* Venezuela GDP to shrink in 2009, grow moderately in 2010
* Government so far unable to control inflation
* Anti-inflation tactics include large bond issues
By Andrew Cawthorne
CARACAS, Oct 15 (Reuters) - Venezuela looks sure to return to growth in 2010 after probable economic contraction this year, but will struggle to tame inflation as looming elections are likely to influence government policy.
President Hugo Chavez had reassured Venezuela's 28 million people that his system of "21st century socialism" would protect the OPEC member state from the global downturn.
But the international climate, lower crude revenues, and troubled local non-oil industries mean the economy will almost certainly shrink this year. Most analysts forecast a 1 percent to 2 percent contraction, though the government expects closer to zero.
Either way, it will be the first time the South American nation's economy has shrunk since 2003, when it was hit hard by an oil workers' strike and political unrest.
"It's a combination of the international crisis and Venezuela's many internal distortions," said Asdrubal Olivero, director of Caracas-based think tank Ecoanalitica.
He predicted, however, that higher government spending, partly with an eye to legislative elections expected in late 2010, would bring "moderate growth" of 1 percent next year.
Other analysts think Venezuela could do better than that, even as much as 3 percent in 2010, as the global situation eases, Caracas enjoys better revenues from its oil, and Chavez spends big in the hope of keeping control of parliament.
But the government is playing it cautious, with a 0.5 percent growth prediction in its 2010 budget.
"There will be a subdued rebound next year, no doubt, even though it is still a very hostile environment for local producers, with price controls, fixed exchange rate and so on," said RBS analyst Boris Segura, who forecasts 2.0 growth.
"You will witness a major acceleration in public expenditure. That is what they always do before an election."
STUBBORN INFLATION
Far harder than turning the growth scenario around for Venezuela is resolving a stubbornly high annual inflation rate, by far Latin America's highest, at 31 percent last year.
That is testing the faith of the still-popular Chavez's legions of supporters in poor urban and rural areas.
Whereas slowing growth would normally work against inflation, in Venezuela's case it is outweighed by unmet local demand and distortions created by the overvalued bolivar currency -- 2.15 to the dollar at the official rate since 2005.
Consumer prices rose 27.3 percent in the 12-month period through September. From January to September, they rose 18.5 percent. The government forecasts 26 percent for the year
Optimistically, in the view of most analysts, Chavez said recently inflation would be between 20 -22 percent next year.
Most analysts forecast 2010 inflation in the higher 20s, some even predicting more than 30 percent.
DEVALUATION DILEMMA
With the bolivar trading at well over double the official rate on a parallel black market, the possibility of a devaluation is always in the background, though still unlikely over the next year due to political factors, analysts say.
Even though his popularity ratings remain around a healthy 50 percent level, Chavez may fear the potential social disruption of a devaluation before the national assembly poll.
"The economy needs it, obviously. The most prejudiced party by the over-valuation is (state oil company) PDVSA, whose revenues suffer badly as a result," Olivero said. "But we all know that politics are what dominate economic policy here."
Foreign exchange rates are intimately tied to inflation since Venezuela is a heavy food importer. The amount allotted to importers at the official rate has varied with the fortunes of the world prices of oil, Venezuela's main export.
Opposition newspaper editor Teodoro Petkoff mocks the government as devoid of economic policy ideas beyond prayers for the price of oil.
"Its policy is to hope that the price of oil returns to $88 a barrel. That's not economics, but magic," he wrote in a withering front-page editorial on the "Chavoeconomia."
World oil prices hit a record over $147 a barrel in July 2008, before dropping below $33 a barrel in December. It is now trading at around $75 a barrel.
With oil prices on the rebound the government says it is channeling more official rate bolivars to importers, thus lowering the average bolivar cost of goods bought abroad.
Another anti-inflation tactic is to soak up money supply chasing goods by multibillion dollar bond issues, which are denominated in dollars but can be bought in bolivars.
The aim is to strengthen the parallel bolivar, and thus cheapen the costs of imports bought at non-official rates.
The latest such bond sale, totalling $5 billion, was last week. A government source said PDVSA will issue $3 billion next week. (Editing by W Simon)