2009 VENEZUELAN BUDGET: OPTIMISM FADES

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001477 SIPDIS E.O. 12958: DECL: 10/22/2018 TAGS: ECON EFIN PREL EINV PGOV VE SUBJECT: 2009 VENEZUELAN BUDGET: OPTIMISM FADES REF: CARACAS 01455 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (SBU) Summary. On October 21, Minister of Finance Ali Rodriguez formally presented the 2009 budget to the National Assembly. The budget continues to use unrealistic economic assumptions, such as a low inflation rate and overstatement of oil production and related revenue. Whereas the presentation included information on projected expenditures, notably absent were details on spending for salaries, debt service and debt repurchase. Rodriguez used the presentation of the budget as an opportunity to attack the ills of capitalism and underscore the strength of the Venezuelan economy. -------------- FANTASY LAND: KEY ASSUMPTIONS IN THE BUDGET -------------- ¶2. (SBU) On October 21, Minister of People's Power for Finance Ali Rodriguez formally presented the Bolivarian Republic of Venezuela's 2009 budget to the National Assembly. According to Rodriguez, the BRV forecasts spending 167.5 billion BsF, approximately 78 billion USD at the official exchange rate of 2.15 BsF to 1 USD. This represents an increase of 22 percent over the 137.5 BsF (64 billion USD) budget approved for 2008. (Note: The BRV routinely requests additional spending throughout the budgetary year; for fiscal year 2008, these additional credits have totaled 38 billion BsF (18 billion USD) to date. End Note.) Government revenues, Rodriguez said, are expected to total 155 billion BsF (72 billion USD),leaving a deficit of 12 billion BsF (5.6 billion USD) or 7.4 percent of the budget. The budget includes an assumed inflation rate of 15 percent, a figure which is significantly lower than the 2008 year to date realized rate of 35 percent. Furthermore, the budget posits continued economic growth, utilizing an annual real growth rate of 6 percent. The BRV, Rodriguez said, will maintain currency controls, the current 9 percent value added tax and the official exchange rate of 2.15 BsF to 1 USD. During the press conference following his presentation, Rodriguez attacked capitalism as a complete failure and stated the Venezuelan economy "is one of the most stable economies in the world, despite the financial crisis." -------------- -------------- SHOW ME THE MONEY: REVENUES AND EXPENDITURES DETAILED -------------- -------------- �A;¶3. (SBU) The budget is based on an assumed per barrel oil price of 60 USD; estimated production levels are set at 3.6 million barrels per day, of which 3 million barrels per day would be exported. Rodriguez and the National Assembly's press release both referenced this figure, although the Ministry of Finance's press release quoted a lower production figure of 3.3 million of barrels per day. Oil revenue is forecast to be 46.1 percent of total revenues, an increase of 50 percent from 2008. Non-oil related revenues are predicted to be 46.5 percent of revenue, representing a 24 percent increase over 2008. (Non-oil related revenue comes from taxes on corporations, individuals, inheritance, gaming establishments, lotteries, alcohol and tobacco.) The remaining 7.4 percent of revenues derives from deficit spending. On debt financing, Rodriguez said, Venezuela would see better financing in 2009 because of its relations with China and Russia. He went on to question the country's risk evaluation. ¶4. (SBU) The budget allocates 21 billion BsF (9.8 billion USD) for social investment, including social projects and a portion of Chavez' so-called "mission" programs. Education will receive 42.5 billion BsF (19.8 billion USD) and spending for the health sector will equal 12 billion BsF (5.6 billion USD.) Investment in the vaguely defined national productive activities is allocated 11.3 billion BsF (5.3 billion USD) and governorships, mayoralties and community councils are slated to receive 41.1 billion BsF (19.1 billion USD.) Debt financing for specific projects, such as the modernization of the Venezuelan tax authority, Seniat, and military, equals 4.6 billion BsF (2.1 billion USD.) Investment in the energy sector, including improvements to power plants and hydroelectric dams, totals 2.3 billion BsF (1.1 billion USD.) Details for spending of the remaining 33 billion BsF in the budget are absent. A portion of this amount may be related to spending for debt service and repurchase and government CARACAS 00001477 002 OF 002 employees' salaries, which were not mentioned. -------------- COMMENT -------------- ¶5. (C) In the past, the annual budget has been an unreliable indicator of the true income and expenditures of the BRV. At the date of issuance, however, the 2009 budget may differ if only because a more realistic oil price is used. (The basket of Venezuelan crudes was assessed at approximately 63 USD on October 21.) However, other budget assumptions, such as oil production at 3.6 million barrels per day and inflation at only 15 percent are unlikely to hold true. Post doubts oil production is 3.6 million barrels per day; under current conditions, production is more likely 2.4 million barrels. Given its underlying assumptions, a continued fall in oil prices, and the likely impact of the world financial crisis, the BRV may be unable to met the revenue and expenditure expectations of this budget and may be forced to turn to its array of discretionary funds to make up the difference. CAULFIELD