AS DICTATED BY CHAVEZ, CENTRAL BANK TRANSFERS 29

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000096

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR RJARPE
NSC FOR JSHRIER
COMMERCE FOR 4431/MAC/WH/JLAO

E.O. 12958: DECL: 01/23/2019
TAGS: ECON EFIN VE
SUBJECT: AS DICTATED BY CHAVEZ, CENTRAL BANK TRANSFERS 29
PERCENT OF RESERVES TO FONDEN

REF: A. 2008 CARACAS 1554

B. CARACAS 87

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


1. (C) Summary: On January 21, Central Bank of Venezuela
(BCV) reserves dropped by USD 12.5 billion dollars (29
percent of total reserves),apparently reflecting a transfer
of USD 12.3 billion dollars to the National Development Fund
(Fonden). This transfer is unprecedented for its size.
While the BCV has moved "excess reserves" to Fonden every
year since 2005, the current amount is almost twice the
largest amount of any previous year. This transfer gives
President Chavez greater discretion over the use of the hard
currency, but it is inherently inflationary and will put
greater pressure on the parallel exchange rate. Given
Venezuela's precarious economic situation and with lower oil
prices expected to persist through 2009, this transfer is a
brazen move and signals President Chavez will continue to
pursue unorthodox policies until he has no other alternative.
End summary.

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A Quick 12 Billion...
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2. (U) President Chavez announced on January 22 that the BCV
had transferred on January 21 excess reserves estimated at
more than USD 12 billion to Fonden. BCV statistics published
January 22 indicated a drop in reserves on January 21 from
USD 42 billion to 29.5 billion, and an accompanying note
explained that USD 12.3 billion was reclassified in the BCV's
balance sheet from "reserves" to "other assets in hard
currency." Given past practice and Chavez's remarks, this
amount has been or will be transferred to Fonden, a
quasifiscal development fund established in 2005.


3. (U) Transfers of this type began with a 2005 reform to
the Central Bank law requiring the BCV and the National
Assembly to establish an "adequate level of reserves" and
authorizing the one time transfer of USD 6 billion from the
BCV to the government. From 2005 through 2008, the BCV
transferred "excess reserves" worth USD 18.5 billion to
Fonden, which also received USD 27.4 billion from PDVSA in
this time period. (Note: Many local analysts believe
transfers from the BCV to Fonden subsequent to 2005 are
without legal basis. End note.) In remarks in recent weeks,
Chavez had indicated that another transfer from the BCV to
Fonden on the order of USD 12 billion was forthcoming. The
January 21 transfer therefore came as no surprise. It is
unprecedented in terms of its scope, however, as it is almost
twice the previous highest transfer from the BCV to Fonden in
a single year (USD 6.7 billion dollars in 2007).

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...With Strings Attached
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4. (SBU) Transfers of hard currency from the BCV to Fonden
have several significant consequences. First, they give
Chavez greater discretion over how the hard currency is used.
Fonden's finances are not transparent (particularly compared
to the BCV's),and its spending does not go through the
normal budgetary process (ref A). However, these transfers
are inherently inflationary, put pressure on the parallel
exchange rate, and reduce the amount of reserves available to
finance imports through normal channels. Forcing the BCV to
give up dollars without receiving bolivars (Bs) in return is
basically the equivalent of printing money. (Note: The BCV,
when it received the dollars in the first place, would have
put bolivars into the economy in return. Thus, when the
transfer is concluded, the dollars have returned to the
economy but the bolivars previously injected into the economy
have not returned to the BCV. The net result is an increase
in bolivars in the economy. End note.) The transfer puts
pressure on the parallel exchange rate because traders know
the BCV has fewer reserves to back the bolivars in
circulation. With the January 21 drop in reserves, the ratio
of liquidity (M2) to reserves (a measure often used by
traders as a benchmark of expectations for the parallel
exchange rate) increased from 4.5 to 6.5 Bs/USD.


CARACAS 00000096 002 OF 002



5. (SBU) A strange twist on the January 21 transfer, in
addition to its unprecedented size, is the jump in reserves
registered in the last two days of 2008. On December 30 and
31, without any official explanation, BCV reserves rose from
USD 38 to 43 billion. Local economic analysts generally
believe this jump corresponded to sales of dollars to the BCV
by PDVSA and Fonden, although they note the transaction
remains obscure. If indeed Fonden sold dollars to the BCV in
December (receiving bolivars in return),only to have the
dollars transferred back to Fonden in January (without
bolivars returning to the BCV),the two transactions
represent, in the words of one economist, "an unlimited
financing mechanism" with "disastrous" inflationary
consequences if the mechanism continues being used.

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Comment
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6. (C) The transfer of almost 30 percent of the BCV's
reserves to Fonden is a brazen move given the country's
precarious economic situation (ref B) and low oil prices. It
is now abundantly clear that the GBRV cannot maintain imports
at 2008 levels during 2009 without reserves dropping to
critical levels. The transfer signals President Chavez is
unlikely to change Venezuela's economic course until he has
no other alternative. End comment.
CAULFIELD