THE GOOD, THE BAD, AND THE MESSY - VENEZUELAN

C O N F I D E N T I A L CARACAS 003927

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: 12/23/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: THE GOOD, THE BAD, AND THE MESSY - VENEZUELAN
MACRO NEWS

REF: CARACAS 3747

Classified By: ACTING DCM RICHARD M. SANDERS FOR REASON 1.4 D

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SUMMARY
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1. (C) Recent economic news in Venezuela is mixed. Third
quarter GDP growth is an impressive 15.8%, and total 2004
growth estimates are being revised upward to as much as 18%,
though the GOV predicts 15-16%. Venezuelan oil prices for
December, on the other hand, are 28% below their October
high. Meanwhile, pressure on the Venezuelan Central Bank
continued, as Chavez demanded the resignation of the Bank's
President - whose term is just weeks away from its end. END
SUMMARY.

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THE GOOD - GDP GROWTH EXCEEDING OLD ESTIMATES
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2. (U) The Venezuelan Central Bank (BCV) announced in
November that 2004 3rd quarter GDP was 15.8% higher than the
same period in 2003, including 18.6% growth in the non-oil
sector. The overall result was 4.6% higher than the 2nd
quarter, and the cumulative growth through September is
20.4%. This positive result has influenced various
economists to raise estimates for total 2004 growth. Albis
Munoz, President of business umbrella group FEDECAMARAS,
while conservatively estimating growth at 12-13%, called 2004
the year of "economic reactivation" in a press conference
December 20. Planning Minister Jorge Giordani, noting the
traditional fourth quarter GDP jump, told press on December
15th that there was no doubt growth would be "greater than 15
or 16 percent." Central Bank Director Domingo Maza Zavala
predicted December 21 a year-end result "between 14 and 16%."
Credit Suisse calls these figures "conservative," predicting
a 17.8% increase for the year, as does the Andean Development
Corporation (CAF),while the UN's Economic Commission for
Latin America and the Caribbean (ECLAC) has estimated 18%.


3. (C) Munoz, however, was critical of government
performance, calling it "not very efficient," and exhorting
the GOV to resume "institutional dialogue," "create friendly
environments for investment," and to give space to the
private sector, especially to allow job creation. Despite
the GDP recovery, and the fact that unemployment in November
(according to the National Statistics Institute, INE) was
12.8% (2.6% below November 2003),it is not clear that jobs
are being created. There are nearly 14,000 fewer people
employed than in November 2003; the statistical reduction is
due to an increase of over 800,000 people who are not
actively seeking employment. Local pollster and consultant
Datanalisis estimates that true unemployment is around 14%.

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THE BAD - OIL PRICES DROPPING FROM RECORD HIGHS
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4. (C) According to the Ministry of Energy, the average price
for the Venezuelan "basket" of oil was USD 31.57 per barrel
in December, 28% off the record high of USD 44 per barrel set
in October, and even 3% below the second quarter average,
when the steady price increase began. A continued drop would
put the 2005 budget at risk, given that GOV spending is
estimated at 30.9% of GDP and dollar-denominated oil income
represents about half of ordinary GOV revenue. Lower oil
prices might force a devaluation in order for the reduced
amount of USD income to cover local expenses in bolivars.
Eduardo de las Casas, Citibank Country Treasurer, told
econoff in October that he thought USD 25/barrel was the
threshold of risk for such a devaluation, which could perhaps
be even greater than the 12% (from 1920 to 2150/USD) assumed
in the recently approved budget.

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THE MESSY - THE LATEST ON CHAVEZ VS. THE CENTRAL BANK
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5. (C) The row between President Chavez and the Central Bank
(BCV) over foreign exchange profits (see reftel) took a
negative turn when Chavez said December 20 that "there will
have to be a trial," implying that BCV President Diego
Castellanos should go to jail. He said that "Castellanos is
of the age that he would be confined to home if a judge
sentenced him to prison. So he will be in his house or he
should quit his job and leave and make way for someone who
wants to fulfill their duty to the country, because that Bank
is not the bank of the Central Bank President," and added
that it was "the Board of the BCV that doesn't want to
understand, they don't understand, there are the completed
calculations, once and again and corrected." Just four days
before, Arlex Fuentes, a banking superintendency employee
involved in the negotiations with the BCV, told econoff that
an agreement had been completed and the BCV would give 2.2
trillion bolivars (1.15 billion USD) to the GOV during the
week of December 20.


6. (SBU) Domingo Maza Zavala, one of the BCV Directors, told
the press on December 21 "the BCV owes nothing to the
government, to the national treasury; the assigned foreign
exchange profits have been given." He added that a trial
would be "very inconvenient" for the interests of the
country, and argued that "the Directors, including the Bank
President, have no other interest but the higher interests of
the Republic, nor are we interested in retaining money that
belongs to the national treasury."

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COMMENT
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7. (C) GDP growth, while expected to be high after two years
of heavy downturn, is better than expected. However, the
lack of job creation implies that this is primarily a
spending boom, which will only last as long as oil income can
support it. The drop in oil prices will need to be sustained
for a considerable period before the GOV, committed to using
the exchange peg as an inflation fighting tool, considers a
devaluation beyond the 12% assumed in the 2005 budget. The
latest demand for cash was probably not motivated by the drop
in oil prices, since this has been as ongoing event.
However, the price drop sets the latest demand for cash in
stark relief, underscoring the amount of funds the GOV needs
to fulfill its spending plans. When Maza Zavala says that
the BCV's methodology "is in accordance with the law" and
international accounting standards, his background (and that
of other BCV directors) leads us to believe that any
calculation errors are on the part of the GOV. We doubt that
the GOV will back down from its demands, so this dispute may
well end up in court. The question is, will Castellanos too?
McFarland


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2004CARACA03927 - CONFIDENTIAL