CAN YOU SPARE A BILLION? NO? HOW ABOUT SEVEN?

C O N F I D E N T I A L CARACAS 001336 SIPDIS NSC FOR CBARTON TREASURY FOR OASIA-GIANLUCA SIGNORELLI HQ USSOUTHCOM ALSO FOR POLAD BUENOS AIRES FOR TREASURY-MHAARSAGER E.O. 12958: DECL: 04/30/2015 TAGS: ECON EFIN PGOV VE SUBJECT: CAN YOU SPARE A BILLION? NO? HOW ABOUT SEVEN? REF: A. 04 CARACAS 2034 ¶B. CARACAS 288 Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D -------------- SUMMARY -------------- ¶1. (C) As Venezuela's international reserves continue to grow - to over USD 27 billion - the GOV continues to pursue methods to gain control of part of them. The amount the GOV wants also continues to rise. While a year ago Chavez wanted a "mere billion" ("un millardito"),and later that year got (at least) two, now the GOV wants as many as eight, and perhaps the means to guarantee more in the future. While GOV officials, including President Chavez, seem to acknowledge that this will require a legislative solution, getting one should not be difficult. The questions are what form the control would take, and what the effect on the economy would be. No matter the answers, two things are clear: that the autonomy of the Central Bank is being further diminished, and that the GOV wants more cash. END SUMMARY. -------------- ARE THERE "EXCESS" RESERVES? -------------- ¶2. (U) The GOV's international reserves have grown USD 3 billion during 2005, reaching an all-time high of just over USD 27 billion (including USD 715 million placed in the once almost empty in the Macroeconomic Stabilization Fund - FEM) on April 25. This is to be expected, with outflows restricted by foreign exchange controls and income increased by record oil prices. (The Venezuelan oil basket has averaged USD 40.57 through April 22, 22% higher than the 2004 average price.) This increase, combined with the perception that it will continue to grow, has renewed discussion of what should be considered "excess" reserves, and calls by the GOV to have access to these funds. President Chavez said on April 10 that "There must be a cap on the reserves, we can't continue accumulating millions and millions of dollars...Venezuela with 18 or 20 billion dollars in reserves is plenty. That would be more than enough for the size of our economy." Just three says later, he said "I believe (the cap) should be between 15 and 18 billion dollars, no more than 18 billion dollars," and noted that this left over 8 billion dollars of "excess" reserves. (A year ago, when Chavez was asking for a "mere billion" dollars, he opined that USD 14 billion in reserves was sufficient.) Finance Minister Nelson Merentes said on March 29 that "all accounts say that Venezuela, with fewer international reserves, could have a pretty healthy economy." ¶3. (C) Central Bank (BCV) Director Domingo Maza Zavala has cautioned publicly that the current amount of reserves was over-stated, given the amount of foreign currency that has been approved for exchange by the Foreign Exchange Administration Commission (CADIVI),but not yet liquidated, which he estimated at about USD five billion. He also recommended saving as much as possible to "compensate for the possible unfavorable effects of a reduction in oil prices." Asdrubal Oliveros and Milton Guzman, economists at Banco de Venezuela (owned by Spanish group Santander) told econoff April 22 the very idea of excess reserves was ridiculous, since their purpose was to back the local currency in circulation. Guzman said that if you were to reduce the reserves, "you'd have to take the equivalent number of bolivars out of circulation." Chavez tried to preempt these arguments in the April 10 speech, saying that "there are economists who deny that there are excess (reserves),but I say that there is an excess and that the country has the right to use these excess reserves." -------------- WHAT TO DO WITH THE MONEY? -------------- ¶4. (U) Observers suggest the GOV could use excess reserves for public spending, to pay off external debt, or to create a new, larger fund than the PDVSA special development fund (reftel A),which would also be administered by BANDES, the GOV-owned Bank of Economic and Social Development. This could also be accomplished by modifying the FEM law to give BANDES, rather than the BCV, control of the funds in the FEM. BANDES is purportedly using the funds thus far allocated (USD 2 billion) for large development projects, as well as micro-loans, but it is unclear how those dollars are being converted to bolivars for local spending. ¶5. (C) Salomon Centeno, National Assembly Deputy from the Accion Democratica (opposition) party and member of the National Assembly Finance Committee, told econoff April 27 that the GOV "will surely use (diverted reserves) for current spending." He noted that the GOV is already violating the current FEM law, which required savings into that account to re-start on January 1, and has yet to happen. He also expressed "deep doubts" about the way the PDVSA fund is being managed, since BANDES control is less objective, less transparent, has no National Assembly oversight, and makes "rational use" of the funds less likely. Centeno expects that the solution will most likely come via modification of the BCV law. Jesus Caldera, President of FOGADE (FDIC-equivalent),told press April 14 that such a modification was "in the hands of Chavez and not the BCV." -------------- COMMENT -------------- ¶6. (C) Credit Suisse First Boston analyst Jan Dehn wrote in an April 14 newsletter that this proposal is two-pronged: "to secure (Chavez's) re-election in 2006," and is "consistent with the government's overall strategy of increasing control over institutions, various sectors of the economy, and in the political sphere." We agree, and expect that the end result of these efforts to be several billion additional dollars available for spending, with perhaps a token amount used to pay down foreign debt. Should, however, oil prices drop, given the enormous commitments it has made for social spending, the GOV may be unpleasantly surprised at how fast reserves can melt away. Brownfield NNNN 2005CARACA01336 - CONFIDENTIAL