Re-elected Chavez faces tough economy in Venezuela

By IAN JAMES and FRANK BAJAK

Associated Press

Published: Tuesday, Oct. 9 2012 12:38 a.m. MDT

Opposition presidential candidate Henrique Capriles is greeted by supporters after he conceded defeat in the presidential elections at his campaign headquarters in Caracas, Venezuela, Sunday, Oct. 7, 2012. Venezuela's electoral council said late Sunday President Hugo Chavez has won re-election, defeating challenger Henrique Capriles.(AP Photo/Sharon Steinmann)

Associated Press

CARACAS, Venezuela — During his re-election campaign, President Hugo Chavez promised to deepen the "21st century socialism" that has meant an ever-greater state role in the economy. That message won him a surprising 11-percentage point win in what many had thought would be a tight race.

Still, he's set to start a fourth presidential term under challenging economic circumstances. The government's free-spending ways, bankrolling the generous social programs that aided his re-election, may be seriously crimped.

Chavez faces immediate economic time bombs beginning with a rapidly expanding public debt, one of Latin America's highest inflation rates and a weakening currency.

Many economics believe Chavez will have no choice but to devalue the currency, the bolivar, by about half early next year at the latest. That will make the money in people's pockets suddenly worth a lot less and likely drive inflation while putting imported consumer goods out of reach for poorer Venezuelans.

"He's going to have to deal with some very basic, mundane capitalist things, like reducing inflation," which stands at 18 percent, said Eduardo Gamarra, a Latin American studies professor at Florida International University in Miami.

Price controls and government subsidies for basic foodstuffs have eased inflationary pressures but a major devaluation would drive prices higher and could worsen scarcities, economists say.

"Investment in social issues is great, but he needs to do other things as well that are going to make that economy more productive," said Gamarra.

Venezuela's economy grew by 5 percent this year but only because of government spending, primarily on raising salaries for many of the country's at least 2.4 million public employees and paying for thousands of new homes that Chavez is giving away, said Joao Pedro Ribeiro, an economist at Roubini Global Economics in New York.

"We think the outlook for the short term is very bleak," he said, with economic growth at about 2 percent next year and "inflation spiking to 30 percent."

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