Country report forecast - January 2008

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Country Report Forecast_2008

Highlights
Outlook for 2008-09

• Mr Chávez's defeat in the December 2007 referendum on constitutional reform will give a boost to the beleaguered opposition. However, internal divisions and a lack of influence over policy remain significant challenges.
• The government will continue to use the state’s wealth of energy resources as leverage to deepen diplomatic and commercial relations with countries it considers "friendly" within and outside the region.
• The government is unlikely to move towards full state control of the economy, but concerns about further nationalisation will curb private-sector investment.
• The central government deficit is forecast to widen, as non-oil revenue falls, but the true fiscal position will be worse, as an increasing burden of expenditure will be placed on PDVSA and Fonden.
• Deficiencies in the policy environment and a stabilisation of fiscal revenue will combine to produce a deceleration of GDP growth in the forecast period.
• Assuming that oil prices remain high, the authorities are unlikely to devalue the bolívar until 2009. Sales of dollar-denominated assets will increase, but the gap between the premium and official exchange rates will remain large.

The political scene: Referendum defeat boosts opposition

On December 2nd, the electorate voted to reject a government-sponsored reform of the constitution, whichwould have significantly enhanced the powers of the president, Hugo Chávez (November 2007,

The political scene).

The vote was divided into two blocks, the first relating to changes proposed by Mr Chávez and the second to changes proposed by the National Assembly. The result was close; according to the official figures from the Consejo Nacional Electoral (CNE, the electoral authority), the first block was repudiated by 50.7% to 49.3%; the second was rejected by 51.1% to 48.9%. There were several hours of considerable tension before the CNE announced that with 87% of the ballots counted, the result was "irreversible". Mr Chávez conceded defeat, although there was speculation that this concession might have been wrung from a reluctant president by implicit or explicit threats from elements within the armed forces.
Mr Chávez's defeat can be attributed in large measure to the recent coalescing of a mass student-based opposition movement, combined with the open rebellion of former Chávez allies. A retired general and popular former minister of defence, Raúl Baduel, campaigned strongly against the constitutional changes and urged Venezuelans to come out in force to vote "no". A small party allied to Mr Chávez, Podemos, also rejected the proposed reforms. The relatively high rate of abstention (45%) also hurt the government's campaign, since many of those who stayed at home were Chávez supporters. This suggests that support for the president rests mostly on his social spending programmes and generally pro-poor policies, rather than on his socialist ideology. A deteriorating economic situation has also contributed to disillusionment with the government, with price and exchange controls generating shortages of basic goods and rampant inflation (see Economic policy). Outside the economic sphere, there is also growing disillusionment with failure to improve delivery of basic services, such as water and housing, to the poor, which is blamed in large part on corruption and mismanagement of the oil windfall.
This result is a major political and personal defeat for Mr Chávez, as it marks the first time that he has lost a national election since winning the presidency in 1998. Mr Chávez has insisted that his planned reforms have been delayed rather than abandoned. He could use his significant powers, including the ability to legislate by decree under the Ley Habilitante and complete dominance over the National Assembly, to push through some of the proposed changes.

However, given the lack of public support this could deepen divisions within his own ranks. Some of the proposed changes would still require a reform of the constitution via a petition by voters, which is unlikely. Much will depend on how the opposition positions itself over the coming months. The victory of the "no" campaign was evidence of the emergence of a "third pole" (as Ismael García, leader of Podemos, calls it), comprising those who have become disillusioned with Mr Chávez but are reluctant to join the ranks of the discredited and unpopular opposition parties. This could be a dangerous development for the president, who has been very successful in presenting his adversaries as belonging to pro-US camp. This places the opposition in a position to reap considerable gains in regional elections due in October, but this will require the traditional and new opposition elements to forge a workable alliance.