Venezuelan Candidates Vie to Lead a Divided, Troubled Country

Nothing demonstrated the divisive legacy of Hugo Chávez quite like his death.

In Plaza Bolívar, the main square of the Andean city of Mérida, the emotional outpouring among supporters after Chávez’s death was announced on March 4 was reminiscent of the grief that swept Britain following the demise of Princess Diana. Thousands of mourners gathered in the plaza, many sobbing hysterically, wearing red berets and T-shirts in honor of their deceased leader. “Chavez might have died, but he has multiplied,” many mourners shouted. “We all have a part of him now.”

Three blocks away, three middle-aged men dined in one of the city’s swankiest restaurants. On hearing the news of Chavez’s death, they shouted “good riddance!” and raised a toast with Buchanan’s whisky. Later that evening fireworks were set off in celebration in middle-class neighborhoods near downtown and in the mansion-filled districts in the hills surrounding the city.

Chavez’s record and high-handed ruling style explain the stark contrast. The president championed the cause of the poor during his 14 years in power, using the country’s oil wealth to nearly halve the poverty rate, to 28.5 percent of the population in 2009 from 50.4 percent when he took power in 1999, according to the World Bank. But Chávez was also an autocratic leader who demonized the opposition, politicized the national oil company to the extent that it couldn’t maintain production, adopted policies that caused the economy to lose ground to the likes of Brazil, Colombia and Peru, and enabled violence to flourish. The country’s murder rate stood at 67 per 100,000 inhabitants in 2011, compared with 38 in Colombia, according to Venezuelan Violence Observatory, a watchdog group.

Bridging the political divide and restoring the country’s economic potential will tax Chávez’s successor, be it interim President Nicolás Maduro or opposition leader Henrique Capriles Radonski. Indeed, the rift in Venezuelan society may well get worse in the near term.

Maduro, the vice president who Chávez anointed as his successor before going to Cuba in December for his final operation, has ratcheted up his rhetoric over the past week, calling Capriles the “prince of the parasitic bourgeois” and accusing the U.S. of spying and implanting cancer cells in Chávez’s body. The 50-year-old former bus driver and union official was due to formally declare his candidacy for the April 14 election on March 11; he will represent the ruling United Socialist Party of Venezuela.

Capriles, 40, is governor of Miranda, the country’s wealthiest and second most populous state. He ran against Chávez in the most recent election in October, and although he lost by 11 percentage points, he rallied the opposition effectively and came closer to Chávez than any previous rival. Scion of a wealthy family, Capriles styles himself as a follower of Luiz Inácio Lula da Silva, the former Brazilian president who combined a strong social agenda with market-oriented policies. Capriles has vowed to maintain Venezuela’s social programs and open the country up to foreign investment.

Most analysts believe, and polls suggest, that Maduro has the upper hand; he is Chávez’s handpicked successor and will be able to ride the wave of emotion unleashed by his death. Governing, and dealing with Venezuela’s economic troubles, will not be easy, though.

Maduro lacks the personal magnetism that enabled Chávez to stay in power for so long and build an increasingly autocratic regime, analysts say. “We are of the view that under a potential Maduro administration, governability would likely be weaker, and the power structure less concentrated than in the centralized and personalized structure led by President Chavez,” says Alberto Ramos, Venezuela analyst at Goldman Sachs in New York. “There is even the chance that a Maduro-led government would have to turn to more autocratic measures, as he lacks Chávez’s charisma.”

The country faces deep, structural economic problems. Inflation is running at a rate of 50 percent annualized and the public sector budget deficit is about 15 percent of gross domestic product.

On February 8 Banco Central de Venezuela devalued the official exchange rate by 32 percent to 6.3 bolivars to the dollar from 4.3 previously. Even so, Goldman Sachs estimates that the currency is still 40 percent overvalued.

The central bank also scrapped the Sitme system, a regulated trading platform that allowed investors to buy Venezuelan public debt with bolivars and then resell that debt for dollars. The Sitme established an alternative exchange rate of about 5.3 bolivars to the dollar, prior to the devaluation, and facilitated imports of nonessential consumer goods. (The dollar fetches as much as 25 bolivars on the black market.)

Since the abolition of Sitme, imports have become more expensive, and scarce. In Mérida, one of the main topics of conversation is about where to find such basic goods as toothpaste, toilet paper and hand soap. As soon as someone finds a store or pharmacy with those goods, the news spreads and the stock is rapidly exhausted.

“The shortages are getting worse,” says Ramos. “This is one of the reasons why the government wants elections sooner rather than later.”

Notwithstanding Maduro’s recent rhetoric, some analysts believe he may be more pragmatic if he prevails next month. Victor Rodríguez, a Venezuelan who is chief executive officer at LatAm Alternatives, a Fort Lauderdale-based third-party hedge fund advisory, dismisses Maduro’s recent broadsides against the opposition as “election-mode speak” rather than evidence of a radical platform. “After the election I think we find Maduro much more pragmatic,” he says. “He is not this huge international figure like Chávez and will want to concentrate on domestic matters so that he is reelected in six years time.”

If Maduro wins, some of his first moves may be to reintroduce a Sitme-like system to alleviate the consumer goods shortages and to dismiss Jorge Giordani, the minister of Planning and Finance and a Chávez loyalist, says Alejandro Arreaza, a Venezuela analyst at Barclays Capital in New York. “Giordani had been a close adviser to Chávez for 14 years and is closely associated with him,” says Arreaza. “There has been a lot of friction between him and other senior members of the government. He was behind Sitme’s abolition and has shown little flexibility about allowing another parallel exchange system.”

Venezuelan debt and the bonds of PDVSA, the state-owned oil giant, had a stellar performance last year as investors, fleeing zero or near-zero rates in the U.S., Europe and Japan, rushed into higher-yielding emerging-markets bonds. VE19s, government bonds maturing in 2019, produced a total return of 30 percent in 2012, while VE34s returned 40 percent. The market has already priced in expectations that the new government will be more moderate, limiting the potential for further gains, says Arreaza.