Country Report March Venezuela. Key changes from last month. March 2004

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1 Country Report March 2004 Venezuela Venezuela at a glance: OVERVIEW The Economist Intelligence Unit's forecast for is premised on the assumption that a revocatory referendum on the tenure of the president, Hugo Chávez Frías, will take place in However, we do not expect Mr Chávez to be recalled by a sufficiently convincing margin to resolve the political crisis, and we continue to base our projections on the assumption that Mr Chávez will manage to cling to power throughout the outlook period. Price and exchange controls will be maintained and creeping statism will continue. Following a 27% drop in real GDP per head between 1998 and 2003, a statistical rebound rather than a genuine recovery is forecast for Fiscal profligacy will keep inflation high. The trade surplus will fall owing to rising import spending and lower oil prices, but exchange controls will facilitate further growth of reserves. Should Mr Chávez be ousted and an opposition administration come to power, the introduction of market-friendly policies would be possible, but by no means certain, and there would be no swift improvement in political or macroeconomic stability. Key changes from last month Political outlook A verdict on whether sufficient valid signatures have been collected for a recall referendum to proceed is now expected in late February or early March. If insufficient signatures are declared to have been collected, the military could be forced to act as final arbiter on whether the referendum should go ahead. Either way, conflict is expected over the result. Economic policy outlook The 16.7% nominal devaluation of the official exchange rate on February 9th was in line with expectations, although earlier than anticipated. Economic forecast The major change to our forecast since our February report is the upward revision in global oil prices for Preliminary official full-year estimates indicate that real GDP fell by 9.2% in 2003, the worst performance on record. Monthly inflation rose to 2.5% in January, indicating worsening supply-side inefficiencies. March 2004 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) dantecantu@eiu.com Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright 2004 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

3 Venezuela 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for Political outlook 8 Economic policy outlook 9 Economic forecast 12 The political scene 20 Economic policy 24 The domestic economy 24 Output and demand 26 Oil and gas 28 Sectoral trends 29 Financial and other services 29 Foreign trade and payments List of tables 10 International assumptions summary 11 Forecast summary 21 Central government finances 24 Main monetary aggregates 25 Gross domestic product growth 25 Consumer price inflation 29 Universal and commercial banks: selected indicators 30 Current account, Foreign reserves List of figures 12 Gross domestic product 12 Consumer price inflation 23 Real interest rates 32 Foreign exchange approvals and disbursements, 2003

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5 Venezuela 3 Summary March 2004 Outlook for The political scene Economic policy The domestic economy Foreign trade and payments The Economist Intelligence Unit's forecast for is premised on the assumption that a revocatory referendum on the tenure of the president, Hugo Chávez Frías, will take place in 2004 (probably in May). However, we do not expect Mr Chávez to be recalled by a sufficiently convincing margin to resolve the political crisis. Price and exchange controls will be maintained and creeping statism will continue. Following a 27% drop in real GDP per head between 1998 and 2003, a statistical rebound rather than a genuine recovery is forecast for Fiscal profligacy will keep inflation high. The trade surplus will fall owing to rising import spending and lower oil prices but exchange controls will facilitate further growth of reserves. Should Mr Chávez be ousted and an opposition administration come to power, the introduction of market-friendly policies would be possible, but by no means certain, and there would be no swift improvement in political or macroeconomic stability. Political hostilities have continued to centre on the opposition's attempts to secure the removal of Mr Chávez through a revocatory referendum. Following a campaign to mobilise the requisite 20% of signatures in December 2003, delays in the verification process have fuelled political tensions, with government and opposition trading accusations of foul play. Changes in the military have fuelled concerns over politicisation. Mr Chávez's popularity ratings have resurged, apparently owing to the much-criticised social assistance programmes launched during the second half of The opposition has made little headway in boosting its popularity or unifying behind a potential presidential candidate. Bilateral relations with the US have remained fraught. The official exchange rate was devalued by 16.7% in February in order to facilitate fiscal expansion ahead of a possible referendum. Preliminary indications suggest that the fiscal deficit was 5.8% of GDP in 2003, following a strong rise in spending in the second half of the year. The overall public debt burden rose to 41.7% of GDP from 39.6% of GDP in Preliminary official full-year estimates indicate that real GDP fell by an unprecedented 9.2% in 2003, the worst performance on record. Monthly inflation rose to 2.5% in January this year, suggesting growing supply-side inefficiencies. Despite lower production, full-year profits from Petróleos de Venezuela (PdVSA, the state-owned oil company) rose by 19.5% in PdVSA's management attributed this to cost-cutting. Import spending rose strongly in the final quarter but was largely offset by firm oil earnings. The sovereign took advantage of abundant international liquidity to place a US$1bn 30-year bond in January. Editors: Justine Thody (editor); Fiona Mackie (consulting editor) Editorial closing date: February 19th 2004 All queries: Tel: (44.20) london@eiu.com Next report: Full schedule on

