ECONOMY ON UPSWING AS REFERENDUM DRAWS NEAR

C O N F I D E N T I A L CARACAS 002487

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD

E.O. 12958: DECL: 08/04/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: ECONOMY ON UPSWING AS REFERENDUM DRAWS NEAR

REF: A. CARACAS 1554


B. CARACAS 2034

C. CARACAS 2198

D. CARACAS 2365

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.5 D

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SUMMARY
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1. (SBU) In accordance with a decree issued by President
Chavez in May, the minimum wage rose 10% on August 1, after
having increased 20% on May 1. Meanwhile, the parallel
dollar rate remains steady at lower levels than before, much
more foreign currency is available than at any time since
exchange controls were instituted, and Venezuelan oil prices
continue to hover near record levels, which has facilitated a
significant increase in government spending. Some business
activity may be slowing down, as retailers in particular face
pre-referendum jitters. But two weeks before the referendum,
President Chavez could hardly ask for anything more from the
economy, given its structural flaws.

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THE GOVERNMENT KEEPS GOING FOR STIMULUS
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2. (U) August 1 marked the implementation of a 10% increase
of the minimum wage to 321,235.20 bolivars per month, the
second and last phase of a May presidential decree that
raised it 20% at that time (ref a). This puts it ahead of
inflation, which according to GOV figures is running at 12.6%
for the year to date. The new minimum wage, USD 167 per
month at the official exchange rate, however, is still 0.3%
less than the most recent (June) official value of the basic
food basket for a family of five.


3. (SBU) Meanwhile, there are plenty more US dollars
available in the economy, thanks to the Commission for
Foreign Exchange Administration (CADIVI). June liquidations
by the Central Bank, while only 46% of what CADIVI approved,
were still 56% greater than in May, and preliminary July
results are show a pace to more than double June. This may
be a temporary surge only, as the GOV just increased (from
USD 2000 to 3000) the amount Venezuelans traveling abroad can
spend each calendar year, and also approved up to USD 1500
annually for purchases via the internet. Since this has just
taken effect, this amount may be high as people rush to take
advantage. (Caracas newspapers are full of advertisements
from banks selling debit cards to allow consumers to access
these dollars.)


4. (U) The GOV is even more directly involved, with spending
growing briskly. (See ref c.) In just the first two weeks
of July, primary government spending was equal to the entire
amount spent in April of this year (USD 1.4 billion),and
three-quarters of what was spent in June. Budgeted primary
spending for all of 2004 was only USD 18.0 billion (1.5
billion per month) at the current exchange rate. The GOV is
giving no sign that it will stop soon, as it has recently
announced USD 364 million will be spent from the new PDVSA
social fund (ref b).

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WHILE THE REST OF THE ECONOMY MOSTLY COOPERATES
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5. (U) Other economic indicators show good news, as well.
The parallel exchange rate continues to appear strong for the
government, as it has fallen fully half the distance from its
high of 3350 in early March to its current rate of 2620.
While up a bit from 2525 in early July, it has remained close
to its current level for about two months. This is somewhat
surprising, considering that monetary liquidity has increased
10% over roughly the same period. It is partly attributable
to oil prices, which continue to float at record levels,
putting the average price for the Venezuelan basket of crudes
at USD 35.71 per barrel, the highest price of 2004. The
average price for 2004 to July 17 was USD 30.66. The
Venezuelan stock market is booming, up over 22% in 2004 after
a 177% climb in 2003. CANTV, the principal Venezuelan phone

company, announced on July 29 that its second quarter
revenues increased over 15% since 2003, and looking up in the
future, as rate increases had just been approved by the GOV.


6. (SBU) There are, however, some signs that some economic
activity is being adversely affected by the lead-up to the
recall referendum. An executive with a U.S. bank which
handles correspondent banking relationships for several
Venezuelan banks (principally letters of credit for imports)
said that in the last two weeks business had begun to
slacken. Similarly, a businessman whose firm produces
cosmetics advised us that orders were off. Both individuals
suggested that retailers were not re-stocking supplies for
the time being, mainly because of a fear that post-referendum
violence could lead to some of that stock being destroyed by
looters.

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COMMENT
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7. (C) Combined with the recent VAT tax reduction (ref d)
(which, though passed into law, has yet to take effect since
it has not been published in the Official Gazette),the
aggressive government spending and increased foreign exchange
conversion demonstrate that Chavez is pulling out all the
short-term stops to create an atmosphere of economic
well-being ahead of the referendum. With oil prices so high,
he can afford it. Any throttling back will have to await the
end of the current cycle of political events (referendum, a
possible presidential election, gubernatorial elections),
and/or a break in oil prices.
Shapiro


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