GOV TAKES FULL CREDIT FOR GDP GROWTH, BUT STILL

C O N F I D E N T I A L CARACAS 002814

SIPDIS


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

E.O. 12958: DECL: 8/12/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: GOV TAKES FULL CREDIT FOR GDP GROWTH, BUT STILL
PASSES BLAME

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A
ND D

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SUMMARY
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1. (SBU) First half GDP statistics show a 23.1% increase over
last year, which also represents the first improvement over
2002 figures. Second quarter growth was 13.6%, led by
non-petroleum growth of 15.0%. Considering these factors,
the GOV has revised its 2004 growth estimate from 6 to 12%.
Meanwhile, S&P raised Venezuela's long and short-term credit
ratings to B. The official GOV line, in public and private,
is that things are good, are going to get better, and that
the only reason they are not better now is because of the
general strike of December 2002-February 2003, not the
government. In its annual report for 2003 as elsewhere, the
GOV downplays the fact that good news are largely a result of
the substantial increase in oil prices in 2003 and 2004. END
SUMMARY.

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THINGS ARE GOOD - BUT IF NOT, IT'S NOT OUR FAULT
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2. (U) New GDP statistics released recently by the Venezuelan
Central Bank (BCV) indicate that not only did Venezuelan GDP
grow 23.1% in 2004 compared to the same period of 2003 (with
growth in all sectors of the economy for the first time in
three years),but that it grew by 4.4% over the same period
in 2002, before the two month general strike of 2002-2003.
The increase is in part because the government also revised
the first quarter growth upward, from 29.8% to 34.8%. Second
quarter growth was not only 13.6% compared to last year, but
4.5% over the first quarter of 2004. Almost simultaneous to
these announcements, Standard and Poor's raised Venezuela's
long and short-term credit ratings (from B- and C,
respectively) both to B.


3. (SBU) The GOV, while taking credit for the recent good
news, has avoided all responsibility for Venezuela's economic
problems by blaming the participants of the December
2002-February 2003 general strike, as criticism of their
economic policy has continued. The Ministry of Finance's
"Summary of Year 2003" (written in early 2004 but distributed
only recently) starts and continues for much of the text by
blaming the strike, and 2002 pre-strike activities, for all
problems in the economy. The report uses harsh language,
repeatedly citing "financial blood-letting," the "devastating
effect" of the strike, the "immense harm inflicted on the
country," "traitors and conspirators," "political
destabilization," and the "ferocious media campaign against
the national economic policy." Y2003 claims that the effects
of the strike "cannot be erased for a long time," and adds
that those who called for the strike, and now blame GOV
policy for the current problems, "are conceptually and
morally incapable of speaking to the nation." It also
asserts that the strikers have not put forth a recovery plan,
and now "maintain biased positions which in no way favor
improvement of the productive climate of the country."


4. (SBU) The report also cites a study conducted by the
Ministry of Finance to prove just how wrong some of its
critics were with their own estimates about GDP and inflation
in 2003. These errors by "experts" led the Ministry to
conclude that, "definitely, the country overcame an extremely
difficult test, and has managed to set itself upon the path
of economic recovery and growth." When Finance Minister
Tobias Nobrega was asked, in an interview televised on August
28, what the GOV could have done better economically over the
last five years, he could only come up with "perhaps a
mistake was not to have applied exchange controls in February
2002."

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WE'RE DOING THINGS RIGHT, BUT DON'T ASK FOR SPECIFICS
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5. (SBU) Not until page 9 of the 36 page text does the study
mention a single action by the GOV - the imposition of


exchange controls. It then lauds the work of the Foreign
Exchange Control Administration (CADIVI): "the objective of
protecting the international reserves and avoiding the
financial blood-letting of the country has been achieved.
International reserves closed 2003 above USD 20 billion. The
specter of a moratorium or cessation of payments has
dissipated. The patrimony of the Venezuelans was preserved."
Some of the alleged achievements are dubious, such as noting
that CADIVI liquidated 50% of the forex it approved in 2003,
It also claimed that CADIVI approved - NOT/NOT liquidated -
"about" what the BCV provided before the "petroleum
sabotage," though BCV statistics indicate that liquidations
in 2003 were only about 60% of those in 2002.


6. (C) The improvement of the economy has raised the question
as to why CADIVI still exists. The report reminds us that it
was conceived to be temporary, but "its dismantling can only
be a response to the disappearance of conditions that gave
rise to its adoption, that is, the definitive extinction of
the environment of irrationality and political and economic
destabilization that has dominated since 2002." In a private
conversation with econoff on September 1, Finance Ministry
Director of Public Credit Alejandro Dopazo confirmed that
exchange controls will not be lifted until the GOV has the
mechanisms "to control the capital account." Nobrega, in the
August 28 interview, implied that CADIVI was needed because
Venezuelans still lacked confidence in the economy. He said
that exchange controls were "the only manner to guarantee
that the foreign currency...stays here."

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HERE ARE (SOME OF) THE STATISTICS TO PROVE IT
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7. (SBU) The GOV has endeavored to justify its performance by
citing various statistics, but it consistently tells only a
part of the story. For example, total GOV income for 2003
was 88.9% of goal, despite the strike. However, Customs
collections were only 57.4% of goal, a side effect of the
initial sluggishness of CADIVI's operations. The report says
that "Plan Zero Evasion" (a program to increase tax
collections by SENIAT, the Venezuelan tax and Customs agency)
brought in an additional USD 7.5 million - which is only
0.13% of total tax revenues - ignoring the fact of increased
revenue from high petroleum prices. It lauds the dramatic
drop in the EMBI Plus risk rating (a measure of credit risk
of government debt relative to U.S. Treasury bonds) from its
high in early 2003, but fails to mention that it reached
similar peaks four other times during Chavez's tenure
(including February, July and October of 2002),and remains
higher than Colombia's rating.


8. (C) On government spending, the report cites a budget
reduction in January 2003, but does not mention - as
statistics from the Ministry of Finance website show - that
year-end spending increased by 34.4%. The budget portion is
long on names of projects funded, but short on details such
as amounts spent. It notes that internal debt increased, but
not how much. (According to the Ministry website, it grew
48.0%.) On external debt, the report claims that investor
efforts to sell Venezuelan debt were triggered by the
"campaign launched against the Republic." The GOV response
was to "take advantage of the circumstances in the financial
market" and lists in great detail - over 15% of the total
text - the terms of new dollar-denominated bonds that were
issued that year, but neglects to mention how the total
external debt was affected (it increased 13.0%, according to
the website, and from 20.9% of GDP to 26.8%, according to
VENAMCHAM). Dopazo was evasive when asked if debt would
increase this year, saying only that the Ministry is
"studying" bond options.

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COMMENT
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9. (C) Comparing 2004 results to strike-affected 2003 is of
limited utility, but that the first semester improvement is
an increase over the first half of 2002 (though still 5.3%
lower than the GDP in the first half of 1998, before Chavez
assumed the Venezuelan presidency) is a positive sign. The


deficit, however, continues to grow, as government spending
for the year, which may be the primary cause for GDP growth,
is projected to be 32% of GDP, a 21-year high. GOV
officials, while touting their good numbers, seem to be
determinedly avoiding the obvious, that Venezuela is hitting
one of its cyclical petroleum booms, and the Chavez
government is doing what previous governments have done -
spend the money as fast as possible.
Brownfield


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2004CARACA02814 - CONFIDENTIAL