6 4 Venezuela Political structure Official name Form of government The executive National legislature Legal system National elections Main political organisations The Bolivarian Republic of Venezuela Federal republic comprising 72 federal dependencies, 23 states, two federal territories and one federal district The president is elected for a renewable six-year term and appoints a Council of Ministers; Hugo Chávez Frías began a fresh six-year term following elections in July 2000 to relegitimise public posts under the 1999 constitution 165-member unicameral National Assembly, headed by the president, which replaced the bicameral Congress abolished by the new constitution adopted in December 1999 Supreme Justice Tribunal at the apex of the court system; appoints judges and magistrates in consultation with civil society groups July 2000 (presidential, legislative and state government); December 2000 (municipal authorities); next elections due in 2005 (legislative) and 2006 (presidential). A revocatory referendum is likely in 2004, as provided for under the 1999 constitution Government: Movimiento Quinta República (MVR), a faction of Movimiento al Socialismo (MAS) and Patria Para Todos (PPT) Opposition parties: Acción Democrática (AD); the Comité de Organización Política Electoral Independiente (COPEI); Movimiento al Socialismo (MAS); Primero Justicia (PJ); La Causa Radical (LCR); Convergencia Nacional (CN) Key ministers Central Bank governor President Vice-president Office of the presidency Communications & information Defence Development & social economy Education, culture & sport Energy & mines Environment & natural resources Finance Foreign affairs Health & social development Higher education Infrastructure (transport, communications & urban development) Interior & justice Labour Planning & development Production & trade Science & technology Diego Luís Castellanos Hugo Chávez Frías José Vicente Rangel Brigadier-General Carlos Eduardo Martínez Jesse Chacón Gen Jorge García Carneiro Nelson Merentes Aristóbulo Istúriz Rafael Ramírez Ana Lisa Osorio Tobías Nóbrega Suárez Jesús Arnoldo Pérez Roger Capella Héctor Navarro General Eliécer Hurtado Soucre Diosdado Cabello María Cristina Iglesias Jorge Giordani Ramón Rosales Nelson Merentes

7 Venezuela 5 Economic structure Annual indicators 1999 a 2000 a 2001a 2002 b 2003 b GDP at market prices (Bs bn) 62,577 82,451 91, ,782 a 137,289 GDP (US$ bn) a 85.4 Real GDP growth (%) a -9.2 Consumer price inflation (av; %) a 31.1 Population (m) Exports of goods fob (US$ m) 20,963 33,529 26,252 26,656 25,859 Imports of goods fob (US$ m) -14,492-16,865-18,660-13,622-10,712 Current-account balance (US$ m) 1, , , , ,668 Foreign-exchange reserves excl gold (US$ m) 12, , , ,487.0 a 16,035.0 Total external debt (US$ bn) Debt-service ratio, paid (%) Exchange rate (av) Bs:US$ ,161.0 a 1,607.8 a Actual. b Economist Intelligence Unit estimates. Origins of gross domestic product 2001 % of total Components of gross domestic product 2001 % of total Petroleum 26.4 Private consumption 68.2 Manufacturing 14.3 Government consumption 8.0 Construction 5.6 Investment incl change in stocks 18.7 Agriculture 4.9 Exports of goods & services 22.7 Services & others 48.9 Imports of goods & services 17.6 Principal exports fob 2002 US$ m Principal imports fob 2002 US$ m Oil 21,311 Oil 1,332 Non-oil 4,908 Non oil 10,948 Main destination of exports 2002 % of total Main origins of imports 2002 % of total US 58.9 US 41.3 Brazil 3.1 Japan 10.4 Colombia 3.2 Italy 8.6 Germany 1.0 Germany 6.6

