Chavez May Strengthen Grip on Venezuela Economy as Foes Gain

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Chavez May Strengthen Grip on Venezuela Economy as Foes Gain

September 28, 2010, 1:22 AM EDT

By Charlie Devereux and Corina Pons

Sept. 28 (Bloomberg) -- Venezuelan President Hugo Chavez, after suffering his

worst setback at the ballot box since taking office in 1999, may seek to

strengthen his grip on the economy and undermine opponents ahead of the 2012

presidential election.

Chavez's United Socialist Party of Venezuela, while securing 98 of 165 seats in

National Assembly elections Sept. 26 after the redrawing of electoral districts,

lost the two-thirds majority needed to pass key legislation by itself. The

opposition took 65 seats and says it won 52 percent of the popular vote.

Authorities didn't release the overall vote count.

Chavez has experienced defeat just once before in 12 elections and could look to

increase state control of the economy, boost spending on social programs and

crack down on opponents to regain political momentum, analysts at Barclays Plc

and Goldman Sachs Group Inc. said.

" It's not in Chavez's nature to take this threat lying down, " said Ray Walser, a

Latin America analyst at the Heritage Foundation in Washington. " He will likely

take a retaliatory step. "

Venezuela's bonds posted the biggest gain in emerging markets yesterday. The

extra yield investors demand to own Venezuelan bonds instead of U.S. Treasuries

fell 23 basis points, or 0.23 percentage point, to 11.54 percent, according to

JP Chase & Co.'s EMBI+ index.

The yield on the nation's benchmark 9.25 percent dollar bond due 2027 fell 53

basis points to 13.41 percent, according to JP. That's its biggest decline

since June 10.

Short-Lived Bond Rally

" The key victory by the opposition could provide a near- term boost to asset

prices, but the rally could be short-lived until Chavez acts, " Bank of America

Corp. said in a report.

Opposition candidates, whose boycott in 2005 on concerns of possible fraud

handed Chavez near-absolute control of the congress, took advantage of voter

discontent with rising crime and 30 percent inflation to make gains in the

unicameral legislature, analysts said.

Chavez may seek to undermine the new assembly before it takes office in January,

using his control of the lame-duck congress to push through measures that

strengthen his rule, said Grisanti, a Barclays economist.

Grisanti said that without a two-thirds majority, Chavez cannot change laws

governing the Central Bank like his party did twice in the past year. His

majority also falls short of the three-fifths needed to grant Chavez powers to

govern by decree.

Chavez on Twitter

" The next congress will be full of debates and conflict, but few laws will be

passed, " Grisanti said in an interview from New York.

Chavez, in a press conference with foreign correspondents yesterday, called the

results a " triumph " for his Bolivarian revolution, while acknowledging that he

fell short of his " maximum goal " of winning a super majority of 110 seats.

He said the media distorted the results to falsely claim victory and that his

allies won the popular vote 5.4 million to 5.3 million for the Democratic Unity

Table alliance. He said the alliance, which said it won 52 percent of the

overall vote, was errantly counting for themselves ballots cast for the

Fatherland for Everyone party, which broke with the government this year and won

2 seats in the new congress.

" The squalid ones said they won, " he said in a message on his Twitter account

yesterday. " Well, let them keep winning like this! "

`Radicalizing Policy'

" The Chavez administration still has a very strong grip on power, " Goldman Sachs

economist Alberto Ramos wrote in a report yesterday. Ramos said he wouldn't be

surprised if Chavez reacted to the election results by " radicalizing the policy

approach and eroding even further the remaining institutional checks and

balances " before Chavez seeks a third, six-year term in 2012.

Chavez suffered his only electoral defeat in 2007 when voters narrowly rejected

a referendum to change 69 articles of the constitution. He went on to implement

many of the measures, including making it easier to expropriate property and

giving more power to community councils closely allied with him.

Venezuela redrew electoral districts last year giving a larger voice to rural

areas where the government is more popular. The changes mean that 20,000 people

in pro-Chavez Amazonas state elected a single lawmaker, giving them the same

representation as 350,000 people in the opposition-controlled capital of

Caracas.

More than 66 percent of Venezuela's 17 million registered voters cast ballots in

what Chavez, citing " comrade " Abraham Lincoln's Gettysburg Address, said was an

" exemplary " exercise in democracy " of the people, by the people and for the

people. "

Venezuela's flailing economy, the fastest inflation rate among 78 economies

tracked by Bloomberg and sporadic blackouts from underinvestment in the nation's

power grid have caused Chavez's approval ratings to fall below 50 percent this

year, according to Datanalisis polling firm.

Shrinking GDP

A drop in foreign investment due to nationalizations and lower oil prices caused

the economy to shrink 3.5 percent in the first half of 2010 even as the rest of

South America surged ahead from the global financial crisis.

Also hurting the government's approval rating are homicides that have more than

tripled since Chavez came to power to a record 16,047 last year, according to

the Caracas-based Venezuelan Observatory of Violence.

Still, the 56-year-old former paratrooper remains revered among many poor

Venezuelans who benefit from free health clinics and subsidized food markets.

Poverty has fallen by half to 24 percent in 2009, government data show.

--With assistance from Jaramillo and Helen in Bogota, Orozco

and Cancel in Caracas. Editors: Goodman n Walsh