BALANCE OF PAYMENTS DATA MAY FORESHADOW CHALLENGES

C O N F I D E N T I A L CARACAS 002228

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E.O. 12958: DECL: 11/21/2017
TAGS: EFIN EPET VE
SUBJECT: BALANCE OF PAYMENTS DATA MAY FORESHADOW CHALLENGES
FOR BRV

REF: A. CARACAS 2181


B. CARACAS 1544

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


1. (C) Summary: The Central Bank of Venezuela's (BCV's)
third quarter balance of payments data illustrate two
important trends: a declining volume of petroleum exports and
rapidly growing imports. Imports over the first three
quarters of 2007 have grown a hefty 36 percent relative to
the same period in 2006. Petroleum export earnings over the
same period in 2007 were USD 44.4 billion, a slight drop from
the same period in 2006. As the average price of the
Venezuelan basket has increased, the BCV figures suggest that
export volume is declining. Moreover, the BCV figures almost
certainly inflate export earnings: the USD 44.4 billion
figure would imply average oil exports of 2.7 million
barrels/day (mbd),whereas most analysts believe the BRV
exports approximately 1.9 mbd. The BRV has reason to be
concerned about the trends of declining production and
rapidly increasing imports. If these trends continue and oil
prices stabilize, the BRV will likely either have to devalue
the bolivar or further restrict imports. End summary.

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Imports Rising, Oil Production Falling
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2. (U) Third quarter balance of payments data recently
released by the Central Bank of Venezuela (BCV) illustrate
two important trends: a probable fall in the volume of
petroleum exports and rapidly increasing imports. According
to BCV figures, Venezuela earned USD 44.4 billion from oil
exports from January through September 2007, a slight fall
from the USD 45.7 billion earned during the same period in

2006. The average price of the Venezuelan basket was USD
59.6 per barrel from January to September 2007, slightly
higher than the USD 57.7 average for the same period in 2006.
Therefore, assuming the average quality of crude exported
was the same, the BCV data indicate that the volume of
Venezuela's oil exports slightly declined. (Note: Given
record oil prices in the first half of the fourth quarter of
2007, we expect Venezuela's overall 2007 petroleum export
earnings to be greater than that of 2006. End note.)


3. (U) According to BCV figures, imports grew from USD 22.6
billion in the first nine months of 2006 to USD 30.7 billion
over the same period in 2007, an increase of 36 percent. As
local commentators have pointed out, the combination of a
rapid increase in imports with declining oil production is
not sustainable (unless, of course, ever increasing oil
prices were to compensate). Venezuela's overall trade
balance surplus dropped from USD 28.2 billion over the first
9 months of 2006 to USD 18.9 billion in the same period of
2007, a 33 percent drop. (Note: Venezuela's non-petroleum
exports remained stable at about USD 5.1 billion in both
periods, roughly 10 percent of total exports. Given current
record oil prices, we expect the final 2007 official trade
balance surplus to be higher than USD 18.9 billion. End
note.)

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Where's the USD 13.4 Billion?
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4. (SBU) The trade balance surplus may actually be
significantly lower than official figures indicate. Assuming
that the Venezuelan basket price represents the average price
received by the BRV per barrel exported, total earnings of
USD 44.4 billion in the first nine months of 2007 imply that
the BRV exported 2.7 mbd. In contrasts, many analysts
believe exports are closer to 1.9 mbd. At this level, export
earnings at the basket price would be USD 31 billion for the
first nine months of 2007, USD 13.4 billion less than the BCV
claims. The trade balance surplus for this period would be
only USD 5.5 billion, as opposed to the USD 18.9 billion in
the official figures. We note that 2.7 mbd in exports, plus
domestic consumption of 600,000 barrels/day, would place


total production at 3.3 mbd, the BRV's claimed production
level, an estimate with which no one in the non-government
petroleum sector agrees.


5. (C) Most local analysts believe export earnings are
inflated in the balance of payments, but there is debate over
the extent to which they are and what other line items are
fudged to cover up the overstatement of exports. CAF country
economist Adriana Arreaza (strictly protect) told econoff
that export earnings were clearly overstated and that BCV
contacts told her that PDVSA was exaggerating its accounts
receivable figures to compensate in the financial account.
(Note: If so, the debit in the "other investment, public
assets" line item in the balance of payments would be
overstated. End note.) National Economic Council President
Efrain Velazquez (strictly protect) told econoff that his BCV
contacts believed the export earnings figures they received
from PDVSA were 90 percent accurate.

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Comment
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6. (C) Regardless of the extent to which BCV figures
overstate export earnings, the BRV has reason to be concerned
about the two vulnerability trends illustrated in the balance
of payments data, namely declining oil production and rapidly
increased imports (ref B). BRV officials publicly maintain
that oil production is high and healthy, but they have
started to take steps to curb imports at the official rate
and encourage domestic production in certain sectors (ref A).
CADIVI, the government agency that authorizes provision of
hard currency to importers at the official rate, has reduced
the average daily dollar authorizations in the past month and
a half relative to the third quarter, though it is too early
to tell if this is a trend. If oil prices stabilize, oil
production stays flat or declines, and imports keep rising,
and assuming that foreigners will be unwilling to lend money
to finance imports, the BRV at some point will either have to
devalue or to further restrict imports at the official rate
(an implicit devaluation, as importers would increasingly
turn to the parallel rate). End comment.
DUDDY