THE 64 BILLION DOLLAR QUESTION: HOW MUCH CASH

C O N F I D E N T I A L CARACAS 001554

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E.O. 12958: DECL: 10/31/2018
TAGS: ECON EFIN PGOV VE
SUBJECT: THE 64 BILLION DOLLAR QUESTION: HOW MUCH CASH
DOES THE BRV HAVE AVAILABLE?

REF: A. CARACAS 622

B. CARACAS 276

C. CARACAS 1428

D. CARACAS 559

E. 2007 CARACAS 2207

F. CARACAS 190

Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b)
and (d).


1. (C) Summary: President Chavez has argued that the
Bolivarian Republic of Venezuela (BRV) can endure a period of
low oil prices by drawing down his government's savings.
While no one disputes the BRV Government (GBRV) has
accumulated financial assets during the oil bonanza, the
value and liquidity of these assets is a wild card given the
government's deliberate lack of transparency. Some estimates
value these assets at as much as USD 125 billion (including
international reserves, and with bolivars (Bs) converted to
dollars at the official exchange rate). Figures of this
magnitude, while perhaps technically correct given the
methodology employed and information available, greatly
overstate the actual value of liquid assets available to the
GBRV over the next several years. A more plausible estimate
would be USD 89 billion (with Bs converted to USD at the
official rate),broken down as follows: USD 40 billion in
reserves, USD 15 billion in funds outside of reserves, Bs 53
billion in bolivar assets, and the equivalent of USD 10
billion in funds whose denomination (Bs or USD) is not clear.
Even this estimate overstates the GBRV's room to maneuver.
A significant drawdown of these assets, should it take place,
could provoke an economic crisis before they were depleted.
End summary.

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International Economic Crisis? No Problem
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2. (U) GBRV officials have adopted a nonchalant attitude in
public regarding the potential impact of the international
financial crisis on Venezuela. President Chavez and Minister
of Finance Ali Rodriguez have both argued that Venezuela has
enough savings to weather a period of low oil prices.
According to press reports, Chavez told the Council of
Ministers that Venezuela has USD 100 billion in reserves and
special funds, including USD 40 billion in reserves at the
Central Bank (BCV),USD 30 billion in the National
Development Fund (Fonden),and USD 12 billion in the
China-Venezuela joint fund (ref A). The chairman of the
Finance Committee in the National Assembly, however, claimed
the GBRV had USD 30 billion in funds outside of international
reserves. To put these figures in perspective, Venezuela is
on track to import USD 50 billion worth of goods in 2008, and
its 2007 GDP was USD 225 billion, converting Bs to USD at the
official rate of 2.15 Bs/USD.

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Estimates All Over the Map
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3. (C) Estimates by local economists of the GBRV's financial
assets are similarly disparate. The BCV's figures for
international reserves and the macroeconomic stabilization
fund (FEM),currently at USD 39 billion and USD 1 billion
respectively, are considered reliable. Excluding reserves
and converting Bs to USD at the official rate, Sintesis
Financiera (a local economic consultancy) estimates GBRV
financial assets at USD 85 billion; Banco Mercantil (strictly
protect) at USD 74 billion; Ecoanalytica (another
consultancy) at USD 57 billion; Miguel Octavio (a blogger and
financial sector executive) at USD 31 billion; and Hugo Faria
(strictly protect; a local economist) at USD 25 billion.


4. (SBU) In part these estimates, which were generally made
from July to September 2008, are so disparate because of
differing methodologies. The Sintesis Financiera estimate,
for example, is the only one which includes PDVSA's accounts
receivables (USD 18 billion). The Ecoanalytica estimate
includes funds with China and Iran as separate line items,

whereas other estimates include these funds only if they
appear on the balance sheet of a GBRV institution. Some
estimates include estimates of PDVSA's cash position; others
do not.


5. (SBU) The central reason these estimates are so
different, however, is a deliberate lack of transparency on
the part of the GBRV. The BCV maintains transparency: it
publishes the value of reserves it holds on a daily basis and
a breakdown of the composition of the reserves on a monthly
basis. On the other end of the transparency scale are Fonden
and PDVSA. Fonden generally publishes a one-page balance
sheet expressed in bolivars twice a year. This statement
contains no important details (like how assets are invested),
and the most recent statement (for the period ending June 30,
2008) was withdrawn from Fonden's website. President Chavez
gives seemingly conflicting accounts of Fonden's available
assets. We would not be surprised if Fonden's true financial
situation is unknown to almost all senior BRV officials: one
senior official in the Ministry of Finance told us he was
once chastised for inquiring (ref B). For a more detailed
discussion of the black box that is PDVSA's finances, see ref

C.

