BOLIVARIAN SPENDING UNSUSTAINABLE BELOW USD

C O N F I D E N T I A L CARACAS 001291

SIPDIS

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR KLINGENSMITH AND NGRANT

E.O. 12958: DECL: 04/17/2020
TAGS: EFIN ECON PGOV VE
SUBJECT: BOLIVARIAN SPENDING UNSUSTAINABLE BELOW USD
40/BARREL?

REF: A. CARACAS 00905


B. CARACAS 00943

Classified By: ECONOMIC COUNSELOR ANDREW N. BOWEN FOR 1.4 (D)


1. (C) SUMMARY. Milton Guzman, the Vice President of
Research with the Banco de Venezuela Santander Investment
Group, said that if the Venezuelan oil basket price dropped
to USD 40 per barrel (from the current USD 60.29 per barrel
for April 2006),the current levels of BRV central government
spending would be unsustainable. With a non-oil deficit
(which is the central government deficit assuming no oil
revenue) of 18 percent of GDP, Venezuela remains extremely
dependent on oil prices (and production levels) to maintain
current levels of spending. END SUMMARY.


2. (C) For 2006 and 2007, Guzman did not anticipate the
BRV will face a deficit, but warned of fiscal vulnerability.
According to Guzman, despite impressive growth in BRV
non-petroleum income as a percentage of GDP from 9.6 percent
(USD 8 billion) in 2003 to 16 percent (USD 21 billion)
estimated for 2006 (largely from increased tax collection by
the Venezuelan tax authority, SENIAT),the BRV central
government non-oil deficit is huge (18 percent of GDP or
around USD 24 billion). (Note: The non-oil deficit equals
total central government non-oil revenue minus central
government expenditures. This calculation measures the BRV's
ability to cover expenditures without any oil income. End
Note.) This simple measure quantifies the BRV's dependence
on oil revenue, and consequently oil prices.


3. (C) According to Guzman's sensitivity analysis
considering various oil price scenarios (see paragraph 4),
the current levels of BRV central government spending are
unsustainable if the Venezuelan oil basket price drops below
USD 40 per barrel. If the oil price drops, the BRV would
have to borrow more to maintain current spending levels,
cover the deficit, and pay debt amortization. Guzman's basic
assumptions for 2006 are: BRV central government expenditures
of 34.2 percent of GDP (approximately USD 46 billion),an
average annual oil price of USD 47.3 per barrel (as compared
to USD 60.29 per barrel in April 2006),nominal GDP of USD
135.1 billion, and oil production level of 2.7 million
barrels per day. (Note: A number of private sector contacts
believe that Venezuelan crude production has recently dropped
to 2.3-2.6 million barrels per day (reftel A). End Note.) As
of March 2006, the BRV 2006 authorized central government
budget expenditures were USD 46.5 billion, which includes the
original annual budget of USD 40.5 billion and additional
credits of USD 6 billion for infrastructure and transfers to
the states. This does not include expected BRV off-budget
spending, which could approach USD 10 billion.


4. (SBU) The table below shows the sensitivity analysis
based on various oil price scenarios for 2006.

GOVERNMENT FISCAL BALANCE AND FINANCING NEEDS
SENSITIVITY ANALYSIS FOR 2006

VENEZUELAN OIL BASKET 25 30 35 40 47.3 50
AVERAGE (USD/Barrel) (1)

TOTAL REVENUE 26.1 28.3 30.5 33.0 36.9 38.4
(AS % OF GDP)

TOTAL EXPENDITURES 32.4 32.5 33.0 33.1 34.2 34.6
(AS % OF GDP)

FISCAL BALANCE -6.4 -4.2 -2.5 -0.1 2.7 3.8
(AS % OF GDP)


(1) 2006 Estimate.

Source: Santander Investment Group.


5. (C) Since completing this sensitivity analysis in March
2006, Santander Investment has lowered its April 2006

estimate for oil production from 2.7 million to 2.65 million
barrels per day. Santander anticipates lower production due
to lower investment by both private companies and PDVSA.
Santander also has raised its estimate for BRV central
government spending from 34.2 to 36.5 percent of GDP.
Santander maintains that the BRV fiscal situation is still
manageable given continued high oil prices and BRV funds
(read: off-budget funds),e.g. the National Development Fund
(FONDEN) and the Special Economic Development Fund (FONDESPA)
(reftel B).


6. (C) Comment: We believe that the BRV may have amassed
roughly USD 33.7 billion outside the formal budget process
held at the National Development Fund (FONDEN),PDVSA, the
Social Economic Development Bank (BANDES),and the Bank of
the Treasury to address social and infrastructure needs, pay
for state entity expenses (e.g. PDVSA),and serve as a
cushion in case of contingencies. Because of the lack of
transparency in BRV financial accounting, the BRV can most
certainly access these funds with speed and discretion. End
Comment.

BROWNFIELD