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Venezuela: Go Hugo, Go!

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The looming collapse of Venezuela’s infrastructure could spell the demise of Hugo Chavez.

BY WALTER T. MOLANO


If water shortages, food lines and multiple exchange rates were not enough, the imposition of rolling black outs across the major urban centers was sufficient to send Venezuelans over the edge.

Years of mismanagement and poor investment brought the electricity grid to the brink of collapse. Its nationalization in 2007, converted one of the best run electricity utilities in Latin America into one of the worst. The problems were aggravated in 2009, with the onset of El Nino, which pushed much of the Andean region into the worst drought conditions of the last 50 years. The Venezuelan electrical grid, which depends on hydroelectric generation for 73 percent of its supply, was brought to its knees. Unfortunately, its decayed conditions accelerated its demise.

Faced with the growing possibility of a catastrophic failure, that would plunge the country into darkness for prolonged periods, the government decided to introduce a series of four hour-long rolling blackouts across the major urban areas. This would provide relief to the system for about four months, or until the onset of the rainy season in May. Venezuela’s rural areas were already subject to extensive power rationing, and the country’s large industrial facilities were operating at reduced levels in order to trim electricity demand. Nevertheless, Venezuela’s electricity grid could not keep up. The government’s decision to postpone the expansions of the Guri and Alto Caroni hydroelectric complexes were two of the major factors that constrained the country’s generation capacity.

However, the problems went much further. It was much more than a deficit in power generation. The lack of investment into the country’s transmission and distribution systems also contributed to its fall. Unfortunately, the drought brought the rot to the surface.

THE END OF CHAVEZ

Years of mismanagement destroyed the country’s vast infrastructure. Incredulous Venezuelans in Altamira spontaneously took to the streets in response to the blackouts. The snarled streets of Caracas turned into a permanent parking lot as the traffic lights went dead. People were petrified when they began to consider what would happen after sunset, when their apartments and condominiums were no longer be protected by close circuit television cameras and electric fences.

With the crime rate out of control, the thought of having to endure such chaos for another four months was too much to handle. This is why the country erupted in protest. Ever the political pragmatist, President Chavez rescinded the blackouts the next day. He also fired his energy minister, Angel Rodriquez. However, many people now ask how the electrical grid will hold up without major investment. A calamity lies close on the horizon. The virtual implosion of the country’s infrastructure is how we can finally contemplate the end of President Hugo Chavez.

Of course, Hugo should have left a long time ago, but his support remained strong. Chavez’s approval rating, prior to the onset of the blackouts, was hovering near 50 percent. Yet, the combination of the blackouts and the maxi-devaluation will push his support levels much lower. The mad rush to stock up on goods and staples prior to an expected increase in prices only exacerbated the shortages. To make matters worse, Chavez used the situation as an opportunity to accuse selective retailers, such as Exito which is owned by a Colombian conglomerate, of hoarding and price gouging. He then nationalized the stores—which will only aggravate the problems. The blackout schedule was also politicized. The government applied the most onerous hours on the higher income neighbourhoods. This proved too much for most Venezuelans to bear.

OUT OF CONTROL

The situation is spiralling out of control. The Venezuelan economy contracted approximately 4.5 percent y/y in 2009, and the government is bracing for another 2 percent y/y decline in 2010. This will make Venezuela the only country in Latin America still mired in recession. Inflation will hover between 20 percent to 25 percent, thus increasing the misery factor. With serious problems at home, a neighbour who is fed up with his antics and capital flight on the rise, the outlook for Chavez is not looking good. Many people will recall that this was not the first time that Chavez found himself in a bind. However, he always managed to find a way to survive. Like a cat, it always seemed like he had nine lives. But, Chavez is running out of lives, and the country’s situation looks bleak.

His policies and rhetoric are too much for people to handle, and his decision to cancel the rolling blackouts only increased the probability that the electricity grid will eventually crash. As John Stuart Mills highlighted more than 150 years ago, the primary role of government is to protect society from anarchy. Failure to do so is the pretext for revolution. Therefore, the looming collapse of Venezuela’s infrastructure could spell the demise of Hugo Chavez. In other words, it may be time for Chavez to go. Go, Hugo, go.

Walter Molano is head of research at BCP Securities.

 

 

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