CHAVEZ CONTINUES FIGHT WITH CENTRAL BANK AT A

C O N F I D E N T I A L CARACAS 000363

SIPDIS


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

E.O. 12958: DECL: 01/30/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: CHAVEZ CONTINUES FIGHT WITH CENTRAL BANK AT A
LOWER KEY

REF: (A) CARACAS 103 (B) 03 CARACAS 4011

Classified By: Charge d'Affaires Stephen G. McFarland for reasons 1.4(b
) and (d)

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Summary
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1. (C) President Chavez has continued his campaign against
the Central Bank of Venezuela (BCV),on January 18
characterizing the Bank's international reserve holdings as
"excessive." In a speech January 28, BCV Director Domingo
Maza Zavala held firm, saying the reserves were necessary to
maintain the strength of the bolivar. The dispute between
the administration and the BCV exists against a backdrop of
parallel currency market troubles for the bolivar and
Ministry of Finance debt-juggling. With the bolivar trading
at sometimes twice the official rate on the parallel market,
the GOV is likely to issue new foreign debt to add some
dollars to the economy. Perhaps in light of that
probability, Chavez has dropped his anti-BCV statements to
more generic political statements in recent days. End
summary.

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Excessive...
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2. (U) In an appearance on the weekly "Alo, Presidente!"
program January 18, President Chavez and Minister of Planning
Jorge Giordani claimed that Venezuela's current international
reserve holdings of USD 21 billion were "excessive."
Giordani stated that USD 15 billion was a sufficient level of
reserves for an economy the size of Venezuela's. He even
claimed to be working on a new "economic theory" that would
define exactly what was excessive. Chavez and Giordani
ascribed the withholding of reserves by the BCV as a
neoliberalism-imposed limitation on Venezuela's development.
Despite these claims, Chavez did not explicitly ask the BCV
for more than his original demand of USD 1 billion to finance
unspecified agricultural programs (Ref A).

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Is Subjective
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3. (C) The BCV has not budged from its position that a raid
on reserves is both legally and economically unsustainable.
Most recently, BCV Director Domingo Maza Zavala engaged in an
"ECON 101 Course" in a speech to an economic forum January

28. Maza Zavala said that despite Chavez administration
claims the reserve holdings were not excessive, indeed
suggesting that the concept of "excessive reserves" did not
make sense. He added that the BCV's holdings were necessary
to ensure the value of the bolivar. Maza Zavala theorized
that in the absence of exchange controls, the BCV's holdings
would fall "within a month" to approximately USD 8 billion.
(Note: Maza Zavala's statements hold Greenspan-like weight in
Venezuela. Despite Chavez's description of the BCV as a
haven for neoliberals, Maza Zavala is decidedly leftist in
orientation. The octogenarian has worked at the BCV for over
forty years and has been a director since 1994. To say that
he is personally impervious to political pressure is an
understatement. End note.)

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Parallel Rate Spikes
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4. (C) Fueled largely on rumors of an imminent devaluation
and Chavez's railing against the BCV, the parallel market
exchange rate peaked at approximately 3,200 bolivars/USD,
twice the official rate, during the week of January 19.
Miguel Santos, Chief Economist for the Venezuelan-American
Chamber of Commerce and Industry (VENAMCHAM),told econoff
January 22 that Finance Minister Nobrega had broached the
subject of devaluation with President Chavez at Miraflores on
the night of January 19. According to Santos, Chavez had
rejected the idea as politically impossible with the recall
referendum still a possibility. Santos said his opinion was


the GOV would have to devalue relatively shortly in order to
utilize exchange rate gains on reserve holdings to finance
Chavez's electoral spending plans. Other economists with
whom we have spoken, including some associated with the
Andean Development Fund, see devaluation well into the
future, but agreed that is was eventually inevitable.

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MOF Managing Debt
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5. (C) Alejandro Dopazo, Director of Public Credit for the
Ministry of Finance, told econoffs January 27 that the GOV
had sufficient resources to keep the bolivar at the 1,600
official rate through 2004. However, he said this was only
possible if the GOV adhered to its historical pattern of
75-80 percent budgetary execution. Anything above that
amount would require either exchange rate adjustment or
additional debt operations according to Dopazo. He also said
the Ministry's main task for 2004 was to lower the domestic
debt maturities coming due over the next three years. These
maturities represent approximately 85 percent of Venezuela's
USD 18 billion internal debt load. Dopazo hinted that a
significant amount of this refinancing would be in the form
of external debt offerings. (Note: Two external debt
offerings in 2003 were used as indirect exchange rate
management vehicles. See Ref B.)


6. (C) Other avenues remain open for additional funds for GOV
spending on Chavez's pet projects. BCV Director of
International Relations Mary Dager told econoff January 20
that the Bank was sensitive to the economic demands of the
country and was seeking legal ways to agricultural lending.
Following Dager's comments on January 22, the BCV lowered
reserve holding requirements two percent for banks that meet
the GOV-mandated agricultural share of their loan portfolios.
That figure stands at 12 percent, although few banks meet
the requirement. The BCV also has USD 7.5 billion in
certificate of deposit holdings in foreign banks. In the
past, the GOV has used earnings from these types of deposits
to fund spending.

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Comment
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7. (C) In the latest "Alo, Presidente!" on February 1, Chavez
kept his rhetoric against the BCV in check. His brief
remarks on the reserve issue were restricted to demands that
the BCV guarantee agricultural financing and "not only with
promises." Professor Gustavo Garcia of the Higher Institute
of Business studies told econcouns January 22 that severe
inflationary effects on the parallel exchange rate could be
felt in as little as one to two months if Chavez were
successful in obtaining the unrestricted reserve transfer
from the BCV to GOV coffers. We can assume that Fin Min
Nobrega has told Chavez the same. In the forum that mimics
Chavez's thought-de-jeur most closely, his supporters in the
National Assembly have likewise fallen silent on the issue,
preferring raucous debate over their own procedures or
changes in the Supreme Court Law.


8. (C) The current environment perfectly illustrates the
cross-pressures in the Venezuelan economy. GOV fiscal health
is dependent on low levels of budget execution, but its
political health is dependent on short-term electoral
spending. Over the past week, Chavez and the BCV have called
a truce that probably has two root causes. First, the BCV
has hinted all along that some sort of legal accommodation
could be found. Second, the MOF could not ignore the
parallel rate being twice as much as the official exchange
rate and will probably seek another bonds-for-dollars debt
issue. That measure requires a kinder, gentler Chavez to
soothe investor worries. Whether this is a conscious choice
on his part or just another lapse of attention remains to be
seen.
MCFARLAND


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