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Looking at the Institutions
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6. (C) Given the likelihood the GBRV will draw on its
financial assets over the next year (ref C),the key question
is how much these assets are worth should they be liquidated
on short notice. The rest of this paragraph addresses this
question by looking at the major institutions holding GBRV
financial assets, distinguishing between hard currency
(calculated in dollars) and bolivar assets.

-- BCV (international reserves and FEM). As of October 27,
the BCV reported USD 39.3 billion in international reserves
and USD 830 million in the FEM, for a total of USD 40
billion. Local economists believe these numbers are
credible. Given the BCV's methodology, they should reflect
the actual current value of the reserves. It would be
difficult, however, for the BCV to liquidate its gold
reserves, known as monetary gold, valued at USD 9.5 billion
in September 2008. (Note: Given the de-facto subordination
of the BCV to the GBRV, the GBRV can access BCV reserves by
having any amount above an optimum threshold, currently
evaluated at USD 33 billion, transferred to Fonden. End
note.)

-- BCV (GBRV deposits in bolivars). As of September 30, the
BCV reported holding deposits of Bs 11.3 billion on behalf of
public entities. Per the BCV's monetary base figures,
updated weekly, the major depositors are the National
Treasury, PDVSA, and other government entities, roughly in an
8:1:1 ratio.

-- Fonden. Fonden is the largest of a number of off-budget
discretionary funds created by the GBRV. It is financed by
transfers of hard currency from PDVSA and the BCV, and,
according to a recent decree, by windfall "contributions"
from oil producers (ref D). Fonden's June 30 2008 balance
sheet showed assets of Bs 31.7 billion (USD 15 billion),of
which Bs. 16.5 billion (USD 7.7 billion) was committed to
projects but not yet executed. The current value, liquidity,
and denomination (USD or Bs) of these assets are not known.
According to the June balance sheet, Bs. 4.4 billion (USD 2
billion) are in cash and Bs. 27.2 billion (USD 12.6 billion)
are in trust funds ("fideicomisos") apparently mostly managed
by the Banco del Tesoro (see below).

-- Bandes (Economic and Social Development Bank of Venezuela,
a state-owned bank). Bandes publishes a one-page balance
sheet each month expressed in bolivars. Its most significant
assets are Bs 15 billion (USD 7 billion) invested in
securities, of which Bs 9 billion (USD 4 billion) apparently
corresponds to China's portion of the China-Venezuela joint
fund (ref E) and is held in a trust fund managed by the Banco
del Tesoro (see below). (Note: Despite President Chavez'

announcement on his recent trip to China of an agreement to
double the fund, a China Development Bank official (strictly
protect) told EconOff that the bank, which loaned the initial
USD 4 billion, was "studying" the proposal to double the fund
and had not agreed to any further loans. End note.) Bandes
also manages trust funds worth Bs 21 billion (USD 10
billion),primarily on behalf of federal and regional
government institutions. We do not know what percentage of
the securities and trust funds are denominated in dollars,
nor do we know the current value or liquidity of these
assets. Sintesis Financiera "extrapolates based on informal
information received almost a year ago" that 80 percent of
the trust funds managed by Bandes are dollar-denominated.

-- PDVSA. Only a few of the estimates presented in paragraph
3 included cash assets controlled by PDVSA. Ecoanalitica
estimated the value of such assets at USD 1.3 billion, and
Miguel Octavio asserted PDVSA "reportedly" had USD 3 billion
and Bs 3 billion in cash. Given persistent indications of
cash flow problems at PDVSA and the GBRV's voracious use of
PDVSA revenue for social spending and transfers to Fonden, we
do not believe PDVSA has significant liquid financial
resources the BRV could tap. Although PDVSA has accumulated
USD 21.5 billion in accounts receivable (according to its
June 30, 2008 financial statement),the current market value
of this supposed asset is probably negligible, as it
represents future obligations from Petrocaribe participants
(and possibly compensates for inflated sales).

