A Comrade In Arms Takes Aim At Chavez

Former coup-mate Arias mounts a stiff electoral challenge

Slum dwellers across Venezuela celebrated Good Friday this year by setting fire to effigies of their President, Hugo Chavez. The annual ritual, dubbed the "Burning of the Judas," targets treacherous politicians. And in the eyes of many Venezuelans, Chavez fits the bill.

Just 15 months after he took office, Chavez the hero has become Chavez the villain. The ex-colonel pledged to improve the lot of the country's impoverished masses. Yet poverty has actually increased by two percentage points, to 81% of the population, thanks to a recession that just won't quit. Such blazing discontent now spells trouble for Chavez.

SLUMP. The President is up for reelection on May 28. The vote, in which all the country's elected posts will be up for grabs, is mandated by a new constitution that Chavez pushed through last year. Yet it could not come at a worse time for the paratrooper turned President. Chavez' approval rating is 54%, down from 70% in January, while that of his main challenger, Francisco Arias, has jumped from 19% to 33% in a matter of weeks. The two men are former comrades-in-arms, having led a failed military coup in 1992. Analysts rate Arias' chances of unseating Chavez as slim. Yet his candidacy has breathed new life into Venezuela's battered political opposition. That could make it harder for Chavez to maintain his monopoly on power.

Chavez has never looked so vulnerable. Members of the President's inner circle and even his own relatives have been dogged by charges of corruption. Meanwhile, his ruling Patriotic Pole coalition, a motley crew of left-leaning parties, is being split asunder by infighting.

But Chavez' Achilles' heel is the economy, which contracted 7.2% in 1999 and an additional 2% in the first quarter of this year, according to private estimates. Fiat, Honda Motor, and Owens-Illinois have all shut down factories in the past six months. With unemployment running at a record 19%, "there's no money to buy," says Norberto Rossi, director general of Unilever Group's Venezuelan subsidiary, which closed soap, toothpaste, and detergent plants in February.

Another headache for business is the bolivar, which by some estimates is as much as 40% overvalued because of a robust inflow of dollar revenues from oil exports. Companies complain that the strong currency has pushed up operating costs and hurt exports. Yet the Central Bank has repeatedly rebuffed calls for an adjustment of the currency's trading band. "We can bring in products from Colombia cheaper, including the cost of transportation," says Rossi.

The slump in private investment is one big reason oil-rich Venezuela is doing so badly even while crude prices have rebounded. What's more surprising, though, is that that the government is not spending either--or at least not with the abandon that is the norm when oil prices are high. Chavez did put $1.4 billion worth of public-works projects in this year's budget. But thanks to his neophyte cabinet's bureaucratic bungling, few have made it past the the drawing board. Aid to victims of December's devastating floods has also been held up.

It remains to be seen whether Arias, a two-term governor of oil-rich Zulia state, can translate growing popular discontent into an electoral coup. He lacks his own party, as well as Chavez' mass appeal. "The feeling that Chavez is one of us, because of the color of his skin, his language, is stronger than the issue of economic development," says Central University of Venezuela sociology professor Roberto Briceno.

Yet Arias, 49, sports bona fide credentials as a coup leader, so Chavez cannot finger him as a member of the old, corrupt regime--his preferred method for dealing with adversaries. Plus Arias has cast himself as a moderate centrist, an image that appeals to upper- and middle-class voters who are turned off by Chavez' radicalism.

While Arias may not be able to pull off a win on May 28, he could yet become the standard-bearer for a new opposition to take the place of Venezuela's discredited traditional parties. Meanwhile, Chavez' own political forces are expected to fall short of a majority in the new unicameral Congress. If that happens, the President will have to horse-trade to see his agenda through. Battles on everything from pension reforms to land rights may ensue. At least it would herald a return to democratic politics, something investors should certainly welcome.

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