PARALLEL DOLLAR RATE CONTINUES RAPID CLIMB

C O N F I D E N T I A L CARACAS 002084

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SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
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COMMERCE FOR 4431/MAC/WH/MCAMERON

E.O. 12958: DECL: 10/24/2017
TAGS: ECON EFIN VE
SUBJECT: PARALLEL DOLLAR RATE CONTINUES RAPID CLIMB

REF: A. CARACAS 2040

B. CARACAS 1053

Classified By: Economic Counselor Andrew N. Bowen for reasons 1.4 (b) a
nd (d).

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Summary
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1. (C) The parallel rate for dollars has jumped sharply in
recent months, increasing 65 percent in the last six months
from 3,700 bolivares (Bs)/USD on April 26 to 6,180 Bs/USD on
October 26. Reasons for the increase include increasing
liquidity and general unease about the constitutional reform
process. While the BRV has brushed off the significance of
the parallel market, the widening gap between the parallel
rate and the official rate, which is fixed at 2,150 Bs/USD,
creates growing incentives for fraud and corruption.
Additionally, as the bolivar becomes increasingly overvalued
at the official rate, the BRV will have to tighten importers'
access to dollars at that rate. End summary.

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Higher and Higher
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2. (U) The U.S. dollar was trading at 6,180 Bs to one USD on
the parallel market on October 26. The parallel rate was
4,975 Bs/USD on September 26 and 3,700 Bs/USD on April 26,
indicating that the value of the bolivar on the parallel
market has declined 23 percent in the past month and 65
percent in the last six months. The bolivar is now trading
on the parallel market at 2.8 times its official value of
2,150 Bs/USD. (Note: The BRV has kept the official rate
fixed at 2,150 Bs/USD since March 2005. The BRV allocates
foreign exchange at the official rate through the Commission
for the Administration of Foreign Exchange (CADIVI). The
parallel market refers to the rate obtained when exchanging
money through a legal bond swap mechanism commonly known as
the "permuta." End note.)

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Reasons for the Spike
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3. (C) Local analysts have offered several reasons for the
rapid recent climb of the parallel rate. Christina
Rodriguez, President of the local consulting firm
MacroEconomia, Luis Zambrano, chief economist of Banco
Mercantil, and Pedro Coa, chief economist at Banesco, all
cited general unease and uncertainty about the economic and
political implications of the constitutional reform process.
Rodriguez added that increased liquidity, partly due to
government expenditures in the run-up to the December
constitutional referendum, was also a factor, as Venezuelans
saw few local opportunities to productively invest their
increasing stock of bolivars. Zambrano cautioned that the
parallel market was small and lacked transparency; as such,
single transactions and rumors could have a disproportionate
impact.

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Does it Matter? Apparently Not (Yet) to the BRV
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4. (U) Vice Minister of Finance Carlos Ramones brushed off
the significance of the rise in the parallel rate. As
reported by El Nacional on October 23, Ramones called the
parallel market marginal, claiming it corresponded to 5
percent of imports. (Note: Most of our contacts believe the
parallel market accounts for 15 to 25 percent of imports.
End note.) He argued that the recent rise was due to
speculative factors and scoffed that anyone who wants to
purchase dollars at the parallel rate was welcome to do so.
Finance Minister Rodrigo Cabezas did not even address the
parallel rate in his presentation of the 2008 budget (ref A),
though he triumphantly guaranteed that there would be no
devaluation of the official rate in 2008.
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Comment
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5. (C) Whatever the causes of the rise in the parallel rate,
it clearly only increases the incentives for fraud and
corruption (ref B). We continue to hear stories that some
importers are inflating their import requests, seeking to
receive extra dollars through CADIVI at the official rate
which they can turn around and sell for bolivars at the
parallel rate. This practice is virtually equivalent to
printing money, except that the rents go to the perpetrator
of the fraud rather than the government.


6. (C) While part of the rise in the parallel rate may be
due to speculation, one underlying driver is the combination
of high inflation without an official devaluation, which has
left the bolivar clearly overvalued at the official rate.
This trend is showing no signs of abating, as increased
liquidity continues to drive inflation. The more overvalued
the bolivar becomes, the more importers will flood CADIVI
with requests for dollars at the official rate. CADIVI in
turn will have to grant these requests more sparingly, which
will lead to greater shortages or higher prices for
non-priority items. Indeed, we are already seeing these
impacts. CADIVI authorizations have grown from an average of
103 million USD/business day from January to October 2006 to
162 million USD/business day over the same period in 2007, an
increase of 57 percent. We have also recently heard
anecdotally that various importers are having to wait longer
for CADIVI approval.
FRENCH