Venezuela: A lose-lose election

Today, we turn to the last in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.

Here's a summary:

Venezuela -- A lose-lose election. No matter who wins the October 7 presidential election, Venezuela's political and economic conditions are likely to worsen. President Hugo Chavez would maintain the same distorting economic policies, and the economy would struggle to overcome the effects of a large pre-election increase in spending and debt issuance. An opposition win would likely lead to an eventual improvement in economic policy, but the transition could produce instability as Chavez supporters, who would still control most of the state apparatus, try to counteract reform. 

Q- Can Chavez win another election? What will affect the outcome?

A- Chavez has the edge because of his relatively persistent popularity despite a growing dissatisfaction with the status quo. The president's popularity (his approval ratings are currently around 50 percent) comes despite high inflation (estimated at nearly 28 percent in 2011), low growth, good shortages, and an electricity crisis. To alleviate these negatives, Chavez will likely engage in a massive campaign spending spree, fueled by high oil prices. His government will also issue a large amount of debt to provide dollar-denominated assets to curry favor and counteract dollar shortages. The major wild card is Chavez's health. He announced in July that he was diagnosed with cancer, but little is known about the severity of his illness. Should his health deteriorate significantly, Chavez's reelection chances will diminish, as the public's faith in his ability to lead drops.

Q- Who is the opposition?

A- The Coalition for Democratic Unity (MUD) will select its presidential candidate when it holds primary elections on February 12. Miranda Governor Henrique Capriles Radonski, a young and popular governor from one of Venezuela's most important states, is the favorite. The opposition hopes to capitalize on the growing dissatisfaction with Chavez and to continue the momentum from the 2010 legislative elections, when a unified opposition list of candidates won 54 percent of the popular vote against the president's United Venezuelan Socialist Party (PSUV). The MUD would promote more orthodox macroeconomic policies, likely leading to lower inflation and more fiscal stability in the long run. The opposition would also adopt oil-related policies that are more attractive to foreign investment.

Q- What are the different risks arising out of the election outcome?

A- A Chavez win would mean a continuation of the same economic policies that have produced widespread market distortions and a strained relationship with foreign oil companies. It will be even harder for the country to recover from the large uptick in spending and debt Chavez is likely to push to improve his election chances. Given Chavez's wide-ranging power within the government, however, it would be easier for a Chavez government than a more fragmented opposition to make some economic adjustments, such as devaluing the currency or tweaking the foreign exchange system.

An opposition win, while positive for long-run growth, could paradoxically lead to more instability in the short-run. The government would be opposed at every turn by Chavez allies, contributing to policy paralysis. The most stable outcome would probably occur if the opposition wins, and Chavez's health makes it difficult for him to continue leading his movement behind the scenes. The most unstable environment would likely arise from a rapid deterioration in Chavez's health, causing him to abandon the presidential race and creating a power vacuum that would roil both the governing party and the opposition.