8 6 Venezuela Quarterly indicators Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Central government finance (Bs bn) Ordinary revenue 3, , , , , , , ,277.6 Extraordinary revenue 1, , , , , , , ,366.5 Ordinary expenditure 3, , , , , , , ,673.9 Extraordinary expenditure 1, , , , , , , ,311.2 Ordinary balance , ,396.3 Overall balance , Output GDP at constant 1984 market prices (Bs bn) n/a GDP at constant 1984 market prices (% change, year on year) n/a Prices Consumer prices (1997=100) Consumer prices (% change, year on year) Producer prices (1997=100) Producer prices (% change, year on year) Venezuelan crude basket (US$/barrel; spot) Venezuelan crude basket (% change, year on year) Financial indicators Exchange rate Bs:US$ (av) , , , , , , , Exchange rate Bs:US$ (end-period) , , , , , , , Deposit rate (av; %) Lending rate (av; %) n/a Money market rate (av; %) n/a M1 (end-period; Bs bn) 7,252 7,599 8,466 10,857 10,788 12,797 14,299 18,971 M1 (% change, year on year) M2 (end-period; Bs bn) 14,707 15,289 16,269 19,573 19,547 22,365 24,574 30,836 M2 (% change, year on year) BVC Caracas stockmarket index (end-period; Dec 1993=1,000)c 6,875 7,452 7,742 8,015 8,507 13,666 16,956 22,204 BVC Caracas stockmarket index (% change, year on year)c Sectoral trends Crude oil production (m barrels/day) Crude oil production (% change, year on year) Aluminium production ('000 tonnes) Aluminium production (% change, year on year) Iron ore production ( 000 tonnes) 4,839 4,849 4,988 5,580 4,146 4,853 5,171 5,472 Iron ore production (% change, year on year) Foreign trade & payments (US$ ma) Exports fobb 5,584 6,637 8,307 6,128 4,319 6,575 7,096 n/a Petroleum & products 4,411 5,260 6,937 4,922 3,372 5,354 5,698 n/a Imports fobb -3,767-3,640-3,235-2,980-2,222-2,098-2,812 n/a Merchandise trade balanceb 1,817 2,997 5,072 3,148 2,097 4,477 4,284 n/a Servicesb n/a Income balanceb n/a Net transfer paymentsb n/a Current-account balanceb 268 1,395 3,854 1, ,339 2,785 n/a Reserves excl gold (end-period) 6,156 7,642 8,154 8,497 9,922 12,828 14,237 16,035 a Balance-of-payments basis. b Source: Banco Central de Venezuela. c End-November data or 4 Qtr Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics; Banco Central de Venezuela, Indicadores Econúmicos; VenEconomy, VenEconomy Monthly.

9 Venezuela 7 Outlook for Political outlook Domestic politics International relations Political stability is unlikely to be restored within the outlook period, following five years of acute political turmoil and economic decline. The Economist Intelligence Unit's forecast is premised on the assumption that the president, Hugo Chávez Frías, clings to power. He is likely although not certain to face a popular referendum on his tenure, probably in April or May. Assuming the referendum goes ahead, however, we do not believe that Mr Chávez will be recalled by a convincing margin. Consequently, the protracted conflict between those who recognise Mr Chávez as the legitimate head of state and those who do not will drag on. The advanced decay of political institutions will preclude reconciliation, while the absence of an opposition with popular appeal will fuel alienation among the electorate. Personality rivalries and policy differences will prevent the opposition from developing unity and coherence, without which it will be unable to mount an effective challenge to the government, control the damaging activities of the more radical anti-government groups or broaden its support. Hostilities will remain entrenched; Mr Chávez has already declared 2004 to be the year of the "revolution within the revolution". The Venezuelan courts have yet to rule on whether Mr Chávez would be permitted to stand in the presidential election that must be convened within three weeks if he is recalled. This underscores the depth of the institutional crisis and the scope that exists for conflict. Mr Chávez would have a reasonable chance of a winning presidential election if the opposition vote were split between more than one candidate, which remains a strong possibility owing to the opposition's disunity. If the referendum is delayed beyond August 2004, Mr Chávez would still have to step down if recalled but, under the constitution, a new election would not be convened. Instead, the vice-president, José Vicente Rangel, would complete Mr Chávez's term. This outcome would mean that the opposition's next chance of winning the presidency would not be until Whether or not Mr Chávez continues as president, the political environment will remain unconducive to economic development. If an opposition government did manage to win power, the implementation of more market-friendly policies would be possible, but by no means certain. Relations between Venezuela and the US, which have been strained since Mr Chávez came to power at the start of 1999, will be fraught for as long as he remains in the presidency. Lingering tensions stemming from Venezuelan allegations of US involvement in the April 2002 coup attempt will be exacerbated during the referendum campaign by US sympathy for Venezuelan opposition groups. The Chávez administration will maintain its hostile stance towards the conduct of the US war on terror and to US engagement in Iraq. Relations with Colombia will continue to be overshadowed by allegations that Venezuela provides a haven for Colombian leftist guerrillas.

