BANKS FACE INTEREST RATE CONTROLS

C O N F I D E N T I A L CARACAS 001501

SIPDIS


NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM ALSO FOR POLAD
BUENOS AIRES FOR TREASURY-MHAARSAGER

E.O. 12958: DECL: 05/15/2015
TAGS: ECON EFIN PGOV VE
SUBJECT: BANKS FACE INTEREST RATE CONTROLS

REF: A. CARACAS 806

B. CARACAS 288

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

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SUMMARY
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1. (C) On April 28, the Venezuelan Central Bank published new
regulations capping the interest rates at which Venezuelan
banks can lend money, as well as setting minimum interest
rates for both savings accounts and time deposits, effective
May 1. Embassy economic contacts agree that while this will
cut into bank profits, it will not have a particularly
harmful short-term effect, and is essentially a political
decision. However, this is yet one more way in which the GOV
is attempting to control the economy. END SUMMARY.

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AT THIS RATE...
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2. (SBU) The Venezuelan Central Bank (BCV) published new
requirements on April 28 for lending and savings rates at
Venezuelan banks. The new rates were effective on May 1,
just one full business day after the publication. The new
maximum lending rate was set to 28%, or 0.5% below the
re-discount rate (rate at which BCV lends to banks when loans
exceed available cash). The minimum rate for deposits was
set at 6.5%, which is 5% less than the "28-day absorption"
rate (the interest rate paid by the BCV to combat inflation
by reducing liquidity). Time deposits also received a
minimum rate of 10%, or 1.5% less than the "28-day
absorption" rate. In addition, several commissions
previously collected by banks were eliminated. On May 3 the
BCV published an additional regulation which limited
additional interest on overdue loans to 3% more than the
original rate. The last time the GOV fixed any such rates
was from June 1995-April 1996, but only for temporary
employee investment accounts and mortgages indexed to
inflation. Cristina Rodriguez, president of economic
consultancy Metroeconomica, told econoff May 6 that rate
fixing was common up until 1989, though less extensively than
is the case with the new regulations.

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THE NEW BOTTOM LINE
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3. (SBU) It appears this decision will have little immediate
effect on the rate paid on time deposits, which presently
average 11.2%, though some 30-day rates will increase.
Savings rates will rise more, from their current 4.8%
average, but they represent only 19% of all deposits. Credit
cards, while representing only 9.9% of the total lending
portfolio, will be affected more, as current rates are
generally above 40%. Miguel Octavio, President of BBO
Financial Services, noted in an April 29 newsletter that
"blue chip banks like Citibank and Banco Venezolano de
Credito were paying savings rates near 2% and will be
strongly affected by the new regulation." He also opined,
"The new regulations will likely push up lending rates for
good corporate risks," while Alejandro Grisanti, president of
consultancy Ecoanalitica, wrote in a May 3 newsletter that
banks will probably soon be "increasing the interest rates
the banks collect from the big corporations and businesses."


4. (C) Overall, Rodriguez predicted "not much impact" on
banks, since "the margins are pretty wide," though she noted
that the BCV can easily adjust them in the future, now that
the precedent has been set. Jesus Bianco, chief economist of
the National Banking Association, told econoff May 4 that
these controls, in effect for a full year, would reduce
banks' return on equity by 7%, based both on actual 2004
numbers and 2005 projections. He noted that it would affect
different banks in different ways, commenting that "the
asymmetries are brutal." Others agreed, but Rodriguez
predicted worse effects for the big banks, which will have to
adjust their rates farther, while Luis Zambrano, chief

economic analyst for Banco Mercantil, told econoff May 4 that
"small banks are less efficient, and will suffer more from
this measure." Bianco, however, said that if inflation were
to increase much, the net worth of banks could be placed at
risk.

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THE WHYS AND THE WHEREFORES
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5. (C) Rodriguez believes that the rate increase was "more of
a political action" than economic, while Rafael Munoz, a
Banco Mercantil economist, said the GOV's entire economic
policy is "only political, in our judgment." Grisanti thinks
the key is "the political dividend, that from these measures
the President of the Republic could obtain the benefit."
Octavio wrote that "perhaps its most negative aspect is the
introduction of another form of control into an already over
controlled economy." Rodriguez echoed that comment, stating
that "the public sector is expanding, expanding, expanding
its scope." She also expects this to be a lasting measure,
as "politically, it's extremely hard to increase rates" after
fixing them.

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COMMENT
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6. (C) GOV control over the financial sector continues to
creep forward. Combined with previously existing
requirements directing lending to housing, agriculture and
microcredit, and setting caps on the mortgage an agriculture
rates (ref A),39% of all bank lending is either directed to
certain areas, has controlled (preferential) rates, or both.
That number is all but certain to increase soon, as the
National Assembly recently approved a report which would
require publicly owned banks to commit 10% of their portfolio
to tourism, and private banks 20%. (A tourism requirement is
probable in the near future, but it is unlikely for the final
percentage to be that high.) Venezuela's banks have made a
lot of money since the imposition of exchange controls, which
has in effect given them a large base of depositors who
cannot take their money out of the country and have had to
accept low interest rates, even as the banks, given the risk
factors, have set lending rates high. The GOV solution,
however, represents yet another distortion built on other
distortions, and entails long-term risk for the bulk of
Venezuela's financial sector. The BCV is now giving high
priority to populist economic ideas, making it appear that
the new GOV supporters in its leadership (ref B) were enough
to end the autonomy of the institution.
McFarland


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2005CARACA01501 - CONFIDENTIAL