Chavez Poised to Make Deep Cuts in Venezuela As Petro-dollars Dry Up

Hugo Chavez has reduced Venezuela's support to foreign allies and is poised to make deeper cuts at home and abroad as plunging oil revenues hit his self-styled socialist revolution.

The government has warned of austerity measures after years of breakneck spending on social programs, nationalizations, arms and diplomacy, an exhilarating splurge when there seemed no end to petro-dollars.

South America's energy giant relies on oil for half of its exports and 95% of government revenue, leaving Chavez's ideological and political ambitions vulnerable to a crunch.

"Oil revenues are the weapons he has been using to fight this war. He is going to have to make big changes," said Pietro Pitts, an oil analyst who publishes Latin Petroleum magazine. "He will have to cut spending or devalue the bolivar, or both. Both are very politically sensitive."

Chavez recently said Venezuela would ride out any financial storm and that oil prices at $80 to $90 a barrel would be sufficient - an estimate which now looks optimistic. Earlier this year he suggested prices could soar to $200.

With next year's budget plans already in tatters, and foreign investment slowed to a trickle, the government started making cuts even before the latest price tumble.

Last month it postponed construction of a $4bn refinery in Nicaragua, a key ally in its anti-US front, and announced tougher terms for subsidizing oil exports to some Caribbean countries.

The state oil company, PDVSA, slashed spending on social programs which have underpinned Chavez's popularity. Aid to Bolivia and Ecuador, and subsidized oil to Cuba, may be hit next.

The finance minister, Ali Rodriguez, signaled the 2009 budget "will have significant restrictions" compared to this year's $63.9bn and that high-rolling government officials would have to cut back on sports utility vehicles and whiskey. "Many expenses, such as expenses on certain types of vehicles, cellulars and parties, will be eliminated."

Some analysts think Venezuela can weather the crisis with the help of $40bn reserves reportedly squirelled away during the boom. "The government should have plenty of room to conduct the sort of fiscal stimulus policies being employed by nations such as the US, the UK and China," according to the Center for Economic and Policy Research, a think tank sympathetic to Chavez.

Others are less sanguine, especially since Venezuela is wracked by 36% inflation, one of the world's highest, and because of precedent: previous governments crashed when oil crashed.