10 8 Venezuela Economic policy outlook Policy trends Fiscal policy Economic policy until mid-2004 will be geared towards boosting Mr Chávez s popularity ahead of a possible referendum on his tenure and a series of state governorship elections due to take place in July. Thereafter, adjustment policies will be needed in order to tackle worsening distortions stemming from price and exchange controls and fiscal profligacy. On the assumption that Mr Chávez clings to power, the adjustment will be narrowly focused on a retrenchment of government spending. Little will be done to encourage economic efficiency and private investment. The authorities resorting to exchange-rate adjustments in order to finance spending will entrench structural fiscal weaknesses, fuel inflation and increase poverty. With Mr Chávez still in office, price and exchange controls will remain in place throughout the outlook period, but authorisations of dollars by the Comisión de Administración de Divisas (Cadivi, the exchange-control board) will be stepped up in an effort to promote the recovery of activity. Creeping statism will continue. Although policy ambiguities will persist, efforts to attract foreign investment in Venezuela's abundant energy reserves will continue. The authorities will continue to advocate OPEC production restraint to bolster world prices, not least because it will be difficult to sustain production levels as a result of the disarray at Petróleos de Venezuela (PdVSA, the state oil company). If an opposition government were to come to power, the introduction of more market-friendly policies would be possible, but by no means certain, and the chronic inefficiencies of the state administration would make implementation extremely difficult. Fiscal fundamentals will worsen in Dependence on the volatile oil market will increase, domestic debt will rise, arrears will accumulate and vulnerability to exchange-rate movements will increase as the stock of dollardenominated public debt rises. Even on the basis of the authorities excessively optimistic revenue and expenditure projections, the budget proposal for 2004 envisages a deficit of Bs13trn (8% of GDP). The total financing requirement, including public debt amortisations, is projected at 12% of GDP. Nevertheless, given its willingness to resort to additional indebtedness and other distortionary measures, the government should be able to finance its outgoings. The devaluation of the official exchange rate will ease public debt management in that the government faces a bunching of maturities of Deuda Pública Nacional (DPNs, treasury bonds) between late March and May. Around Bs2.1trn (US$1bn at the new official exchange rate, US$1.3bn at the previous rate) of domestic debt matures during this period, representing almost 40% of the annual total of Bs5.6trn. Following the devaluation, the government is likely to undertake further sales of dollar-denominated bonds in the domestic market, in the wake of two operations of US$1bn each in August and November Appetite for such bonds will be strong as they provide one of the few means for domestic investors to gain access to hard-currency assets. Such placements will enable the government to extend average domestic debt maturities and

11 Venezuela 9 reduce interest costs in the short term. The drawback is that the government's exposure to currency risk will increase, compounding structural fiscal weaknesses. The devaluation will also boost revenue from foreign-exchange profits recorded by the Banco Central de Venezuela (the Central Bank); use of this revenue will compound the build-up of repressed inflationary pressures. Monetary policy The Central Bank will remain under pressure from the government to pursue an expansionary stance. Political pressures evident most recently in the initiative to expand lending to the agricultural sector will hamper the Central Bank's ability to control inflation. The monetary authority will continue to engage in open-market operations in an effort to control excess liquidity stemming from the exchange controls and alleviate pressure on the parallel exchange rate. Steadily increasing imports will also help to drain liquidity from the system. The abundance of liquidity means that open-market operations will not create significant upwards pressure on interest rates. Real interest rates will remain in negative territory in the first half of the forecast period and extremely low in the second, but this is not expected to translate into any marked increase in lending to the productive sector. The financial system will continue to invest in government paper but will remain reluctant to extend credit to the private sector given the unstable outlook. A move back to positive real interest rates will be necessary as part of a post-referendum adjustment, in order to ease the build-up of pressures on the controlled exchange rate. Economic forecast International assumptions International assumptions summary (% unless otherwise indicated) Real GDP growth World OECD EU Exchange rates :US$ US$: SDR:US$ Financial indicators 3-month interbank rate US$ 3-month Libor Commodity prices Oil (Brent; US$/b) Gold (US$/troy oz) Food, feedstuffs & beverages (% change in US$ terms) Industrial raw materials (% change in US$ terms) Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. An upturn in the global economy will be driven by extremely accommodative fiscal and monetary policy in the US. However, the risks associated with our forecast remain weighted on the downside. The sustainability of the upturn is questionable given the persistence of large imbalances in the US and elsewhere in the global economy. The large US current-account deficit is of particular

12 10 Venezuela concern. If financing constraints were to cause a disorderly decline in the value of the dollar, the global outlook would worsen sharply. We still expect oil prices to fall from this year owing to global oversupply but we now expect the decline in 2004 to be less sharp than previously anticipated. Economic growth The latest preliminary indications from the Central Bank are that real GDP shrank by 9.2% in 2003, the worst performance since records began in the 1950s. Real GDP per head has fallen on average by 4.8% a year since In 2003 real GDP per head (at purchasing power parity) fell to its lowest level since A statistical rebound will occur in , with growth especially strong in the first half of 2004, fuelled by fiscal spending and flattered by the low base of comparison. The second half will be weaker as fiscal spending is reined in and the base of comparison becomes more challenging. This will reduce momentum going into Moreover, the forecast growth does not represent a genuine recovery. Several years of high growth rates would be needed in order to make inroads into widespread poverty and inequality. Our central forecast is premised on the assumption that Mr Chávez succeeds in clinging on to power. On the basis that there is no radical shift in the economic policy framework, growth will be lopsided and unspectacular. The decline of the private sector since 1999 will leave Venezuela s economy more vulnerable than ever to swings in the volatile oil market. The risks to the outlook for the economy are compounded by uncertainties over PdVSA s ability to step up production following several years of insufficient investment and the loss in early 2003 of technical expertise, following the dismissal by Mr Chávez of almost half of PdVSA's workforce as a result of its participation in a crippling two-month nationwide general stoppage. There will be some importsubstitution activities (led by small and medium-sized domestic enterprises), but on the whole, private investment in the non-oil sector will remain weak. Inflation Despite the deep recession and the implementation of wide-ranging price controls, consumer price inflation averaged 31.1% in Supply shortages, excess domestic liquidity and the devaluation of the official exchange market will sustain inflationary pressures in 2004 despite the anticipated retention of price controls. A strong increase in the level of domestic demand, fuelled by the government's current expansionary fiscal policy, will result in a more marked pass-through from the devaluation to domestic prices than occurred in The influence of a backlog of repressed inflationary pressures, reflected in a disparity between the consumer and producer price indices in 2003 (a byproduct of the price controls and the scarcity of dollars at the official rate), will also feed through into the consumer price index. However, these effects will be mitigated by a more efficient release of dollars at the official rate. On the assumption that the rate of nominal depreciation will slow from 2005, inflation should gradually decline. In the longer term, structural reforms to address the underlying causes of low competitiveness will be needed in order to promote a sustainable reduction in inflation. Consumer price inflation has now been in double digits for more than two decades, even in years where heavy overvaluation of the exchange rate contained price increases by reducing the cost of imports.

