Venezuela: What Happens if Chávez Loses?

Oct. 4, 2012— -- This Sunday, Venezuelans will vote for president, and for the first time since Hugo Chávez took office in 1998, the result is not a foregone conclusion. The odds still favor Chávez, who has significant fiscal resources, control of state media and a loyal and organized party base. However, the challenger Henrique Capriles, who has united the opposition and run a stellar campaign, is tied with Chávez, according to some polls.

So what happens if Capriles pulls off the upset and defeats Chávez?

"If Chavez loses, one needs to be very thankful, but the challenges are going to be huge," says Alberto Bernal, head of research at Bulltick Capital and an open critic of Chávez's economic policies.

There's a good chance Capriles already knows that. Here are the five main challenges he should be prepared for, if he wins.

1. Potential Civil War

Capriles will face a polarized public and potential violence. Chávez himself has warned that a civil war could erupt if he loses. Last weekend, two Capriles supporters were shot by protestors before an opposition campaign rally. In the case of defeat, various armed militia groups that support Chávez could take to the streets (particularly if the results are close or disputed). This would be difficult to control.

Non-political violence will also be an issue. In recent years, Venezuela has become one of the most violent countries in the world. Capriles would have to find a way to maintain law and order without further dividing the population.

2. Working With the Opposition

Capriles would have to deal with a powerful opposition that could disrupt his ability to govern. Venezuela's congress, Supreme Court and the giant state-run oil company Petróleos de Venezuela (PDVSA) will still be under the control of Chavistas, who are unlikely to want to work with a Capriles administration.

A big risk is that the Chavistas "would sabotage whatever Capriles wants to do," says Federico Barriga of the Economist Intelligence Unit.

"If he [Capriles] wins the government will try to leave him with no money."

3. The Economy

The third challenge will be finding a way to revitalize the Venezuelan private sector, which has been devastated by nationalizations and increasing state control of the economy.

"Eighty percent of the private enterprise that used to generate employment [when Chávez first took office] is gone," says Bernal. And they won't come back overnight.

4. The Currency

The fourth major dilemma will be how to manage the Venezuelan currency, which is the most overvalued in Latin America, according to Moody's Analytics. That's because the Chávez government currently operates a confusing fixed exchange rate regime with different rates and limits on the amount of foreign exchange that can be accessed.

A Capriles government would have to figure out how to devalue the currency without causing too much public unrest.

"He will have to take some pain and make some difficult decisions. This will generate problems for him in terms of governability," says Bernal.

While there are longer-term benefits of devaluation, in the short term it would mean a rise in the cost of imports and everyday goods used by Venezuelans.

5. Great Expectations

This leads us to the fifth and potentially biggest challenge for Capriles. He will have to meet the extremely high expectations of millions of Venezuelans who are hoping for immediate change.

"It's going to take many years. The damage that has been done is simply too significant," says Bernal.

Things could get worse before they get better. Capriles has promised to maintain many of Chávez's popular, but expensive, social programs while also investing heavily in an aging infrastructure. High oil prices will provide significant revenues but there is a lack of clarity about the government's current financial situation.

"One of the major challenges of a transition would be to determine the real state of the public finances, including the unaudited off-budget funds controlled by the executive," says the Economist Intelligence Unit's Barriga. The government has been spending heavily in order to win the election and some large debts are due in 2013.

A President Capriles would be severely constrained in what he can do. But it's arguable that candidate Capriles has also been severely constrained. If he can pull off a miracle and defeat Chávez, he may surprise everyone in how he handles the challenges of being president.

Even when the odds are against him.