Chavez clings to shaky control of Venezuela

The Latin American president's economic solutions may not be enough to pull the country back from the brink.

By DAVID ADAMS and PHIL GUNSON
© St. Petersburg Times
published February 17, 2002

CARACAS, Venezuela -- In a national broadcast Venezuelan President Hugo Chavez last week asked his countrymen "to help me sheathe my sword."

They were welcome words.

Venezuelans have become increasingly frustrated and angry in recent months over the president's handling of a political and economic crisis that threatens to plunge the country into social chaos.

In his televised address Chavez appeared to step back from the brink, saying he was "willing to review" contentious government policies.

But it may be a case of too little too late.

Three years after he was elected, most Venezuelans have lost all confidence in Chavez, a former paratroop commander who was heralded as the savior from poverty and political corruption.

While he may have dropped his rhetoric -- at least for the time being -- Chavez now faces an entirely new set of problems.

His about-face included an equally unexpected package of drastic economic measures. In a complete reversal of his free-spending populist policies, Chavez announced new taxes and a staggering 22 percent budget cut. On top of this he suspended efforts to protect Venezuela's currency, the bolivar, leading to a sudden devaluation.

The measures were welcomed by most analysts as long overdue economic medicine. But they also appear destined to create new social strains, with Chavez's own die-hard supporters likely to be the hardest hit.

According to political commentator Manuel Felipe Sierra: "Chavez is governing on the edge of the abyss. Never in 43 years of democracy has the country faced a more delicate and explosive situation."

March on La Casona

Last week's news was the culmination of a striking series of political missteps in which Chavez sank almost daily deeper into public ridicule. It boiled over when a previously unknown air force officer, Col. Pedro Soto, made an emotional appeal for the president to resign. Claiming to represent 75 percent of the officer corps, he accused Chavez of being a "tyrant."

Soto is not the first active duty officer to make such a demand since Chavez came to power in 1999. But his Feb. 7 speech -- and the government's lame response -- seemed to capture a national mood of crisis.

February has often been a turbulent month in Venezuelan history. In February 1989 hundreds of civilians died at the hands of security forces when bus fare increases sparked looting and riots. Chavez himself first caught national attention when he led a failed military coup in February 1992.

Ironically, Soto's public insubordination came only three days after Chavez held an official celebration of the 10th anniversary of his attempted coup.

"Chavez is trapped in a labyrinth of his own making," said historian Jorge Olavarria, noting that the president could hardly object to rebellion in the ranks given his own record.

Soto's remarks, delivered in an impromptu speech at a forum on freedom of expression, had immediate effect. Within hours the Venezuelan currency fell by 10 bolivars to hit 782 bolivars to $1, the biggest drop in more than five years. It fell another 10 bolivars the next day.

On the streets of Caracas thousands marched behind Soto heading for the presidential residence of La Casona.

"If Chavez had any sense he'd have left the country already," said Doris Siemen, as she watched the crowd gathering in the Plaza Francia. "But he's not a normal person." Siemen and her husband brought their 15-year-old daughter to the demonstration, although they thought there could be trouble.

"The thing is, it's historic," said Max Siemen. "In the whole history of the republic we've never seen this type of spontaneous demonstration -- there's no leader, people are here of their own free will."

'Yuppies and oligarchs'

The government appeared not to know how to react. At first officials dismissed the protest as a minor incident hardly worthy of note. Soto, they said, had acted out of personal pique, having twice been passed over for promotion to general.

"This is something totally domestic," said Vice President Diosdado Cabello. "The president does not need to pay great attention to it."

Even so, officials talked darkly of Soto being at the helm of a conspiracy to topple the president. Cabello said opposition leaders had carefully scripted Soto's forum appearance and the subsequent march to La Casona. The government went so far as to organize its own show of force, mobilizing a pro-Chavez demonstration where supporters chanted slogans accusing Soto of being a "traitor."

In a brief interview Soto said he had no political ambitions: "All I'm doing is expressing the feelings of the armed forces and the people."

There was also little evidence to back up government accusations of an opposition plot. In fact, Soto had to climb on the roof of a TV van to address the crowd, most of whom could not hear him speak through the bullhorn which was his only aid.

When he eventually set off at the head of the crowd there was not much sign of planning. Some 15 or 20 minutes were lost -- amid considerable confusion, pushing and shoving -- while it was decided which route they should take.

The president and his allies continue to insist that their opponents are a small minority, denouncing those who marched on La Casona as "yuppies and oligarchs."