13 Venezuela 11 Exchange rates External sector The new official exchange rate of Bs1,920:US$1 is in line with the 2004 budget assumption and is likely to be retained for most of the year, assuming that Mr Chávez clings to power. A strong reserves position will contain pressure for further adjustments, on the basis that the authorities are able to check the divergence between the parallel and official rates. They will seek to do so by adopting greater flexibility in the administration of the exchange-rate regime, thereby increasing the share of transactions channelled through the official market. The black-market premium currently around 60% should narrow progressively but bouts of volatility are likely. Further placements of dollardenominated domestic public debt will encourage temporary appreciations of the parallel rate. Even so, a substantial premium over the official rate can be expected to persist, which at some stage will increase pressure for another devaluation. This is unlikely in 2004 unless Mr Chávez were to be ousted, which is not our central forecast. An adjustment programme under a new government would probably entail an initial maxi-devaluation, the reunification of the currency market and the lifting of capital controls. The quality of the adjustment programme and the level of oil prices would determine the evolution of the free rate thereafter. The trade surplus is forecast to fall in from its levels. Although the average volume of oil exports will be greater than during strike-hit 2003, world oil prices are forecast to decline in the medium term. Import spending will rise from its artificially low level of 2003 as more foreign exchange becomes available at the official rate (even following the adjustment, the new official rate is well below the previous parallel rate) and as a modest recovery in economic activity takes hold. Exchange controls will restrain the expansion of the services and income deficits by deterring travel abroad and restricting profit remittances. However, trends in the merchandise trade balance, which dwarfs all other items, will cause the current-account surplus to shrink sharply. Ongoing investment in oil and gas projects will underpin modest inflows of foreign direct investment (FDI) in the outlook period, but Venezuela's potential to attract FDI in other economic sectors will continue to be underexploited. FDI inflows were flattered in 2003 by the late registry in 1996 of a US$800m investment by the Compañia Autónoma Nacional Teléfonos de Venezuela (CANTV, the main telecommunications company). Forecast summary (% unless otherwise indicated) 2002a 2003 b 2004c 2005c Real GDP growth Gross agricultural production growth Unemployment rate (av) 15.9b Consumer price inflation (av) Consumer price inflation (year-end) Short-term interbank rate Central government balance (% of GDP) -4.8 b Exports of goods fob (US$ bn) 26.7b Imports of goods fob (US$ bn) 13.6b Current-account balance (US$ bn) 7.4b Current-account balance (% of GDP) 7.8b

14 12 Venezuela Forecast summary (% unless otherwise indicated) 2002a 2003 b 2004c 2005c External debt (year-end; US$ bn) 33.0b Exchange rate Bs:US$ (year-end) 1, , , ,322.8 Exchange rate Bs: 100 (av) , , ,019.5 Exchange rate Bs: (year-end) 1, , , ,112.5 Exchange rate Bs:SDR (year-end) 1, , , ,556.9 Parallel exchange rate Bs:US$ (av) 1, , , ,315.4 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. The political scene Tensions deepen over proposed referendum In the past three months, political hostilities have continued to revolve around the attempts by the opposition to secure the removal of the president, Hugo Chávez Frías, through a revocatory referendum. Efforts to convene a referendum have dominated politics since February 2003, following the failure of more extreme measures to secure Mr Chávez's removal. These included an abortive coup in April 2002 and a crippling two-month general strike in December 2002-January Only after extreme strategies to remove Mr Chavez failed did most of the opposition groups in the Coordinadora Democrática (CD, the heterogeneous umbrella-grouping of opposition organisations) begin to concentrate their energies on the revocatory referendum campaign. Under the 1999 constitution, all elected officials may be subjected to a recall referendum midway through their term if a petition is signed by 20% of voters in the relevant constituency. The midway point of Mr Chávez s term was August 19th In December 2003 the opposition mounted a campaign to mobilise the requisite signatures (at least 2.4m voters). Around the same time, pro-government groups organised signature campaigns in support of recall referendums on 37 opposition deputies in the National Assembly. For a referendum to go ahead, the Consejo Nacional Electoral (CNE, the national electoral authorities) must verify that sufficient valid signatures have been collected. If it does so, a referendum must be held within 30 days. A fresh presidential election would then be necessary, provided the referendum was

