IMF REP SEES LITTLE TO CHEER ABOUT IN VENEZUELA'S

C O N F I D E N T I A L CARACAS 000610

SIPDIS


TREASURY FOR OASIA - SIGNORELLI
NSC FOR SHANNON/BARTON
SOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 02/19/2014
TAGS: ECON EFIN PGOV VE
SUBJECT: IMF REP SEES LITTLE TO CHEER ABOUT IN VENEZUELA'S
ECONOMY

REF: CARACAS 03/4011

Classified By: Economic Counselor Richard M. Sanders

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Summary
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1. (C) In a February 19 meeting with Econcouns, IMF
Resident Representative Humberto Arbulu expressed deep
skepticism over Chavez administration economic policies and
frustration over the lack of transparency in economic
information made available to him. He gave the Finance
Ministry high marks for its borrowing activities, while
seeing the Central Bank as vulnerable to Chavez's attacks.
He was appalled at the Planning Ministry's preoccupations
with food self-sufficiency, and believed that PDVSA was
keeping large amounts of money off-shore. His medium-term
prediction for Venezuela was "steady decline," rather than a
big crash, a view with which we concur. End summary.

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The Borrowing Machine Rolls On
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2. (C) Arbulu suggested that within ten days, the GOV would
issue its long expected bond issue which would roll over
existing internal debt into a mixture of foreign and domestic
obligations with longer maturities. (Note: Finance Minister
Nobrega told the Ambassador on February 6 that the issue
could be for as much as USD 3 billion dollars.) Arbulu
predicted that savings in loan amortizations could be as much
as USD 1.5 billion over time. This would all, he predicted,
be ploughed back into current spending by the GOV. He
confirmed that like previous issues, this one would entail
the immediate exchangeability of purchased bonds for dollars
at the official rate (see reftel for further details on this
mechanism). This has the effect of making such bonds "a
killing" for purchasers, noted Arbulu.

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Financial Wizardry, Amidst Continued Economic Doldrums
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3. (C) The successful bond swap means that the GOV will be
able to maintain fiscal equilibrium avoiding a painful
adjustment "at least until October or even December," in
Arbulu's view, assuming that world oil prices do not drop
significantly. This would, however, entail renewal of the
.05 pct tax on financial transactions, which is due to
expire. Arbulu also suggested that once it got past the
current political season, the Finance Ministry would be
looking at revenue enhancement measures. (Note: Finmin
Nobrega has spoken on occasion of extending value-added tax
to a wider range of products. End note.) While the GOV may
have covered its financial flanks, and thus can avoid a
crisis, it would not, he suggested, be able to achieve
robust, job-creating growth, because Venezuela's private
sector does not face conditions favorable to investment. His
overall medium-term economic prediction was "slow, steady
decline."

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Tension Among Economic Decision-Makers
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4. (C) Arbulu, whose office is located at the Central Bank
headquarters, painted a portrait of a government bureaucracy
racked by suspicion and confusion. The Central Bank was
under great pressure, following Chavez's public attacks on
it. His own access at the Bank was diminishing, as once
easily obtained information becomes less available. Chavez's
repeated, public demonization of the IMF was, he concluded,
making Central Bank officials increasingly less willing to
talk to him. The Finance Ministry remained a somewhat more
normal environment, he suggested, although Nobrega has been
weakened by Chavez's evident intention to maintain a single
exchange rate, rather than go to a dual rate system. He saw
the departure of Banking Superintendent Irwing Ochoa, a
U.S.-trained technician and a close Nobrega associate, as a
precursor to Nobrega's own departure.

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Bizarre Meeting at Planning Ministry
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5. (C) A recent meeting at another key player in economic
policy-making, the Planning Ministry, had been a "disaster,"
according to Arbulu. He had sought a meeting with members of
Minister Luis Giordani's team for several months with the
purpose of trying to understand the sources of funding for
the various GOV "missions" in health, education, and job
creation and the purposes to which they were being put. The
Planning Ministry officials danced around his questions, and
ultimately it became obvious that they did not have any clear
understanding themselves. Ministry officials, however, did
devote considerable energy to defending GOV supposed
initiatives to revitalize domestic agricultural production.
This was crucial, they asserted because Venezuela was
import-dependent now, and "a foreign power" could blockade
the country's main ports, reducing it to starvation.

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The PDVSA Mystery
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6. (C) Arbulu said that by his calculations in 2003 state
oil corporation PDVSA earned more than USD 2 billion than it
reported to the Central Bank. This very large sum was
presumably being kept in off-shore accounts. Arbulu
suggested that a considerable amount of the funding which the
various GOV social spending programs were receiving was in
fact coming off the books from PDVSA. Amounts earned by
private individuals in exchanging this money, which would not
go through the Foreign Exchange Control Commission (CADIVI),
were, he further speculated, likely to be enormous.

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Comment
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7. (C) Arbulu's picture of turbulence and lack of
transparency at GOV economic institutions tracks what we hear
from other sources. The combination of ideology,
improvisation, corruption and short-term politicking that
affects economic decision-making is not likely to change
while Chavez is in office. Successful borrowing operations,
both externally and internally, mean that a financial crash
is unlikely. But political tension, growth-smothering
exchange controls, and lack of attention to the fundamentals
mean that the modest recovery we are seeing right now after
two dreadful years is unlikely to be sustainable. Arbulu's
prediction of further decay over the medium term seems right
on the money to us.
SHAPIRO


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2004CARACA00610 - CONFIDENTIAL