By Palash R. Ghosh: Subscribe to Palash's RSS feed
September 27, 2010 6:50 PM EDT
Venezuelan President Hugo Chavez's ruling Socialist Party lost its super-majority in the nation's parliament, as the opposition reached more than one-third of the legislative body's seats, following elections over the weekend.
The vote was viewed as a referendum on Chavez himself (although he did not run himself) as the populace grows weary of a weakening economy and uncontrolled crime and violence in the capital city Caracas.
Although Venezuela's second quarter GDP came in better than expected – contracting 1.9 percent year-over-year, from a 5.2 percent decline in the first quarter – the economy is suffering from some deeply-entrenched problems, including runway inflation and an aging infrastructure.
According to preliminary results, Among the 165 seats in the unicameral congress, the ruling party won 96 seats, while an opposition alliance group united the “Democratic Unity Table” banner gained 63 (the remaining handful of seats are still too close to call).
Julio Borge, an opposition leader, was quoted as saying that “we achieved this against all the odds. We won a clear majority in the popular vote – mathematics is mathematics. The majority of the people do not support the government’s radical plans.”
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The two-thirds majority rule which Chavez's party lost was crucial because it had allowed him to rewrite laws and pass budgets unopposed as well as unilaterally appoint senior officials.
By contrast, in the prior assembly election in 2005, Chavez won nearly 100 percent control after his opponents boycotted the election.
Neil Shearing, senior emerging markets economist at Capital Economics, said the election results provide the strongest evidence yet that Venezuela’s economic woes have begun to dent President Chavez’s popularity.
“All eyes are now on the 2012 presidential elections and, with the opposition set to mount a vigorous challenge to Mr. Chavez, political risks are on the rise,” he said.
The failure to hold onto the two-thirds majority means that this is a defeat for Chavez and will be viewed as an indictment on his administration, Shearing noted, particularly given the vast amount of resources it mobilized to fight the election and the fact that it redraw legislative districts in order give greater votes to rural areas, where Chavez's support is strongest.
Shearing explains that what underpins the country's fragile economy is its unsustainable currency system, “which despite recent attempts at reform, ignores a fundamental problem -- the country is running out of dollars.”
And this problem will only be exacerbated if oil prices keep falling over the next year or so.
“The loss of its two-thirds majority will... temper the government’s ability to match this with hard policies – and as such political risks look set to rise,” Shearing added.
“But at the very minimum it seems that fiscal policy will stay extremely loose while a renewed clampdown on the private sector may also be on the cards.”
Shearing also noted that in the event inflation keeps climbing, the government might be forced to enact another devaluation of the official exchange rate.
“Either way, Venezuela looks set to remain the region’s laggard for a while yet,” he concluded.
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