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Chavez faces economic challenges

| Monday, Oct. 8, 2012, 10:04 p.m.

CARACAS — 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, which bankrolled the generous social programs that aided his re-election, may be seriously crimped.

Chavez faces immediate economic time bombs beginning with 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.” The black market value of the Venezuelan bolivar, whose official value is set by the government, was half of the official rate in July.

It is now one third of the official rate.

At the heart of Chavez's economic challenges is declining productivity in the oil industry, which accounts for 95 percent of exports and funds Chavez's social programs. Governing the country with the world's largest proven oil reserves has so far insulated Chavez from the fallout of his confrontational polices, including a drop in foreign investment.

But economist David Rees of London-based Capital Economics said the government has relatively few dollars left, “having utilized them to fund an import binge ahead of the ballot. That will add to the reduction in imports and increase in shortages.”

Some experts say oil production has stagnated due to insufficient investment and management problems in the state-run oil company.

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