S/C MCCARTHY'S MEETINGS WITH ECONOMIC PLAYERS

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001228

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E.O. 12958: DECL: 06/20/2017
TAGS: ECON EFIN VE
SUBJECT: S/C MCCARTHY'S MEETINGS WITH ECONOMIC PLAYERS

REF: A. 06 CARACAS 943


B. 06 CARACAS 3375

Classified By: Economic Counselor Andrew N. Bowen for reason 1.4(d).

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SUMMARY
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1. (SBU) Special Coordinator for Venezuela Deborah McCarthy
met with local economists, businessmen, consultants, and
bankers during her June 12-15 visit to Venezuela. While the
economists agreed that mounting problems in the Venezuelan
economy, including deficit spending and a lack of fiscal
control, would eventually lead to a correction, none foresaw
a crisis in the very short term given the massive oil income
supporting the state. Representatives of the
Venezuelan-American Chamber of Commerce described their
decreasing levels of access to the BRV and concerns about the
tightening noose around the private sector in Venezuela. Oil
production seems unlikely to increase in the short to medium
term. According to a leading banker, the Venezuelan banking
system remains highly profitable, but banks have been living
off the liquidity created by government expenditures and
should liquidity fall, they could face problems.

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LUNCHING WITH ECONOMISTS
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2. (C) Renowned economists and commentators Robert Bottome,
Alejandro Grisanti, and Orlando Ochoa (PROTECT THROUGHOUT)
joined S/C McCarthy for lunch on June 12. While all agreed
that fiscal imbalances, coupled with excessive government
spending and an eventual decline in oil price or production
(or both) would lead to a financial correction, these three
economists seemed to think such a correction was not likely
in the near term. Grisanti estimated that the BRV ran a
deficit of approximately 1.8 percent of GDP (or USD 3
billion) for the first quarter of 2007 and predicted that the
BRV would exert some fiscal discipline to rein in spending
and restore some investor confidence, noting that spending
had not grown during the first quarter of 2007. He added
that foreign debt levels remained low, and the BRV could take
on more debt to cover a budget shortfall, though warned that
domestic public debt had grown substantially in recent years.


3. (C) Ochoa described a recent meeting with President of the
National Assembly's Finance Committee, Ricardo Sanguino.
Ochoa also described his surprise at the number of stories
recounted by Sanguino about corruption involving government
projects and social programs, noting how money was
disappearing left and right. At the same time, few, if any
have been punished for their graft.


4. (C) The group also discussed the pending monetary
conversion whereby the Venezuelan Bolivar will be replaced by
the "Bolivar Fuerte," denominated as 1/1000 of the old
Bolivar. Everyone agreed that the government and private
sector were ill-prepared for the conversion and that there
were no government-led initiatives to reprogram software,
streamline pricing, or distribute the new currency. Bottome
added that there would be no coins to distribute as the
minter was unable to comply with the contract.

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LUNCHING WITH VENAMCHAM
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5. (SBU) S/C McCarthy had a wide-ranging conversation with
the VenAmcham's Board of Directors during a lunch on June 16.
McCarthy noted, inter alia, that the U.S. hemispheric agenda
was a positive one focusing on the fundamentals of social and
economic development. She added that there was a growing
consensus in the region about the threats to democratic space
in Venezuela and their implications for the hemisphere, as
well as a growing awareness of the security challenges posed
by Venezuela, in terms of a transit country for drugs, links
to Iran, etc. While Venezuela is no longer perceived as
solely a problem for the United States, few governments are
willing to be openly critical. The Secretary, in her
intervention in the OAS, spoke out of concern for the
principle of freedom of expression, calling on the OAS to

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take action. The United States was not engaging in a war of
words with the BRV but was standing on a principle. On the
spate of nationalizations of U.S. companies, S/C McCarthy
emphasized that the United States was closely following
developments and, by common agreement with the IOCs, was
refraining from speaking publicly to allow them to negotiate,
though the principle of adequate compensation has been
commented on.


6. (SBU) VenAmcham President Edmond Saade expressed concern
over the VenAmcham's decreasing access to the BRV, stating
that "doors were being shut, slowly but surely." As a
result, VenamCham was lowering its public profile, though
membership continued to be strong. There was general concern
that the private sector was being held "hostage" by the BRV
and that constant change in rules and regulations, plus the
generally hostile attitude, was predictably leading to a
sharp decline in investment. A number of members noted that
the attitudes by some countries towards developments in
Venezuela, notably Brazil and Colombia, were very much
influenced by the booming market the country represented to
their exporters. It was likely that, in the case of Brazil,
these commercial interests would hold sway over any effort by
the Brazilian Parliament to prevent Venezuela from entering
Mercosur. "We need Mercosur" stated some members, or the
country will find itself outside of all regional trade
schemes. Another member stated that the closing of RCTV had
clearly exposed Chavez' true colors.

