FINANCE MINISTRY OFFICIAL MAKES SALES PITCH

C O N F I D E N T I A L CARACAS 000857

SIPDIS


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

E.O. 12958: DECL: 03/22/2015

TAGS: EFIN ECON PGOV VE
SUBJECT: FINANCE MINISTRY OFFICIAL MAKES SALES PITCH


Classified By: Economic Counselor Richard M. Sanders. Reasons 1.4(b) a
nd (d).

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Summary
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1. (C) In a March 21 meeting with econcouns, Rudolfo Romer,
the head of the Finance Ministry's National Public Credit
Office (and thus chief liaison with the international
investment community),expressed satisfaction with a recently
concluded billion euro bond issue. He asserted that the GOV
policies, including the creation of off-budget trusts for
infrastructure and of massive "missions" to meet health,
education, and employment needs, were in fact "rational
administration" of the oil bonanza. Central Bank
independence was being respected; now there was just "better
coordination." The GOV's decision to buy USD 500 million in
new Argentine bonds was, he claimed, quite justifiable on
economic rather than political grounds. Much of Romer's
presentation was unconvincing, but investors, viewing
Venezuela through the prism of high oil prices, seem inclined
to keep buying GOV securities, for now. End summary.

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Financing Strategy ) Look for Opportunities
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2. (C) Rudolfo Romer, head of the Finance Ministry's
National Public Credit Office, led off a meeting with
econcouns on March 21 by noting his satisfaction with the 1
billion euros (USD 1.3 billion) debt issue the Finance
Ministry had concluded on March 7. This had been the first
time since 2001 that the GOV had gone to Europe for
financing, and was proof of market interest in the "new
Venezuela." The issue covered a significant slice of the USD
4 billion which the GOV needs to raise in 2005. How much
would be borrowed locally and how much in international
markets was entirely a matter of which presented better
opportunities. (He admitted to some concern about a likely
increase in U.S. interest rates and its impact on emerging
market debt as a whole.) He praised previous Finance
Minister Tobias Nobrega and his team for having successfully
issued instruments to push back large amounts of debt which
had been coming due in 2003 and 2004. There would not now be
an important spike in immediate obligations until 2008. New
financing was thus aimed at meeting the current gap between
spending and revenue. While previous debt issues had been
quite complex (with mixtures of dollar and
bolivar-denominated debt, the latter convertible at
preferential rates),for the recent issue, the GOV went with
a "plain vanilla" approach -- a 7 pct interest rate over 10
years on a straightforward euro-denominated instrument, so as
not to scare investors who were unfamiliar with Venezuela.


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Spending Plans Under Control
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3. (C) The GOV, Romer asserted, was looking to "administer
high oil prices with rationality." He noted that the GOV's
budget had prudently assigned a price of USD 23 per barrel
for oil. (The Venezuelan basket of crudes now trades above
USD 42 per barrel.) When pressed as to whether this low
price estimate was in fact necessary to make up for oil
production well below the official claim of 3.1 million
barrels, Romer declined to engage, saying "I am not an oil
expert. I leave that to the Ministry of Energy." He
suggested that the GOV's decision to leave USD 2 billion in
earnings from state oil corporation PDVSA in separate
off-budget trusts, administered by the state Bank for
Economic and Social Development (BANDES),was in fact an
indication of economic discipline, making sure that the money
was spent on long-term infrastructure and human capital
projects than on regular spending on salaries and operations.


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Argentina Deal -- Economics or Politics
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4. (C) Econcouns asked how President Hugo Chavez's

announcement that the GOV would now buy USD 500 million in
Argentine bonds would be implemented (and how it made sense
if the GOV itself was raising new money for its own needs at
the same time). Romer responded that the bonds would be
purchased by the BANDES, which has large state deposits. He
suggested that BANDES might resell some of the debt on the
open market. In any event, he added that these were new
post-default Argentine bonds which offered good returns and
which international investors generally were finding
attractive. He denied that the decision had been imposed by
Chavez for political reasons. Rather, BANDES management had
been interested in the purchase, and had suggested to Chavez
that he could announce it publicly. (Comment: This
stretches credulity. Whatever the merits of the new
Argentine bonds as an investment, tying up this large a sum
in them seems like an imprudent decision, to say the least.
End comment.)

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Central Bank -- Just Good Coordination
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5. (C) Romer resisted the suggestion that the naming of
Chavez loyalist Gaston Parra as head of the Central Bank and
the Bank's earlier agreement to transfer to the GOV 3.2
trillion bolivars (USD 1.48 billion) created as a result of
devaluation marked a definitive end to the Bank's
independence, raising the risk of inflation. He dismissed
the issue of how much in foreign currency earnings should be
transferred as one of methods of calculation. He saw Parra's
selection, which enjoyed ample support within the (majority
pro-Chavez) National Assembly, and the naming of new board
members as current members' terms expire, as heralding
greater "coordination," but he insisted that such
coordination "flows in both directions." The GOV, he went
on, was sensitive to Central Bank concerns regarding the need
to keep inflation on a downward path, and cited inflation in
2004 (19.2 pct, coming in below the 20 pct which the GOV had
forecast) as proof of its commitment.

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Spending on Missions Will Pay for Itself
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6. (C) Romer spoke enthusiastically of the GOV's aggressive
spending on social welfare "missions." He noted the
"collapse" in health and educational systems in the
pre-Chavez era, stressing that there was no way that
long-term economic growth could be achieved without paying
attention to needs in these sectors. The use of ad hoc
structures, as opposed to ministries, had been necessary
because they were "more agile," but the challenge was now to
institutionalize them. He cited GOV statistics on decreased
mortality rates as proof of success. When asked if the
missions, and the expectations that they will continue
indefinitely, were creating enormous financial obligations
that would be impossible to sustain, Romer responded that "in
a country this poor you cannot use purely fiscal arguments."
As for the disequilibria that these spending commitments may
create, "you have worse problems in the U.S."

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Comment: The Greater Fool Theory in Action
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7. (C) While Romer, who had previously worked for Finance
Minister Nelson Merentes when the latter was in charge of
BANDES, was superficially plausible, his assertions, whether
they be on the independence of the Central Bank or the GOV's
commitment to fiscal discipline while keeping billions in
PDVSA earnings off-budget, are lacking in substance.
Nonetheless, markets appear to like Venezuelan debt. The
combination of relatively high rates, caused in large measure
by persistent noise about the political environment and the
quality of economic decision-making, and the confidence that
in the end, oil revenue provides a guarantee of repayment,
makes them irresistible for now. Of course, as one visiting
U.S. investment banker told us, those buying Venezuelan debt
have a trader's mentality, and do not expect to hold it for
long periods. Venezuela thus benefits from the "greater
fool" theory (a chestnut of market analysis, under which an
investor buys questionable securities not with regard to
their quality but with the hope of quickly selling them off

to another investor -- the greater fool -- who is also hoping
to flip them). Should oil prices slide (admittedly this
could be a long way off),whoever is holding Venezuelan
securities, may indeed look foolish. The GOV, which wants to
keep its spending machine at full tilt through the December
2006 Presidential elections, however, may look quite smart,
if also quite cynical.
Brownfield


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2005CARACA00857 - CONFIDENTIAL