CHAVEZ AFTER FIVE WEEKS

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 000745

E.O. 12958: DECL: 3/04/09
TAGS: PGOV PREL ECON ETRD VE
SUBJECT: CHAVEZ AFTER FIVE WEEKS

CLASSIFIED BY AMBASSADOR JOHN F. MAISTO. REASON: 1.5 (D).

--------------
SUMMARY
--------------


1. (C) PRESIDENT HUGO CHAVEZ'S FIRST FIVE WEEKS IN OFFICE HAVE
BEEN CHARACTERIZED BY DRAMATIC AND CONFRONTATIONAL ADVANCEMENT OF
HIS AGENDA OF POLITICAL AND INSTITUTIONAL CHANGE, ADMINISTRATIVE
FUMBLING AS HE ATTEMPTS TO INSTALL HIS GOVERNING TEAM, AND
CONTINUITY OF ECONOMIC POLICY FROM THE CALDERA ADMINISTRATION. HIS
IMPATIENCE WITH ESTABLISHED PROCEDURE, PROFOUND SUSPICION OF HIS
POLITICAL ADVERSARIES, AND NEED TO RESPOND TO HIS POPULAR SUPPORT
BASE HAVE LED TO ACTION AND RHETORIC WHICH, WHILE WELL WITHIN THE
BOUNDS OF DEMOCRATIC PRACTICE (EXCEPT FOR REMARK ABOUT THE SUPREME
COURT FROM WHICH HE QUICKLY STEPPED BACK),HAVE GIVEN RISE TO
CHARGES OF AUTHORITARIANISM. HIS ADVERSARIES DEEPLY RESENT HIS
HECTORING WAYS, BUT HIS POPULARITY CONTINUES TO GROW WITH EACH
SLASHING ATTACK AGAINST TRADITIONAL POLITICAL PARTIES AND CORRUPT
PRACTICES. DURING HIS FIRST FIVE WEEKS, DEMOCRATIC INSTITUTIONS--
SUCH AS THE CONGRESS AND THE SUPREME COURT--HAVE LEARNED TO PUSH
BACK WHEN SHOVED, AND A RECOGNIZABLE OPPOSITION IS SLOWLY FORMING
IN THE CONGRESS. IN THE MEANTIME, CHAVEZ'S GREATEST THREAT COMES
NOT FROM HIS POLITICAL ENEMIES, BUT FROM AN ECONOMY WHICH CANNOT
PAY THE GOVERNMENT'S BILLS, GENERATE EMPLOYMENT, OR PROVIDE THE
ADDITIONAL REVENUE NECESSARY TO ADDRESS PRESSING SOCIAL NEEDS. END
SUMMARY.

--------------
THE FIRST FIVE WEEKS
--------------


2. (C) LIKE PECOS BILL RIDING THE TORNADO, PRESIDENT HUGO CHAVEZ
HAS STRAPPED HIMSELF TO THE BACK OF VENEZUELAN DEMOCRACY AND VOWED
TO RIDE IT TOWARDS PROFOUND POLITICAL AND INSTITUTIONAL CHANGE.
UNDAUNTED BY ESTABLISHED PROCEDURES OR THE NICETIES OF
PARLIAMENTARY DISCOURSE, THE AT TIMES RHETORICALLY AGGRESSIVE
CHAVEZ HAS CHALLENGED VENEZUELA'S POLITICAL INSTITUTIONS AND ACTORS
TO RESPOND TO THE RESULTS OF THE DECEMBER 6 ELECTION AND TO MAKE
VENEZUELAN DEMOCRACY RELEVANT TO THE EVERY DAY CONCERNS OF THE
VENEZUELAN PEOPLE.


3. (C) IN SHORT ORDER, CHAVEZ HAS:

-- ISSUED A DECREE CALLING FOR A REFERENDUM ON HIS PROPOSED
CONSTITUTIONAL ASSEMBLY;

-- ORDERED THE NATIONAL ELECTORAL COUNCIL TO BEGIN PREPARATIONS
FOR THE REFERENDUM;

-- ESTABLISHED A PRESIDENTIAL COMMISSION TO LAY THE GROUNDWORK FOR
SUCH AN ASSEMBLY;

-- BEGUN A SERIES OF CONSULTATIONS WITH KEY SOCIAL AND POLITICAL
SECTORS REGARDING THE AGENDA OF THE ASSEMBLY;

-- SUBMITTED AN ECONOMIC AND FINANCIAL ENABLING LAW TO THE
CONGRESS, WHICH, IF APPROVED, WOULD GIVE HIM BROAD POWERS TO
ADDRESS VENEZUELA'S FISCAL CRISIS;

-- JUMP-STARTED HIS SOCIAL AND ECONOMIC DEVELOPMENT PROGRAM
THROUGH HIS "PLAN BOLIVAR 2000," A MILITARY-RUN CIVIC ACTION
PROGRAM (INCLUDING SUCH WARMLY-RECEIVED WORK IN THE POOREST SECTORS
OF CARACAS AS PICKING UP TRASH, PAINTING SCHOOLS, AND STAFFING
CLINICS WITH MILITARY DOCTORS).