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CONSULTING ON OIL AND GAS
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7. (C) S/C McCarthy met with Alberto Cisneros (PROTECT
THROUGHOUT) on the afternoon of June 14. Dr. Cisneros holds
a PhD from UNC-Chapel Hill and has worked as both an academic
and strategist in the oil and gas industry. Cisneros did not
see oil production rising in the short to medium term and was
dismissive of PDVSA's plan to double production by 2012.
With regards to the future of the IOCs and the trend to
replace them with state oil companies in Venezuela, Cisneros
agreed that it was a deliberate government policy. But, he
noted, there was a wide discrepancy among state companies,
with some being quite competent and others merely "paper
companies," lacking the skills or abilities to extract heavy
oil. Cisneros believes that the BRV still needs the IOCs,
though the BRV is attempting to obtain unacceptable terms
from them. It is not clear what will be completed by June

26. Commenting on the political situation, he noted that the
BRV is trying to impose a French Fifth Republic
constitutional model of government onto a federalist
structure and surmised that it will not work. He also
discussed his activities educating other academics about the
deteriorating human rights situation in Venezuela and noted
the potential for the USG to work through academic
multilateral fora.

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BANKING IN VENEZUELA
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8. (C) Oscar Garcia Mendoza (PROTECT THROUGHOUT),President
of Banco Venezolano de Credito (BVC),remains the most
outspoken critic of Chavez in the banking sector and confided
to S/C McCarthy that BVC currently has no government money.
They were the prime banker for PDVSA before the 2002 strike,
but since then have cut off (or been cut off) from all BRV
business. Mendoza, along with well-known economists, Orlando
Ochoa and Jose Guerra, has sued the BRV for violating the
constitution by transferring foreign exchange reserves from
the Central Bank to the National Development Fund (FONDEN)
(reftel A) and continues to criticize BRV decisions in local
and international press. (COMMENT: Following S/C McCarthy's
meeting, Mendoza was scheduled to meet a visiting reporter
from the Wall Street Journal. END COMMENT).


9. (C) Mendoza confirmed that the banking sector was very
healthy at the moment, making record profits as it, in his
words, "lived off of liquidity." Consumption loans (credit
cards, car and home loans) have doubled from May 2006-2007
and banks are profiting from BRV debt issuances, such as the
Bonds of the South (reftel B),which return 20-30 percent.
Mendoza noted that the boom and BRV social spending have

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created labor issues for his bank, and estimated that as many
as 10 percent of their low-skilled labor force does not show
up to work on a given day, as they make as much via handouts
from Mission participation as they do working.


10. (C) S/C McCarthy raised potential USG concerns regarding
the pending opening of an Iranian bank in Venezuela and
Mendoza shared those concerns. For him, the Venezuelan
financial sector is very vulnerable to exposure for
facilitating actions by money launderers, narco-traffickers,
and potentially even extremist Islamic elements. Mendoza
agrees with most Venezuela-watchers that a bust will
eventually follow the current boom and relayed his concerns
about the banking sector's stability in such a scenario,
though for now, that banks were managing risk well.


11. (C) Mendoza is an ardent opposition supporter and was
heartened by the recent student protests against the closure
of RCTV. He noted that one of his charitable activities,
"Leadership with Vision," which seeks to train young
Venezuelan leaders had suffered a dearth of interest by
Venezuelans under 35 in recent years, but he was very
impressed with the current under-25 student leadership.
(Note: Banco Venezolano de Credito (BVC) is one of
Venezuela's oldest, and is currently the 16th largest bank.
End Note.)

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COMMENT
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12. (C) The general consensus in Venezuela remains that
economic times remain good (shrinking political freedoms
notwithstanding) and, while a bust will eventually follow the
current boom, it is not yet imminent. Distortions in the
economy, from the spike in consumer credit to the declining
labor force and labor productivity are all caused by BRV
intervention in the economy. The BRV can maintain these
policies so long as oil production and prices remain high,
though the potential for both to decline in the medium term
gives cause for concern.


13. (SBU) S/C McCarthy cleared this cable.

DOWNES