MEETING WITH FINANCE COMMITTEE PRESIDENT RODRIGO

UNCLAS E F T O CARACAS 002252 SIPDIS SIPDIS NOFORN SENSITIVE NSC FOR DTOMLINSON HQ SOUTHCOM ALSO FOR POLAND TREASURY FOR KLINGENSMITH AND NGRANT COMMERCE FOR 4431/MAC/WH/MCAMERON E.O. 12958: N/A TAGS: EFIN PGOV VE SUBJECT: MEETING WITH FINANCE COMMITTEE PRESIDENT RODRIGO CABEZAS This Message is Sensitive but Unclassified, Please treat accordingly. ¶1. (SBU) Summary: EconCouns, accompanied by Econ Specialist, met July 12 with Rodrigo Cabezas and Ricardo Sanguino, President and Vice President, respectively, of the National Assembly's Finance Committee. During a 90-minute tour d' horizon, Cabezas said reform of the banking law was still under discussion and he expected the bill to pass in 2007, but foresaw no structural changes to the current law. On other topics, he said: there would be no devaluation of the bolivar in 2007 (let's see); saw no reason, despite one press report, for the BRV to assume control of the banking sector post December 2006; confirmed the decision had been made to reduce the bolivar by three zeroes, with new currency in circulation by 2008; and, expected a constitutional referendum between 2007-2008 that would, inter alia, recognize other forms of property, beyond private property. He also stated that the adequate level of Central Bank international reserves for 2006 was USD 25 billion and USD 28 billion for 2007. End Summary. ¶2. (SBU/NF) Cabezas, deputy from the state of Zulia, and an economist by training, said that reform of the Banking Law was still under discussion (first discussion had been completed in 2004) and passage was expected in 2007. He expected no fundamental/structural changes to the current law. The new law would reinforce current BRV policy regarding directed lending to selected sectors, have provisions for client/depositor rights, and provisions to regulate credit and debit cards. EconCouns asked Cabezas if he had seen a recent small article in the daily economic journal "Reporte" suggesting the BRV would assume greater control of the banking sector after December 2006 national elections. Cabezas replied that he saw no political or economic reason for the government to nationalize the commercial banking sector. He noted that relations between the banking sector and the BRV were good, unlike the BRV's relationship with Fedecameras (the umbrella business chamber) or Conindustria (the industrial chamber). (Note: We contacted a number of banking reps; none saw any reason for the BRV to take such a move in the current environment. End Note.) Cabezas also mentioned that a new Insurance Law would replace the existing law, which dates to 1940, and contain new articles to account for technological changes and modernization in the industry. ¶3. (SBU) Monetary reform, he said, was a political and economic decision that "had already been taken." The BRV means to remove three zeroes from the national currency while implementing some measures on the fiscal side (NFI). The goal was to try and ensure sustainable economic growth along with price stability. According to Cabezas the Central Bank (BCV) had recommended the Assembly approve legislation in order to remove three zeroes off the currency. He expected that everything would be ready for new currency to be in circulation by January 2008. He also said there would be no changes to the BCV Law. (Note: With regard to Cabezas' comments about fiscal side reforms, we assume that he is talking about measures to ensure coordination between the Ministry of Finance and the Central Bank -- most likely with the already weak BCV losing whatever thin strand of autonomy it remains. End Note.) ¶4. (SBU) Cabezas said that while constitutional provisions for protecting private property would be maintained, he expected constitutional changes in 2007 to recognize other forms of property such as cooperatives, mixed enterprises, co-management and other arrangements (read: make the concept of private property a relative one). The idea he said was to apply new economic concepts to 21st century socialism. Cabezas mentioned a possible national referendum between 2007 and 2008 to decide this and some other constitutional changes. (Note: On the economic front, such changes could also remove de jure BCV autonomy (or if there is anything left of it) as such autonomy is spelled out by the constitution. End Note.) ¶5. (SBU) On BRV spending, Cabezas said that the Central Government was expected to spend Bs 90 trillion (USD 42 billion) during 2006, which represented between 75 and 80 percent of the total approved budget and additional credits for 2006. However, FONDEN (the National Development Fund) and FONDESPA (the PDVSA managed development fund) could "invest" around USD 9 billion in additional spending during this electoral year. The goal was to compensate for the lack of public and private investments during the last 25 years. Cabezas also stated that there would be no devaluation during 2007 (let's see),confirming the obvious: the BRV's use of the exchange rate as an anchor against inflation, and to try to compensate for the reduction in real income during the last several years. ¶6. (SBU/NF) On the topic of adequate international reserves, Cabezas said that the adequate level of BCV international reserves for 2006 was USD 25 billion and for 2007 USD 28 billion. What was above those amounts would be transferred to FONDEN, without changing the current Central Bank Law. ¶7. (SBU) Comment: Both Cabezas and Sanguino (a deputy from the state of Tachira, and also an economist) were relatively straightforward in their presentations and responses, despite some initial stiffness by Cabezas. Both admitted that, while they were both economists, their job as legislators was fundamentally a political endeavor. Cabezas mentioned that the Assembly would be in recess from August 15 - September 15, and he would be coming back to Caracas just once a week to sign off on mandatory business; beyond that he would be out campaigning for Chavez. BROWNFIELD