-- Banking system deposits. Per statistics available from
the Superintendency of Banks (SUDEBAN) and considered
reasonably reliable, as of September 2008 the public sector
had Bs 37 billion deposited in the local banking system.
These bolivar-denominated assets are liquid, with the proviso
that their large-scale withdrawal would cause immediate
liquidity and near-term solvency problems at a number of
smaller and medium-sized banks.

-- Office of the National Treasury (ONT). As noted above,
the ONT maintains an account in Bs at the BCV. It also has
assets in trust funds managed by Banco del Tesoro (see
below). Finally, the ONT likely manages dollar assets in
offshore accounts. Ecoanalitica valued the latter at USD 2.5
billion in August 2008 based on sources in the national
budget office. Other estimates do not include a line item
for these assets; Sintesis Financiera, for example, notes
there is no available information to allow an estimate.

-- Banco del Tesoro (a state-owned bank). Banco del Tesoro's
capital is minimal, but according to its June 30, 2008
financial statement it manages significant trust funds valued
at Bs 46 billion (USD 21.4 billion) on behalf of several GBRV
entities, including Fonden (Bs 26 billion, or USD 12
billion),Bandes (Bs 12 billion, or USD 5.6),and the
National Treasury (Bs 4 billion, or USD 1.8 billion). Per
the financial statement, Bs 6 billion of the assets held by
these trust funds are denominated in bolivars. The rest are
denominated in dollars and mostly consist of short-term
securities (generally maturing in less than one year) emitted
by major international investment banks. The structure of
these securities is unclear, making it impossible to estimate
losses that might have resulted from the international
financial crisis. Per the financial statement, USD 2 billion
corresponded to structured notes backed by Argentine,
Ecuadorian, and Venezuelan debt (ref F),and USD 500,000
corresponded to a securities emitted by Lehman Brothers. The
funds held on Bandes' behalf represent the China-Venezuela
joint fund.


7. (C) Summing up the assets mentioned in paragraph 6 and
discounting by 30 percent any assets whose liquidity or
current value is in doubt (i.e., all assets except those held
by the BCV or as deposits in the banking system),we arrive
at an estimate of USD 89 billion in total financial assets
available to the GBRV in the short term, with Bs assets
converted to USD at the official rate. This figure can be
broken down as follows: USD 40 billion in reserves, USD 15
billion in funds outside of reserves, Bs 53 billion in
bolivar assets, and the equivalent of USD 10 billion in funds

whose denomination (Bs or USD) is not clear. This estimate
is based on a number of admittedly questionable assumptions,
including the discount percentage used and the figures taken
from the balance sheets of many of the GBRV institutions.


8. (C) A variety of factors limit the actual amount the GBRV
could draw on to cover budget or currency shortfalls. Some
of the specific factors are mentioned above, including
problems associated with a large scale withdrawal of GBRV
funds from the banking sector, the fact that some of Fonden's
assets are already committed to projects, and the difficulty
of liquidating a large position in monetary gold. In
addition, there are some restrictions on how the
China-Venezuela joint fund can be used, with a small team
from the Chinese side present in Caracas to monitor
implementation. More generally, a significant drawdown of
financial assets by the GBRV, should it take place, could
provoke an economic crisis before the drawdown was complete
as expectations of a crisis increased.

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Comment
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9. (C) The deliberate lack of transparency in many GBRV
financial institutions and PDVSA makes it impossible to
develop an accurate estimate of the current value of the
GBRV's financial assets. Indeed, we would not be surprised
if no one in the GBRV, including President Chavez himself,
could give an accurate estimate. Our analysis in paragraph
six is useful as a ballpark guide, however. It gives a sense
of the room President Chavez has to maneuver in 2009, as he
reviews options such as reducing spending, issuing internal
debt, raising taxes, further restricting imports at the
official rate, and/or a devaluation in order to keep
Venezuela's economy propped up at the lowest political cost
should oil prices remain below USD 70 per barrel. While not
publicly admitting it, the GBRV already appears to be
operating in a tighter financial environment: several
pending nationalization deals have yet to be struck, for
example, and payment has not materialized for others
(septel). We will return to this analysis of the GBRV's
financial assets as the economic situation and GBRV policy
evolve. End comment.
CAULFIELD