. If to this you add that all reports point out to a stalled oil production in Venezuela and a lack of financial muscle to expand production, it is clear that the government is facing a very serious crisis, no matter how many denials we are hearing these recent days. Obviously nobody has told Chavez the truth yet.

What Venezuela has

In face of the coming crisis we still do have some advantages, no matter what lack of reserves we might have.

The follies of Chavez have somewhat isolated us from world markets. In a way that is good as we are not as affected as the major financial places, but is is also bad because at a time when we will need financing to overcome the errors of these past 10 years there will be no fresh capital available to us, except perhaps for oil production, and with lots of strings attached.

We do have oil. Even at 80 USD a barrel and even with lower production we will have a steady source of income that can help us weather with reasonable sacrifices a world recession.

We have many budgetary options to improve our financial balances. For example an increase in the price of gas at the level of production cost in Venezuela, an increase in the price of electricity at the level of cost will free enough funds for the government to improve quickly public transportation and electrical services, and thus productivity of the population and business. There might be even enough funds released to offset some of the social cuts that are unavoidable. And of course we can call off all of these expensive weapons purchases since with a world recession and oil below 80 USD it is unlikely that anyone will be in any position to invade us for the next 3-4 years.

In other words with a medium quality management of the country we could avoid a deep recession and get a more solid economy in 2 to 5 years. But we will not avoid some rough waters ahead.

What will happen

First we must agree on a likely outcome to the present world crisis. Personally I think that a global depression will be avoided. However a recession is now unavoidable. How strong and how long it will be it is any one's guess. However we can assume that unless there is major Middle East blow up or a nuclear conflict in India/Pakistan, the price of oil will not go back to 100 for at least a couple of years. I do not think it will go much lower than 80. As low as 60 perhaps at the end of the Northern winter 2009 if this one is mild. But oil is disappearing and the general tendency is for up, up and up until alternative energies becomes wide spread.

On a practical level for Venezuela this means 2 years of oil at 70-80 average, and little access to credit. International credit will be more difficult to get now as investors will be much more conservative and less credit will be available. An economy like Venezuela with its corruption, unpredictability and mismanagement is an awful credit candidate in the new financial world. At least whatever oil we produce we will be able to sell, which is not the case of the trinkets produced by China or India.

What will be the possible scenarios?

Chavez gets told and decides to take care of Venezuela. The November result is 10 states for the opposition while his budget plans sink with the crisis. Chavez decides to 1) cut 70% of his foreign aid, 2) start an increase in gas prices, 3) cut spending to about half of his misiones, retaining only those on health, subsidized food for the poor and some educational program 4) devalue the currency from 2.15 to 3 VB to 1 USD, 5) start a protectionist program to reboot Venezuelan production. Inflation will by hard for a few months but social programs targeted to the very poor only will mitigate the shock some and by the end of 2009 we might be looking toward much lower inflation and more industrial production. That the opposition directs 10 states will force enough political compromise and social peace for such a transition plan. For 2010 a recovery of oil prices, an improved agricultural production and a controlled spending restart general economic growth in Venezuela.

Yet, this probably mean that Chavez will accept an expiration date of 2012 and will work on improving things enough to have his chosen successor elected.
ODDS: less than 5%

Chavez tries to escape reality but still does take some measures. No matter what the November results are, Chavez decides to continue supporting Cuba and Bolivia even if it is at lower levels. And he does not renounce his lifelong reelection scheme. He needs money for that. Understanding that in Venezuela increasing further taxes means the end of private sector he settles for postponing weapons purchases, a devaluation and an increase in gas prices, betting that oil prices will recover faster than they will. If inflation reaches 50% he might even think he can survive that with a few devaluated cash grants. And if oil prices return to 90 by spring 2009 he might apparently succeed. But none of the basic problems of the Venezuelan economy are solved and the crisis is just postponed making this one probably worse when it finally comes. In addition this allows for a mercurial Chavez that can go anytime against his already meager crisis control plan, undoing any good he might have done with a single speech or program.
Basically it will be a dangerous game between what the opposition gains, how the crisis develops, how Chavez popularity with the poor survives, what legal expedient he can manage to get his constitution changes. The consequence is a systematic instability as we have had these past ten years with unpredictable outcomes. Life at the edge but even more so.
ODDS: maybe 25%?

Chavez speaks loudly, blaming others, but changes nothing to his ways.
The reality is that Chavez will not stop from supporting Cuba which will ask even more money from Venezuela as it suffers from the world crisis: less tourists, you know....
The reality is that in ten years Chavez has made a new promise every Sunday and now he simply cannot stop making promises.
The reality is that he only cares about him retaining power forever; the rest is immaterial.
As such he will decide to believe that he can fudge his way out of the tight spot and that he can manage somehow to rush oil back to 100 a barrel. Sure, he might still devaluate some, he might suspend the purchase of some weapons, he might cut off Ecuador and the tiny Caribbean islands. But that will not solve the problem at all. Two possible outcomes:

Chavez rushes forward and radicalizes the country. Taxes go up, the private sector is further nationalized in an orgy of Venezuelan companies takeover without the compensations accorded to foreign companies. Workers are sent to occupy industries, not to take them over but to have them forget for a while about the other problems of the country. A referendum to "address the crisis" is quickly called pretending that by more centralization, the repartition of private sector and the participation of workers in state companies the crisis is solved. In that referendum of course he tries to get his reelection ad infinitum. It can all end in some "fujimorazo" on any lame excuse.

Chavez waits to react to the crisis and keeps his current radicalization pace. The crisis hits us anyway and is felt no matter what isolated measures are undertaken. Social unrest grows. Two things can then happen: 1) fearful chavistas decide to remove Chavez from office before things reach a no-return point or 2) Chavez decides to radicalize faster, as above, but the momentum is lost, people now associate the crisis to Chavez and major civil unrest results. In such conditions if he is tempted by a "fujimorazo" it will be a bloodshed.
ODDS for each one: 30-40% each, but probably more for the first option

So there you have, Venezuela News and Views Crystal Ball. The answers in less than a year.

-The end-