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Bloomberg: The same tumbling oil prices that led OPEC to slash output last week threaten to send Venezuela’s economy into a tailspin, and put an end to President Hugo Chavez‘s ambitions to expand his socialist revolution at home and abroad.
To cope with plummeting oil revenue, the source of half the government’s spending, Chavez may have to cut domestic handouts and foreign aid. The first items likely to go will be arms purchases from Russia, oil subsidies for Cuba, and job-creating local projects such as bridges and subways, economists say.
“You have a country with an oil boom, that doesn’t know how to save, doesn’t know how to set up productive industries that generate jobs, and goes into debt,” said Elsa Cardozo, a professor of political science and international relations at the Universidad Central de Venezuela. “Then oil prices fall and the party ends.”
Venezuela may be poised to repeat the economic collapse it suffered in the 1980s at the end of its last oil boom. Former President Carlos Andres Perez, employing policies similar to Chavez’s, lavished petrodollars on public works projects, foreign aid and nationalizations in the late 1970s, setting the stage for a 1983 currency devaluation and spending cuts that sent millions of Venezuelans into poverty.
“Venezuela is now more dependent than ever on oil,” said Jose Toro Hardy, a former board member of state oil company Petroleos de Venezuela SA. “Venezuela is the most vulnerable country in all of Latin America to a falling oil price.”
Chavez is already spending beyond his means, posting a $7 billion budget deficit in the first half of 2008, a period of unprecedented oil prices, on a $63.9 billion budget for the year.
Economists’ estimates of the minimum oil price Chavez needs to sustain his economic policies range from $120 a barrel to $65. Oil fell $1.00, or 1.6 per cent, to a 17-month low of $63.15 a barrel in New York at 12:12 p.m.
Below $80 a barrel, it’s likely that Chavez will devalue the bolivar for the first time since 2005, sparking a surge of inflation and a drop in real wages because of Venezuela’s reliance on imports, said Gustavo Garcia, an economics and public finance professor at the Instituto de Estudios Superiores de Administracion, a Caracas business school.
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