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 SIPDIS SENSITIVE SIPDIS TREASURY FOR KLINGENSMITH, NGRANT, AND MMALLOY COMMERCE FOR 4431/MAC/WH/MCAMERON NSC FOR DTOMLINSON HQ SOUTHCOM ALSO FOR POLAD 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). -------------- SUMMARY -------------- ¶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. -------------- LUNCHING WITH ECONOMISTS -------------- ¶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. -------------- LUNCHING WITH VENAMCHAM -------------- ¶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 CARACAS 00001228 002 OF 003 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. -------------- CONSULTING ON OIL AND GAS -------------- ¶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. -------------- BANKING IN VENEZUELA -------------- ¶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 CARACAS 00001228 003 OF 003 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.) -------------- COMMENT -------------- ¶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