GROWTH IS NOT ENOUGH - HAND OVER THE CASH!

C O N F I D E N T I A L CARACAS 003747 SIPDIS STATE FOR WHA/AND NSC FOR CBARTON TREASURY FOR OASIA-GIANLUCA SIGNORELLI HQ USSOUTHCOM FOR POLAD BUENOS AIRES FOR TREASURY-MHAARSAGER E.O. 12958: DECL: 12/30/2014 TAGS: ECON EFIN PGOV VE SUBJECT: GROWTH IS NOT ENOUGH - HAND OVER THE CASH! REF: CARACAS 3110 Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A ND D -------------- SUMMARY -------------- ¶1. (C) Amidst good news on the economic front, the GOV's thirst for cash remains unslaked. Third quarter GDP grew 15.8% versus the same period in 2003, and the official unemployment figure for October was 13.7%, the lowest since ¶2001. However, the GOV's row with the Venezuelan Central Bank continues, as the GOV is now demanding foreign exchange earnings on not only the Bank's cash reserves, but also its gold holdings. A Central Bank Director told econoff he expects the matter only to be settled in the Supreme Court, as negotiations have made little progress. President Chavez has called for more money in the GOV's special development fund, but the Director thinks PDVSA is already allocating as much money as it wants. END SUMMARY. -------------- GOOD NEWS - ECONOMIC INDICATORS IMPROVING -------------- ¶2. (C) The Venezuelan Central Bank (BCV) released GDP results for the third quarter of 2004, which show a healthy 15.8% growth over the same period of 2003. This is the fourth straight quarter of growth, the first such stretch since 2001, and also puts GDP ahead of 2001 totals for the first time, by 1.6%. It also exceeds pre-Chavez levels, beating 1998 3rd quarter GDP by 5.1%. Independent economists attribute the growth in large part to increased GOV spending. Banco Mercantil Vice President Philip Henriquez told econoff December 1 that the GOV has 15-20% of market share in food sales, thanks to its low-cost MERCAL grocery-store program. He also noted that, while people had been hesitant to make major purchases (such as cars, homes, or remodeling) due to the political uncertainty of the last two or more years, Venezuelans are finally moving forward with spending that has been put off, given that the political landscape is not likely to change for at least two years. He also suggested that the rush to spend could be related to the fact that the recently approved budget assumes a 12% currency devaluation, which current rumors say will take place on January 1. (NOTE: press reports quote Finance Minister Nobrega as having said December 2 that "the Government will adjust the fixed exchange rate starting January 1 to 2150 bolivares per dollar." END NOTE) ¶3. (C) Unemployment, according to figures from the National Institute of Statistics (INE),dropped to 13.7% for the month of October, 3.0% better than October 2003 and the lowest since December 2001. Private estimates differ; economic consultant and pollster Datanalisis places unemployment at 17%. Post also has reason to question the GOV's numbers, as a report provided by Luz Bastidas of the INE shows the sample for the October survey was heavily skewed toward rural areas. (She indicated in an email that this was due to a high no-response rate in more populous areas, but opined that month-to-month comparisons were nonetheless valid "under certain considerations.") -------------- CENTRAL BANK, CAN YOU SPARE SOME (MORE) CASH? -------------- ¶4. (C) Meanwhile, the GOV continues to demand more foreign exchange earnings - 3.1 trillion bolivars (USD 1.6 billion) - from the BCV (see reftel),above and beyond the 1.5 billion already given for the first half of 2004. Earlier press reports cited a difference in accounting method (first-in, first-out vs. last-in, first-out),but BCV Director Armando Leon confirmed to econoff on December 1 that method was never an issue (which helps explain why the BCV has in fact regularly turned over substantial exchange earnings),but only whether or not profits should also be determined on the gold portion of the international reserves (11.25 million troy ounces, currently worth about USD 5.1 billion). The GOV insists that the gold should be treated like cash reserves, but Leon said the BCV position was that there were no profits since the gold was never sold like currency reserves and no gain was realized. ¶5. (C) The issue has continued to receive significant play in the press, though negotiations between the GOV and BCV (led by Leon) have ended. Efrain Velazquez, President of the oft-ignored advisory National Economic Council, repeated in the press November 28 his organization's warnings that using exchange control profits "can cause two kinds of economic imbalances: inflation and an exchange rate crisis." Domingo Maza Zavala, another BCV Director, criticized the GOV demand for more cash in a conversation with econoff on November 3. He cited not only the demand for forex profits, but the spending of over USD 6 billion from the Macroeconomic Stabilization Fund (FEM) in 2002 and 2003 as well as the fact that central GOV internal debt has increased from USD 1 to 12 billion since 1998. Finance Minister Tobias Nobrega (who called the BCV's accounting problems "very grave" and said the discussion "is over!" in October) and Banking Superintendent (SUDEBAN) Trino Diaz have made repeated public calls for the money, which Leon says has no influence on the BCV, but reflects a "competition" between the two to see who will become BCV President in January 2005 (when the term of current President Diego Castellanos expires) or get some other key role in the administration. Leon added that the BCV would deliver a report on the profits to SUDEBAN on December 8, but that he expected this issue to be resolved only by the Supreme Court. -------------- -------------- TO ROTATE, OR NOT TO ROTATE - THAT IS THE QUESTION -------------- -------------- ¶6. (C) Amid reports that the PDVSA Social Fund (see reftel) balance has reached USD 1.6 billion (80% of its stated maximum),President Chavez has renewed statements that the fund should be "rotating" in nature, that is, the USD 2 billion limit is on the balance, not total deposits. Maza Zavala told the press in November that "the fund is not rotating," that it was only a one-time approval, but clarified that such a change could be formally requested by the GOV. Leon, however, believes that PDVSA is already using the Fund as if it were rotating, and noted that the BCV has no audit role and the only information it has on the Fund are the reports PDVSA prepares for the Bank. Press reports (apparently based on the PDVSA reports) state that, while all of the funds so far in the Fund have been committed to specific projects, only USD 290 million have actually been disbursed. -------------- COMMENT -------------- ¶7. (C) The GDP growth is clearly good news for Venezuela, but the fact that the GOV feels a cash crunch in a time of record income - both oil and non-oil - seems paradoxical. Maza Zavala compared it to the oil boom of 1974, saying it is "like winning the lottery and going to the bank for a loan." Even if the GOV gets the exchange earnings it wants, its deficit would only be cut in half. Moreover, it would only be a one-time benefit, with potentially inflationary results. In other words, it could cost the GOV more in the long run. For now, the GOV seems unconcerned. Brownfield NNNN 2004CARACA03747 - CONFIDENTIAL