ECONOMIC FALL-OUT FROM INCREASED POLITICAL TENSIONS

UNCLAS CARACAS 000714 SIPDIS NSC FOR SHANNON/BARTON TREASURY FOR OASIA - SIGNORELLI SOUTHCOM ALSO FOR POLAD ENERGY FOR PUMPHREY AND LOCKWOOD STATE PASS USAID FOR DCHA/OTI - PORTER E.O. 12958: N/A TAGS: ECON PGOV EFIN ENRG VE SUBJECT: ECONOMIC FALL-OUT FROM INCREASED POLITICAL TENSIONS Sensitive But Unclassified. Please handle accordingly. -------------- Summary -------------- ¶1. (SBU) The rise in political tensions over the revocatory referendum on Chavez's tenure in office and attendant violence is beginning to spill over into the economy. The parallel market bolivar/dollar rate has spiked as has the spread on Venezuelan bonds. It appears, however, that a planned bond issue will go forward. In the face of rumors of a possible US embargo on Venezuelan oil, state oil company PDVSA President made soothing noises, only to be undercut by inflammatory comments by President Chavez. Food sector businesses are reviewing their emergency supply plans, although they see no imminent crisis. There are no problems with the electrical supply. Some gasoline stations are closed, causing concerns about supply. Flights at Caracas's international airport are proceeding as scheduled, although with many cancellations, presumably because of uncertainties regarding ground transportation. -------------- -------------- Financial Indicators -- Currency and Country Risk -------------- -------------- ¶2. (U) Even prior to the street protests, political tensions had taken a toll on international markets' confidence in Venezuela. In the period following the February 5 devaluation of the official rate from 1600/dollar to 1920/dollar, the parallel rate (implicit rate between CANTV American Depositary Receipts trading on the New York Stock Exchange and CANTV ordinary shares trading on the Caracas Stock Exchange) was stable around 3050/dollar. However, as the prospects for the referendum have grown more dubious it has moved sharply upward, trading upwards of 3250. As of March 1, the CANTV rate was at 3303/dollar. By another measure, that of quasi-legal trading in dollars by stock market operators, the dollar is trading even higher, at 3450/dollar. ¶3. (U) Similarly, Venezuelan country risk, measured as the spread between its benchmark Global 27 bond and the 30 U.S. treasury bond, has increased. This spread, which had been 562 basis points (1 basis point = .01 percent) on February 6, had risen to 619 basis points on February 20 and 635 basis 
points on February 27. We understand that as of mid-day March 2, the spread had climbed to over 700 basis points. -------------- Bond Sale to Go Forward -------------- ¶4. (SBU) In the light of the turbulence in currency and bond markets there have been questions raised about whether the GOV will hold off on a long-planned large bond issue which would roll over existing locally denominated debt into a mixture of foreign and domestic obligations with longer maturities. As was the case with previous issues, this one would have as its principal attraction for buyers the immediate exchangeability of purchased bonds for dollars at the official rate. Econcouns asked Ali Lenin Aguilera, senior advisor to Finmin Nobrega, if the transaction, rumored to be going forward in the next few days would be delayed given that the higher interest rate which would have to be paid. Aguilera responded that the Ministry had consulted with its investment banker, and would be going forward. Once the numbers were run, it was clear that the losses from the higher interest rate would be made up by the fact that devaluation meant that the GOV would be paying fewer dollars for the same amount of bolivars on the rollover of locally denominated debt. -------------- Oil Production Comments -------------- ¶5. (SBU) With Chavez's increasing effort to paint the current political crisis in terms of USG interference in domestic politics, rumors of a U.S. embargo on Venezuelan oil exports (the U.S. counts for 57 pct of Venezuela's crude exports) have circulated. On February 28, PDVSA President Ali Rodriguez publicly discounted any rupture in U.S.-Venezuela energy relations, asserting that "nothing is heading in that direction," and that "the concern of U.S. authorities is to maintain normality in these relations." However, Rodriguez's calm words were overtaken by President Chavez's fiery remarks in his February 29 speech at which he suggested that in a crisis the USG might seize CITGO, Venezuela's downstream chain in the U.S. or otherwise "blockade Venezuela, but in that case "not a drop of oil would arrive from Venezuela" and that the U.S. should remember that it has "plenty of installations here" (that could be seized in retaliation. (See septel for reporting on U.S. oil firms' reactions to Chavez's comments.) -------------- Key Services: Food Supply -------------- ¶6. (SBU) Agricultural specialists queried representatives of the National Supermarket's Association (ANSA) and the Venezuela Food Producers' Chamber (CAVIDEA) regarding possible disruptions to food supply as a result of the street protests. (Note: Some supermarkets were shut down on March ¶1. Econoff saw long lines in front of some supermarkets on March 2. End note.) According to the representatives of the trade associations, a contingency plan for assuring food supplies is under review, and could be activated within the next 24-48 hours. Supermarkets may operate under limited hours, as they did during the December 2002-February 2003 general strike. Although supportive of the political aims of the opposition strikers, the food sector is concerned about "effervescence in the street," which can easily turn into sackings of supermarkets. At the wholesale level, there are adequate food stocks for three months, they advised. -------------- Key Services: Gasoline -------------- ¶7. (SBU) As of March 2, there were reports (including from embassy staff) of some difficulties obtaining gasoline, as a result of filling stations being closed in areas near to roadblocks, either because managers felt it was unsafe to open or because they had run out of fuel to sell and had not received replacement supplies. (Note: Running gas trucks near areas where burning barricades are up would be obviously unsafe. End note.) There are, however, other reports of open gasoline stations, without long lines. A ChevronTexaco downstream manager told energy officer that the distribution plant in Guatire, which services Caracas, and the plant serving northern Valencia are indeed having problems in delivering fuel. The Texaco station in Las Mercedes (used by the Embassy) has already run out of unleaded fuel. State oil corporation PDVSA has assured ChevronTexaco that all refineries are operating normally and that the only gasoline problems lie in distribution. -------------- Key Services: Electricity -------------- ¶8. (SBU) A check with a manager at "Electricidad de Caracas," the utility serving the capital, revealed the situation to be normal, with electrical power fully available. Some of the firm's offices, however, had been closed or had reduced staffing because of transportation problems. A report that the company's sub-station in Altamira, the site of some of the most severe street protests, was false, although there had been some damage to street lamps. "Electricidad de Caracas" is majority owned by U.S. power holding company AES, and Chavez's comments about the possible seizure of U.S. industry in Venezuela in a crisis had not been well-received. -------------- Key Services: Aviation -------------- ¶9. (SBU) Executives of U.S. air carriers flying out of Caracas's international airport advised that flights are proceeding normally, and that air crews who normally overnight at hotels near the airport, are having no trouble getting to their planes. However, there have many cancellations, apparently the result of passenger concerns about their ability to get to the airport because of problems on the streets. Taxi drivers are reportedly charging double or triple their normal airport fares. An official of the National Institute of Civil Aviation (FAA-equivalent) told econ specialist that on March 1 there had been some rock-throwing incidents and temporary blockages of at least one of the tunnels on the airport highway, but these had been promptly stopped by police. -------------- Comment -------------- ¶10. (SBU) A few days of snarled traffic in Caracas is not in and of itself likely to provoke any serious economic crisis. But the fact remains that at its best Venezuela's economy, severely damaged by last year's strike and the only minimal recovery since then, is vulnerable to even modest shocks. If street violence is prolonged, many people, from Wall Street bond traders to Caracas food shoppers, could start to panic, affecting the price and supply of both money and products. SHAPIRO NNNN 2004CARACA00714 - UNCLASSIFIED