THE CENTRAL BANK: THE BRV'S ELEPHANT BRIGADE

UNCLAS CARACAS 000485

SIPDIS

SIPDIS

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TREASURY FOR KLINGENSMITH AND NGRANT

E.O. 12958: N/A
TAGS: EFIN ECON PGOV VE
SUBJECT: THE CENTRAL BANK: THE BRV'S ELEPHANT BRIGADE


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1. (SBU) SUMMARY: Central Bank (BCV) Director Domingo Felipe
Maza Zavala told Econoffs February 15 that the BCV's primary
role these days is to mitigate/accommodate the monetary
affects of the BRV's "enormous" fiscal expenditures. The
always understated and professorial Maza maintained that the
BCV was an autonomous public institution with a
constitutional mandate to support state goals; noted that,
with the passage of the July 2005 Central Bank Law, the BCV
no longer had the exclusive rights to the country's
petroleum-driven foreign exchange earnings; and asserted that
the accumulated foreign exchange holdings of various BRV
institutions exceeded those of the BCV (currently USD 28.79
billion). He also added that the BCV continues its efforts
to manage the country's growing money supply, which are
hindered by exchange controls, election year spending, debt
accumulation, and interest rate controls. END SUMMARY.

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BCV ROLE: MITIGATING AFFECTS OF BRV FISCAL POLICY
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2. (SBU) According to Maza, the Central Bank (BCV) derives
its autonomy from the 1999 BRV Constitution, but, must also
cooperate with the BRV to promote economic stability,
economic growth and economic welfare. He noted that the BCV
and the Executive Branch have an annual requirement,
established by constitution and law, to set goals for
economic growth, inflation, the current account, and the
maximum fiscal deficit each year. This year will mark the
first time this agreement will be formalized, which was not
possible in prior years because of "political turmoil" (read:
strike, referendum, etc). Each BRV entity must, in turn,
work to support these goals.


3. (SBU) Maza, in a non-critical tone, said the BRV
determined fiscal policy, and the BCV has tried to mitigate
the monetary effect of BRV expenditures, which would be
"enormous" in 2006 (Note: In 2006, BRV expenditures will be
at least 30.5 percent of GDP, with additional significant
off-budget expenditures in the neighborhood of an additional
10 percent of GDP expected. End Note.) Maza added that the
issuance of domestic bonds (new domestic debt) helped the
banking sector, which lacked options to place money to
complement their other portfolio investments. The BRV also
benefited, by using debt to pay for its needs. Maza
described the Venezuelan debt-to-gdp profile (currently 37.8
percent) as more manageable than Brazil's, Argentina's, and
Mexico's. Despite Venezuela's ability to assume more debt,
Maza said that it did not have the need and a good option
would be to pay down some of the foreign debt with current
petroleum income. (Comment: Maza's caution and professorial
nature often make him a master of the obvious. End Comment.)


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THE CENTRAL BANK REFORM
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4. (SBU) In the past, the BCV exclusively managed the
foreign exchange earnings of Petroleos de Venezuela (PDVSA).
Under the 2005 Central Bank law, the BCV was required to make
a one-time transfer to the National Development Fund (FONDEN)
of USD 6 billion. Under the new law, Maza said, PDVSA
negotiates the amounts needed to meet Venezuela's currency
needs with the BCV, maintains foreign currency for its needs
abroad, and transfers the rest to FONDEN (for 2006 PDVSA
plans to transfer around USD 100 million a week to the fund
according to public statements by Chavez and other senior BRV
officials. FONDEN currently has around USD 8 billion
available to spend).


5. (SBU) Maza said he originally opposed the transfer of
Central Bank reserves to FONDEN, but added that FONDEN may
actually help alleviate the excess liquidity problem as
foreign exchange earnings that go directly from PDVSA to
FONDEN do not enter the monetary base (i.e., are not
transferred into Bolivars). FONDEN would only make requests
of the Central Bank when it needed Bolivars, Maza said.
(Note: FONDEN resources were originally intended to be spent
for imports or to pay foreign debt. End Note.) He added
that, in addition to FONDEN, other public entities, such as
the Fund to Guarantee the Deposits of Financial Institutions
(FOGADE),the Economic and Social Development Bank (BANDES),
the Ministry of Finance, and PDVSA also hold foreign
exchange, in amounts that exceed the gross international
reserves of the BCV (Currently, USD 28.79 billion). However,
he distinguished these foreign exchange holdings from
&reserves8, because they are not under BCV control and they
do not have the function of reserves.


6. (SBU) The Central Bank Law (July 2005) also established
the concept of "adequate level of reserves.8 Maza noted
that the Central Bank must determine how much is needed to
meet Venezuela's external obligations and pay for
international transactions. Maza said that the figure was
confidential for strategic reasons. (Comment: We anticipate

SIPDIS
that the adequate reserve level will be around USD 25
billion, as Chavez has announced in the past. In February
2005, Chavez proposed the BCV transfer another USD 4 billion
to FONDEN. End Comment.) Eventually the BCV will need to
transfer to FONDEN the excess reserves, but current law does
not provide a mechanism to do so, said Maza.

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MONETARY LIQUIDITY
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7. (SBU) Monetary liquidity is very high (M2 grew around 53
pct growth year on year) and will continue to grow, Maza
said, due primarily to the strong inflow of petrodollars,
fiscal spending levels, and exchange controls. In an effort
to mop up liquidity, the BCV has issued the Bolivar
equivalent of around USD 14 billion in CDs, which is costly
(around USD 871 million in 2005). To lower costs, the BCV
earlier this month lowered CD interest rates and eliminated
the 56-day CDs, now offering just 14 and 28 day issuances.
Maza said that BANDES, PDVSA, and FONDEN investments abroad
help contain some of the liquidity growth.


8. (SBU) With exchange controls in place and BRV legislative
branch and executive mandates setting certain interest rates,
Maza said that the BCV does not have many options to control
liquidity. Exchange controls were established in February
2003, following the coup, the strike, and the fall of
petroleum prices, all of which exacerbated to capital flight
according to Maza. He described that traditionally the
Venezuelan balance of payments' current account has been
strong while the capital account traditionally has been weak
and negative because of capital flight. Under the current
regime, the legal forms of exchange include requesting
dollars through the Foreign Exchange Control Commission
(CADIVI),or purchasing BRV dollar denominated bonds or CANTV
ADRs, which can be purchased locally for Bolivars and then
sold abroad for dollars. Maza noted that the parallel market
is another option for exchange, though not legal, and that
the official rate and parallel rate differ.

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COMMENT
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9. (SBU) The 83-year old Maza has publicly called for
regulations for the management of FONDEN and publicly
defended the BCV's independence. He has been an academic for
most of his career, a former deputy in the legislature, and
an author of economic textbooks that are widely used
throughout Venezuela. While choosing his words carefully, he
has demonstrated, through public statements and press
interviews, a greater willingness to be open about his
opinions (which in economic terms are seemingly orthodox),
particularly when they relate to defending perceived BCV
prerogatives. While hewing close to the official line,
Maza's comments underscored the challenges BRV fiscal policy
and quasi-monetary policy (selective interest rate controls)
have for the country's principal monetary authority.
WHITAKER