15 Venezuela 13 held within a year of August 19th If more people were to vote against Mr Chávez in the referendum than voted in his favour in the 2000 elections (3,757,773 people), he would be required to stand down. The CNE comes under intense partisan pressure The CNE has come under intense pressure from both the opposition and the government. Delays in commencing the process of validating signatures, which had been due to start on December 22nd, prompted opposition groups to accuse the CNE of colluding with the government to delay the referendum beyond August, thereby blocking the possibility of a fresh presidential election. In the event that the referendum is held after August 19th, a fresh presidential election would not be convened, even if Mr Chávez were to be recalled. Executive authority would instead pass to the vice-president, José Vicente Rangel, for the remaining two years of Mr Chávez s term. The opposition's allegations of bias against the electoral authorities must be set against the fact that anti-chávez groups are well represented in the CNE. A source of particular frustration for the opposition has been that the verification process encompasses the checking of the fingerprints provided by all petition signatories as proof of identity. Verifying fingerprints has proved more timeconsuming than envisaged, pushing back the likely announcement of the CNE's verdict from mid-february to the end of the month at the earliest. A former US president, Jimmy Carter, who visited Venezuela in February as part of a delegation of the Carter Center, which has a long-standing involvement in the country, has estimated that the results of the verification exercise are unlikely to be available before the first week of March. Assuming that the CNE finds that sufficient valid signatures have been collected by then, a referendum could be convened in April. The fact that Venezuela has a history of electoral fraud and malpractice helps explain why the revocatory referendum process has proven bureaucratic and time-consuming. Although delays have been criticised, anything perceived as a short cut would arouse objections. In the immediate aftermath of the opposition's signature campaign, the government claimed that there had been a "mega-fraud". Although the CNE has discouraged speculation, the opposition has suggested that as many as 652,000 of the 3.4m signatures collected in December may have been disqualified. Such an outcome would be accepted by the CD only if credible proof is provided that widespread fraud occurred. In an effort to ensure that the verification process is broadly accepted as thorough and transparent, the CNE has sought to strike a balance of pro- and anti-government groups on its executive board and in the technical commissions that have been charged with validating the signatures. Of the five executives on the CNE's board, two are regarded as pro-opposition and two as pro-government. At the time of his appointment in August 2003, the CNE's president and fifth board member, Francisco Carrasquero, was welcomed by both sides as an independent. In recent weeks, however, it has been claimed that the government has applied pressure on Mr Carrasquero to deliver a result favourable to Mr Chávez (in other words, to declare that there are insufficient valid signatures for a referendum to proceed). Mr Carrasquero has refuted charges of bias by arguing that around 80% of CNE administrative staff are opposition supporters. He has remarked that opposition sympathisers have

16 14 Venezuela acted professionally, not allowing their political affiliation to interfere with CNE responsibilities. The slowness of the CNE's count has also been criticised by pro-government figures, who claim that this is the fault of anti-chávez elements within the CNE. According to this view, foot-dragging in the validation process would be a smokescreen behind which the opposition's alleged failure to mobilise sufficient valid signatures is concealed while a "Plan B" to remove the government can be devised. Mr Chávez, even as he has urged opposition figures and the private media to refrain from undermining the CNE, has himself cast aspersions on the electoral authorities, accusing its pro-opposition members of corruption. Concerns persist about politicisation of the military Withdrawal of firearms licences provokes controversy Government critics have interpreted recent military personnel changes, including the appointment of the new minister of defence, General-in-Chief Jorge García Carneiro, as an attempt by Mr Chávez to secure the institution's partisan loyalty, with a view to a possible autogolpe (a "self-coup", involving some sort of suspension of constitutional guarantees). Mr Chávez has never disguised his ambition to integrate the military into his political project. But all indications are that the constitutionalist faction continues to predominate within the military, which would be most unlikely to support an authoritarian move against the opposition by Mr Chávez. Moreover, it is in the government's interest that constitutional procedures are seen to be followed, not least because a central tenet of its discourse is that Mr Chávez's administration upholds democracy, whereas democratic institutions were summarily dissolved during the brief ouster of Mr Chávez by an opposition-led abortive coup in April The recent changes in senior military personnel seem to foreshadow a renewed restructuring of the armed forces if Mr Chávez retains power. A purge was carried out following the April 2002 coup attempt, but the government is concerned that pro-coup elements remain and may be susceptible to continued calls for military intervention from some quarters of the opposition. The opposition has expressed fears that any reorganisation will be partisan, aimed at rooting out elements who are not personally loyal to Mr Chávez. Military spending will also be stepped up, on the basis that budget constraints during the past two years have caused a squeeze. Recent trends in real military spending are difficult to ascertain in the context of recession, devaluation, high inflation and cash-basis accounting. But morale problems within the armed forces have been compounded by the belief among many serving personnel that assistance provided by the US to the Colombian armed forces has led to an imbalance in relative capabilities. In his inaugural address, General García announced that military personnel would receive salary increases of 30-45% in He also announced details of several bonuses to be paid. In February the Ministry of Defence withdrew the concealed weapons permits of 150 senior military officers who have declared themselves in open rebellion against the government. In an unusual move, the weapons permits of a number of influential opposition civilian politicians have also been rescinded. The disarming of civil society is one of the pledges to which both sides committed in the internationally brokered conciliation agreement between government and opposition forces signed in May However, if the

