ANALYSIS - Blackouts, devaluation hurt Chavez in election year

Venezuela's President Hugo Chavez attends his weekly broadcast ''Alo Presidente'' in Portuguesa, about 350 km (217 miles) west of Caracas in this November 8, 2009 file photo.

CARACAS (Reuters) - As he prepares for elections in September, Venezuela's President Hugo Chavez faces the biggest threat to his popularity in years, hit by a weak economy, electricity blackouts and revelations of government graft.

The Marxist former soldier has had a troubled start to his 12th year in office, forced to devalue the currency he had dubbed the "strong" bolivar and order sweeping power cuts to save energy across South America's top oil exporter.

The January 8 devaluation increased the amount of bolivars the government receives for every dollar of oil it sells, and unless crude prices drop, will stimulate the economy and fund the social spending that underpins Chavez's popularity.

But with inflation high and likely to rise and voters tired of officials many see as mediocre and corrupt, Chavez may face a struggle to keep control of the 165-seat parliament despite problems opposition parties have creating a united front.

Chavez allies won all the seats in the last legislative election in 2005 after the opposition boycotted the vote. About a dozen lawmakers have since switched sides.

The next presidential election is not due until 2012.

A banking scandal that exposed vast fortunes made by businessmen close to the government has disgusted many in the poor neighbourhoods clinging to hills around Caracas that are core to Chavez's support.

"What socialism is this, what revolution is this?" asked government worker Sergio Pinto, in a street painted with portraits of China's late communist leader Mao Zedong and Venezuelan heroes. "They say its bad to be rich but they live in luxury. It's double-speak."

More than a dozen banking executives were jailed and a senior minister resigned in the government clean-up of 11 mismanaged small banks that began November, but the image remains of great wealth among other cabinet members.

Chavez has hinted he has another larger bank in his sights. A takeover would further rock the economy.

'SHARED RESPONSIBILITY'

The failure of rains last year due to the El Nino weather anomaly reduced the electrical generating capacity in a country that depends on hydro-power. A lack of investment to keep up with demand has aggravated the situation.

In a rare sign of vulnerability, Chavez called off rolling cuts in Caracas this month after anger at a chaotic first day of outages that left people stuck in elevators or in dangerous parts of town without street lighting.

"This is a shared responsibility," Pinto said. "Previous governments did nothing, but neither has this one."

Chavez risks major industrial and social problems if rain does not bring relief in a few months. He accepts that mistakes have been made but accuses opponents of stirring up rebellion against his government.

After years saying a devaluation of the bolivar would hurt the poor, Chavez's hand seems to have been forced by the energy shortages that will slow economic recovery.

The staggered blackouts that started two weeks ago will hit homes and industry outside of the capital Caracas every two days until at least May, and are, along with water shortages, a reminder that all is not well now an oil boom has petered out.

"It is likely to only heighten uncertainty and deeper anxiety among most Venezuelans. The country may well be heading into a politically tumultuous year," said Michael Shifter of Washington thinktank Inter-American Dialogue.

FRAGMENTED OPPOSITION

Some opponents scent blood in Chavez's current woes but the ex-tank soldier still has around 50 percent popular support, and a big campaign warchest.

"This is not going to matter much, because oil prices are rising, he will start to hand out money to the social programs and people soon forget," a housewife who only gave her name as Jaqueline said in Caracas after the devaluation.

Chavez also heads to the elections backed by a new law that allows new electoral districts and reduces proportional representation and which opponents say makes it harder for them to compete.

John Magdaleno, a political scientist at Venezuela's Simon Bolivar University, said the new law means the opposition's small parties will struggle to gain ground.

"The government will also count on a cohesive ruling party and a weak and fragmented opposition that has so far failed to capitalize on Chavez's weakness," said Patrick Esteruelas of political risk analysts Eurasia Group.

Oil prices are stronger than they were last year and Chavez has also recovered from far worse situations. In 2002, massive street protests led to a coup that temporarily toppled him. An oil strike then drove the economy into the ground for months.

He quickly bounced back, reaching a peak of popularity by building health clinics and education projects that led to his triumphant 2006 re-election.

(Reporting by Patricia Rondon and Eyanir Chinea; Editing by David Storey)