But recent polls show that Chavez's support has imploded since reaching record highs early in his administration. The latest poll by Keller & Asociados found that 63 percent of voters would not re-elect the president, against 25 percent who still support him.

But that's only the tip of the iceberg.

Besides internal military splits and falling popularity, Chavez is increasingly isolated internationally and faces dire economic forecasts.

Immediately before Soto's speech, three senior U.S. officials, including Secretary of State Colin Powell and CIA director George Tenet, expressed concern about the direction in which Chavez was leading Venezuela.

Recent weeks have also seen further evidence of strain in the relationship with the Vatican, after the papal nuncio warned of the danger of excessive radicalization. Chavez responded to that by blasting the Roman Catholic Church as a "tumor on the nation."

Relations with neighboring Colombia were also damaged last month after a leaked video showed Venezuelan army officers apparently fraternizing with Colombian guerrillas.

The price of bread

But it is the economy that may now make or break Chavez.

Chavez's mismanagement has created such a crisis of confidence that the country's financial reserves have been drying up. Analysts say investors have withdrawn $21-billion in the last three years. In January alone $1.6-billion took flight, according to the World Bank.

At the start of the month analysts were predicting Chavez would bring in exchange controls to stop the hemorrhage of dollars. But over a long carnival weekend the government bowed to the inevitable. Tuesday night, before the markets reopened Wednesday, the president made his move. But to the surprise of most everyone, instead of exchange controls he declared that the bolivar would be allowed to float rather than being maintained within artificial bands.

"The time bomb exploded," was how private sector business leader, Pedro Carmona, put it.

When trading resumed, the currency crashed. After losing almost 30 percent of its value at one stage, it staged a partial recovery, but only after analysts say the government intervened at a cost of $100-million.

In addition to the flotation of the currency, Chavez announced sweeping budget cuts and several other emergency measures.

Most observers responded favorably, although they warn of an uncertain future. "He's done the right thing economically," said Ian Campbell, a Latin America financial analyst. "But the big question now is can he survive the consequences."

Campbell and others warn that the financial rot in Venezuela's economic system has been allowed to fester for so long, there is no quick solution. "Chavez is like a fish who's got the hook in his mouth and he's making a run to avoid the landing net. Odds are he won't make it."

Economists explain that after decades of being used to an overvalued dollar, Venezuelans have become addicted to imported goods bought with dollars earned mostly by its giant oil industry.

With the largest oil reserves in the Western Hemisphere, the country is the third-most important supplier of oil and derivatives to the U.S. market. The oil industry accounts for 50 percent of government income and about 80 percent of export revenue.

The problem is what happens when the oil price goes down, especially -- as now -- at a time of political crisis. More than 40 percent of the market in processed foods, medicines, electronics, automobiles and clothes is supplied by imports. Late last week, as the value of the bolivar slid, inflation began to take off. Price tags in shops rose at least 30 percent for most products, including basic foods. Bread was up 40 percent.

That inflation also impacts locally assembled products that depend on imported components. Medicines are likely to be particularly badly affected. According to the pharmaceutical chamber of commerce, treatments for diseases like cancer and AIDS are wholly imported. All but one drug manufactured locally are 90 percent dependent on imported ingredients.

Good news for Dr. Diablo

While the business community and many independent economists found themselves in the unusual position of applauding the government, the measures have by no means satisfied Chavez's opponents. Most believe he is continuing to underestimate the size of the problem. They also want changes in the economic cabinet, which they blame for the current crisis.

Recent appointments, however, are unlikely to satisfy the president's critics.

Chavez named former Vice President Adina Bastidas, feared by the private sector, as minister of production and commerce. He then put a hard-line leftist academic, Gaston Parra, in charge of the state oil company, PDVSA.

Parra had helped draft a controversial new oil law, which business analysts say will frighten off foreign investors with its insistence on high royalty payments.

What really worries the experts, though, is that the government might use PDVSA as a source of ready cash to bridge the budget gap. At a press conference on Wednesday, the outgoing head of the oil company, Gen. Guaicaipuro Lameda -- who has criticized the new oil law -- warned against such a policy.

"PDVSA cannot resolve all the country's fiscal problems," Lameda said.

One of the few to take any kind of consolation from this gloomy picture was Rodrigo Herrera, who runs Dr. Diablo's debt-collection agency.

Herrera anticipated that business will be booming.

"We saw this coming some time ago," Herrera said. "The price of the dollar was unrealistic. Right now, people are going crazy with panic buying. The dollar is what counts here, and it's bound to hurt."

-- Times correspondent Phil Gunson is based in Caracas. David Adams can be reached at dadams7308@aol.com

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