17 Venezuela 15 disarmament process is perceived as discriminatory, it will be ineffective in containing rising levels of violence. It is estimated that the homicide rate rose to 44 per 100,000 population in 2003, up from 42 per 100,000 population in 2002, and one of the highest levels in the world. Most murders occur in poor neighbourhoods, underscoring problems of social violence in underprivileged districts. There will be a persistent risk of bloodshed at political demonstrations. Opposition rallies are likely to be countered by pro-government demonstrations, fuelling tensions and the possibility of violence. Social programmes boost support for Mr Chávez Abstention may decide Mr Chávez's fate According to opinion poll surveys, Mr Chávez has enjoyed a resurgence of popular support. One survey to have received widespread coverage in the local media was carried out by an organisation called North American Opinion. Its survey suggests that 48% of respondents would support Mr Chávez in a recall referendum. A further 42% voiced a positive evaluation of the administration. The findings of North American Opinion's poll are in line with those of other polling companies such as Consultores 21, Datanálisis and Seijas. In mid- February the latest survey by Datanálisis put Mr Chávez's approval rating at 40-45%. Several factors account for the apparent upswing in support for Mr Chávez. Around 51% of North American Opinion respondents pronounced themselves in favour of the exchange controls imposed in February Around 90% had a positive opinion of the Barrio Adentro (Inside the Barrio) programme of primary healthcare for low-income neighbourhoods. This programme, which has elicited severe criticism from the opposition, is controversial because it relies heavily on the participation of Cuban doctors (December 2003, page 18). However, it has delivered primary healthcare services to poor neighbourhoods which were neglected by existing services. The government has also claimed some success at the grassroots level with its micro-financing fund. Created in 2001, the Fondo de Desarrollo Microfinanciero (Fondemi) channels financial assistance to community and "small" entrepreneurial projects through 500 non-governmental organisations and municipal entities. In 2003 Fondemi disbursed Bs20bn (US$12.5m) in loans averaging Bs2m-3m (US$1,250-1,875) each. Around Bs70bn was distributed to 17,000 farmers for investment in machinery and livestock within the framework of Plan Zamora, an agricultural development plan. Plan Zamora forms part of a broader project of agricultural development that is intended to reduce Venezuela s long-term dependence on imported food and improve living standards in rural areas. Although they have been criticised by the opposition, these heterodox policies have been popular as they have provided a sense of inclusion and opportunity previously denied to poor Venezuelans. There has been a long-running controversy surrounding the reliability of opinion polls conducted by Venezuelan firms. The government and a number of independent commentators have claimed that these polls have consistently underestimated support for Mr Chávez, owing either to flaws in the methodological approach or deliberate falsification of findings. The fact that the recent "readjustment" of Mr Chávez s poll ratings coincides with demands from powerful economic groups that the opposition revitalise its campaign is likely to reinforce doubts about pollsters' independence.

