VENEZUELA: THE REVOLUTION ACCELERATES AS THE

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000819

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E.O. 12958: DECL: 06/29/2019
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA: THE REVOLUTION ACCELERATES AS THE
ECONOMY HEADS SOUTH

REF: A. CARACAS 87

B. CARACAS 368

C. CARACAS 330

D. CARACAS 778

E. CARACAS 407

F. CARACAS 305

G. CARACAS 731

H. CARACAS 690

I. CARACAS 307

J. CARACAS 581

K. CARACAS 155

L. CARACAS 149

M. CARACAS 643

N. CARACAS 750

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


1. (C) Summary: As we approach the halfway point of 2009,
two trends are clear in Venezuela's economy: state control
is accelerating just as the economy enters a recession. Most
analysts predict economic output to decline by 1.5 to three
percent in 2009 as lower oil prices force the government of
the Bolivarian Republic of Venezuela (GBRV) to rein in
spending. This sobering outlook has not stopped the GBRV
from expanding its control over the economy, however.
Empowered by the removal of term limits in the February
constitutional referendum, President Chavez has nationalized
companies in additional industry sectors and pushed the
National Assembly to pass several laws increasing the state's
economic power. These and other actions are damaging
regional economies in key areas, including Zulia, Guayana,
and Valencia. Survey results suggest concerns about the
economy's direction are playing a role in a recent dip in
Chavez's popularity, but there is no way of knowing whether
or how these concerns might translate into a more serious
challenge for Chavez. End summary.

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Stagflation Approaches...
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2. (U) The Venezuelan Central Bank (BCV) reported anemic
growth of 0.3 percent in the first quarter of 2009 (with
respect to the same period in 2008). After years of stellar
but decreasing growth, the trend is clear: Venezuela's
economy is all but certain to enter into recession in 2009,
with most local analysts predicting a two to three percent
contraction. With oil prices significantly lower than in
2008, the GBRV has been forced to rein in spending, which had
served as the main economic driver from 2004 on (ref A). The
latest BCV statistics available indicate central government
spending declined by 7 percent in nominal terms in the first
two months of 2009 (relative to the same period in 2008).


3. (SBU) The "anticrisis" economic measures announced by
Chavez in March amount to little more than a plan to finance
the projected budget deficit by issuing local debt (ref B),a
plan the GBRV has been aggressively implementing. To ensure
a receptive local market, the BCV has loosened monetary
policy. While many analysts have lowered their expectations
for inflation for 2009 (from roughly 35-40 percent to 28-35
percent) as a result of a larger-than-expected contraction
and GBRV efforts to control food prices, they generally
expect inflation to be higher in 2010 than 2009, partly as a
result of the BCV's accommodating monetary policy. BCV data
and pollsters' numbers indicate that many Venezuelans are
suffering declining purchasing power. In the last quarter of
2008 and the first quarter of 2009, accumulated inflation was
12.6 percent while compensation to salaried workers rose only
2.7 percent, according to BCV figures.

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...And Chavez Tightens the Economic Screws
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4. (SBU) Even as the economy heads toward stagflation,
Chavez has stepped up his campaign to increase central
government control after a relative hiatus beginning in the
run-up to the November 2008 regional elections and lasting

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through the February 2009 referendum. Specific GBRV actions
in recent months include: nationalizing ports and airports
(March 12; ref C),and then port service companies (mid-June,
ref D); announcing the seizure of Venezuelan carrier
Aeropostal (March, ref E); nationalizing a Cargill rice plant
(March, ref F); banning the sale of Coca Cola Zero for
unsubstantiated health concerns (June, ref G); reaching an
agreement for the nationalizations of Banco de Venezuela,
which the GBRV will take over July 3, and steel-maker Sidor,
which the GBRV had already taken over (May, ref H); taking
over more agricultural lands (ongoing, ref I); expropriating
the assets of numerous oilfield service companies, including
several whose operations are critical to production (May, ref
J); and, most recently, decreeing the nationalization of iron
briquette companies in Guayana, making it illegal for
construction companies to adjust prices for inflation,
passing a law mandating state control over the petrochemical
industry, and opening debate on a law over "social property."


5. (C) While nationalizations are not new to Venezuela, the
pace has picked up again. The best explanation we have heard
as to why comes from Rafael Munoz (strictly protect
throughout),a political economist at Banco Mercantil. On
the one hand, Munoz argues, Chavez has sufficient liquid
reserves in quasifiscal funds that he is not forced to
negotiate with other economic actors. On the other hand, the
current window between the February referendum and future
electoral challenges, such as National Assembly elections
scheduled for 2010, offers Chavez an important opportunity to
consolidate his political and economic control in what is at
its core a totalitarian project. The actions mentioned in
the preceding paragraph represent the gamut of GBRV tactics
for increasing economic control, from outright expropriation
to harassment of private companies to legal changes that pave
the way for future state actions.

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The Revolution is Coming Closer
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6. (C) While the general economic situation affects all
Venezuelans, several of our contacts believe Chavez's
specific actions are directly affecting a growing proportion
of the population. Munoz believes there is a palpable sense
among even Venezuelans of modest means that "the revolution
is coming closer" in the sense of potentially affecting their
humble aspirations. Another contact, who advises on mergers
and acquisitions, noted recent government actions are harming
key regional economies, including Zulia (via recent service
company nationalizations); Guayana (via the briquette
nationalizations and the continued consolidation of economic
activity under the state-owned Corporacion Venezolana de
Guayana; and Valencia (where government control over key
imports for automobile assemblers (ref K) has led to
widespread work stoppages). The government's accelerated
drive to control the economy is having international
repercussions as well. Media reports indicate that the
Japanese Bank for International Cooperation is rethinking a
potential USD 1.5 billion loan to PDVSA and that Argentine
industrialists have expressed their displeasure to President
Kirchner over the ongoing nationalizations. (Note: Both
Japanese and Argentine companies had interests in the
briquette manufacturers; Japanese companies have interests in
the petrochemical sector as well. End note.) On the other
hand, there are indications that companies from countries
considered friendly by the GBRV are being favored in other
situations (ref L).

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Increasing Tension, No Clear Outlet
--------------


7. (C) If many of our contacts think economic tensions are
rising, no one has a clear sense of whether or how they might
translate into a political challenge for Chavez. There are
some preliminary indications that more Venezuelans believe
President Chavez is responsible for the country's economic
problems, but no clear evidence of a trend. There has been
an increase in labor unrest, but the labor movement as a
whole is divided and confused, according to a prominent labor

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analyst (ref M). Munoz, who has studied the political,
social, and economic factors behind the 1989 uprising known
as the Caracazo, believes current conditions are equally ripe
for large-scale public unrest. He points to the
deteriorating economy, a growing sense that one cannot get
one's problems resolved through current political
institutions (including opposition parties, and especially
given the possibility of indefinite reelection),and the
feeling that the revolution is hitting closer to home. Just
because the conditions are ripe, Munoz cautions, does not
mean a generalized reaction will happen, nor does it allow us
to predict when, where, and why it might.

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Comment
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8. (C) Even with the steady rise in oil prices from January
through June, 2009 is shaping up as a grim year economically
for Venezuela. While economic problems could conceivably
cause or contribute to a serious political challenge for
President Chavez, it would be wrong to assume they will.
Given Chavez's already significant political and economic
control and ability to repress selectively actors who
challenge this control (ref N),there is no obvious channel
for discontent over economic problems to express itself in a
generalized way. End comment.
CAULFIELD