Venezuela Defence and Security Report 2009

Economic growth is expected to slow down sharply in Venezuela in 2009, as a result of a tougher global economic climate and significantly lower oil prices. As a result, the government of President Hugo Chávez, whose popularity has rested at least partly on the generous social spending of oil revenues, is expected to face a challenging political situation. According to Central Bank preliminary estimates, GDP rose by 4.9% in 2008, already showing a loss of dynamism on the 8.4% figure registered in 2007. The international price of oil, Venezuela’s main export, peaked at almost US$150 a barrel in July 2008, but after September of the same year virtually collapsed as the global economic slowdown began to gather pace. Oil prices averaged US$65 a barrel in 2007, and rose to US$89 in 2008. In contrast, a number of analysts are predicting a US$40 average price in 2009, a level that could cause the government serious difficulties, since half of fiscal revenue is oil-based. International ratings agencies cautioned that the government might be unwilling or unable to make the necessary fiscal adjustments at the speed that would be needed. Standard & Poors (S&P) reduced its Venezuela outlook from stable to negative, warning that the Chávez government’s campaign on a new constitutional referendum in early 2009 would distract its attention and delay the adjustment process. S&P’s rating for Venezuela stood at three notches below investment grade.

Venezuela’s armed forces are amongst the smallest in the region, but were traditionally technologically superior to many of its regional counterparts. However, this superiority is becoming increasingly insignificant. Venezuela plays little part in the world arms market. It imports nearly all its weapons, and in fact has almost no indigenous defence production capability. Venezuela’s marked dependence on weapons imports has traditionally been somewhat offset by the diverse suppliers from which the country purchases its arms.

Modernisation and upgrades under a new procurement programme are likely to be externally directed, with European and Middle Eastern countries expected to make up most of the suppliers. However, the overall increase in procurement could prove beneficial for the defence industry if co-operative or domestic bids are chosen for later contracts. Defence spending will increase over the forecast period as a result of recent high oil prices that have enabled the government to go on an arms procurement spending spree. However, in May 2006, the US imposed a ban on arms exports to Venezuela, having tried to stop the sale of military aircraft from Spain and Brazil that use US manufactured components.

BMI believes that Hugo Chávez is here for a while yet. Chávez has dominated Venezuelan politics since his election in 1998. The anti-Chávez opposition movement has been deeply divided since the failed coup in 2002 and the subsequent failure to make a recall referendum stick. Venezuela is not likely to develop a competitive defence industry in the foreseeable future and will remain import-dependent for its weapons purchases and diverse in the sources it relies on for those purchases.