18 16 Venezuela Most evidence suggests that well over one-third of the electorate supports neither the government nor the opposition. Datanálisis puts the "ni-ni" (neithernor) vote at 38.7% of the electorate. The consequent difficulty inherent in predicting a referendum result with any confidence will be compounded by the possibility of high rates of abstention. Although a majority of survey respondents have indicated that they intend to vote, abstention in national elections has generally been high in recent years. Around 36.5% of the electorate abstained in the 1998 presidential election and 43.5% in High abstention would favour the government by reducing the likelihood that Mr Chávez's mandate is credibly revoked. The 3,757,774 votes that would be required to fulfil the criteria laid down in the constitution represents around one-third of the electorate. In light of the depth of hostilities, the discredit of political institutions and the unpopularity of much of the opposition, a substantially greater vote against Mr Chávez would be needed for the recall referendum to serve as a credible transition mechanism. The opposition's ability to sustain the momentum of popular mobilisation will thus be crucial to its prospects of unseating Mr Chávez. The opposition struggles to achieve greater unity Agreement on a presidential candidate remains elusive Since it was created in 2002, the CD has been organisationally fragile and has lacked clear leadership. The CD is an unwieldy alliance that embraces 22 political parties and 60 civil society organisations representing a diverse range of views and ideologies, many of them antithetical to each other. Some groups, including the Confederación de Trabajadores de Venezuela (CTV, the main labour confederation), the Federación Venezolana de Cámaras y Asociaciones de Comercio y Producción (Fedecámaras, the main business chamber) and the historically dominant parties, Acción Democrática (AD) and the Comité de Organización Política Electoral Independiente (COPEI), have supported radical (including extra-constitutional) attempts to secure Mr Chávez's removal. These have included a series of mass mobilisations, endorsement of a military coup in April 2002 and recourse to nationwide strike action, most recently the crippling two-month stoppage that commenced in December The failure of such tactics to bring down the government has enabled moderate groups, committed to a peaceful and constitutional resolution of the political crisis, to gain greater influence within the CD since the first quarter of The moderates include a number of influential civil society groups cohering as the Alianza Cívica (Civic Alliance), and a range of relatively "young" parties including Proyecto Venezuela and Primero Justicia, which emerged in the late 1990s as splinter groups of AD and COPEI after the latter two parties failed to undertake effective organisational renewal. Differences of policy, ideology and organisation have given rise to acute tensions between the "old" and "new" political parties within the CD. The CD has weakened its own campaign to secure Mr Chávez's removal by repeatedly deferring crucial decisions. The most important of these are: whether to field a unity candidate in the event of a fresh presidential election; how such a candidate should be selected; and what should be the CD's campaign platform. The same three figures have been front-runners for the CD nomination for over a year. The first is the leader of the Proyecto Venezuela

19 Venezuela 17 party, Henrique Salas Romer, who was defeated by Mr Chávez in the 1998 elections. The fact that he won 40% of the vote in 1998 (representing 25% of the electorate when abstention is factored in) leads many within the CD to regard Mr Salas Romer as a credible challenger to Mr Chávez. In common with Mr Salas Romer, Julio Borges of the Primero Justicia party has the advantage of not being associated with COPEI and AD, the historically dominant but widely discredited traditional parties. However, Mr Borges' relative youth (he is in his mid-thirties) and the small size of his party make him a less convincing contender in the view of many within the CD. Enrique Mendoza, the governor of Miranda state, is a member of COPEI, but his reputation for independence and competent management at the state level are in his favour. Opinion poll surveys suggest that Mr Salas Romer has nudged to the front of the field in recent weeks, with about 40% of voting intentions, compared with 35% for Mr Mendoza and 25% for Mr Borges. Polls of voter intentions fluctuate but a consistent finding has been that if the opposition were to field more than one candidate, this would work in Mr Chávez's favour, with around 35% of the population estimated to lend "hard" support to the president. Amid uncertainty over the CNE's likely verdict on the signature-collection campaign, some within the opposition fear that, in not defining a "leader" earlier, the CD may have prejudiced its chances of success in mobilising sufficient valid signatures. There is a strong possibility that the CD will collapse under the pressure of selecting a unity candidate. In an attempt to ease the selection process, the CD has debated the possibility of appointing a candidate who will act as a "transitional" president, serving out the remaining two years of Mr Chávez s term should his mandate be revoked. This candidate would then stand aside in the 2006 presidential election. Mr Salas Romer has forcefully rejected this idea, insisting that primaries should be held to select a candidate. Mr Borges appears to share Mr Salas Romer's views, but has articulated them less publicly. Part of the reason that supporters of Mr Salas and Mr Borges have been pressing for primaries is that they fear that the traditional parties are seeking to usurp control of the CD and transform it into a vehicle for a Mendoza/COPEI election campaign. Should this transpire, it will harm the CD's election prospects. The traditional parties remain deeply unpopular and their growing influence within the CD has been detrimental to the organisation s credibility. Mr Salas Romer's acceptance of AD and COPEI support in the 1998 elections damaged his campaign and increased support for Mr Chávez. The CD's lack of prestige may lead the more independently minded presidential hopefuls, including Mr Salas Romer and Mr Borges, to decide that their presidential ambitions would be best served by running as independents. Local elections in August complicate opposition strategy Preparations for local and state governor elections scheduled for August 1st have compounded the CD's internal tensions. The AD's secretary-general, Henry Ramos Allup, has suggested that the CD field unity candidates. Neither Mr Borges, Mr Salas Romer nor the civil society groups within the CD are in favour of this proposal, which they regard as an attempt by AD and COPEI to impose their own candidates on the smaller parties. Mr Borges has gone further than other members of the CD in issuing a protest against the election schedule. Supported by his PJ party, he has called on the CNE to delay the