4. (C) CHAVEZ HAS PUSHED HIS AGENDA IN A PUGNACIOUS AND
CONFRONTATIONAL FASHION. HE HAS LEAP-FROGGED THE CONGRESS ON THE
CONSTITUTIONAL ASSEMBLY REFERENDUM, THREATENED THE SUPREME COURT
WITH POPULAR WRATH THAT HE WOULD CHAMPION SHOULD IT BLOCK HIS PLANS
FOR A REFERENDUM, AND CHARACTERIZED VENEZUELA'S TRADITIONAL
POLITICAL PARTIES AND INSTITUTIONS AS CORRUPT AND INEFFECTIVE.


5. (C) HIS HARD-HITTING AND POPULIST RHETORIC, WHILE WITHIN THE
BOUNDS OF DEMOCRATIC TRADITION AND PRACTICE, HAS PROVOKED THE
RESENTMENT AND HOSTILITY OF HIS ADVERSARIES. THEIR INITIAL EFFORTS
TO BLOCK OR RE-ROUTE CHAVEZ'S CONSTITUTIONAL ASSEMBLY INITIATIVE
WERE STEAM-ROLLERED BY CHAVEZ, WHO REFUSED TO ALLOW THEIR
INSTITUTIONAL POSITION TO DILUTE OR DIMINISH WHAT CHAVEZ BELIEVES
IS HIS ELECTORAL MANDATE TO EFFECT SWEEPING POLITICAL CHANGES.


6. (C) CHAVEZ'S SUCCESS IN DRIVING HIS POLITICAL AGENDA FORWARD
HAS HAD ONE IMPORTANT CONSEQUENCE: MOVEMENT TOWARDS A
CONSTITUTIONAL ASSEMBLY IS A REALITY. THE QUESTION NOW IS NOT
WHETHER SUCH AN ASSEMBLY WILL HAPPEN, BUT HOW AND UNDER WHAT
CONDITIONS. THE RECOGNITION OF THIS HAS FORCED MOST IMPORTANT
POLITICAL ACTORS TO ACCEPT THE NECESSITY OF CHANGE, AND TO LOOK FOR
A WAY TO LINK THEMSELVES TO THE REFORM PROCESS. AT THE SAME TIME,
CHAVEZ'S CONFRONTATIONAL TACTICS HAVE ACTIVATED NATURAL DEMOCRATIC
DEFENSE MECHANISMS. INSTITUTIONS, SUCH AS THE CONGRESS AND THE
SUPREME COURT, ARE LEARNING HOW TO PUSH BACK WHEN SHOVED. FOR
INSTANCE, WHEN CHAVEZ "THREATENED" THE SUPREME COURT ON ITS PENDING
REFERENDUM DECISION, CHIEF JUSTICE CECILIA SOSA PUBLICLY LECTURED
CHAVEZ ON THE SEPARATION OF POWERS AND MADE IT VERY CLEAR THAT THE
COURT WOULD NOT BE INTIMIDATED. THAT MEETING WAS FOLLOWED BY A
CHAVEZ VISIT TO THE SUPREME COURT, AFTER WHICH HE STATED THAT HE
WOULD, OF COURSE, ACCEPT WHATEVER DECISION THE COURT MADE. THE
RESULT HAS BEEN A CLEARER DEFINITION OF THE INFLUENCE AND AUTHORITY
OF THESE INSTITUTIONS. ALSO, OPPOSITION TO THE GOVERNMENT IS
FORMING IN THE CONGRESS AND ELSEWHERE. THIS OPPOSITION,
RECOGNIZING THE NECESSITY OF CHANGE, IS WORKING TO INFLUENCE THAT
CHANGE, AND ENSURE THAT IT TAKES PLACE WITHIN A DEMOCRATIC AND
CONSTITUTIONAL FRAMEWORK.

--------------
ADMINISTRATIVE FUMBLING
--------------


7. (C) CHAVEZ'S SUCCESS IN DRIVING FORWARD HIS POLITICAL AGENDA
HAS NOT BEEN MATCHED IN THE FORMATION OF HIS GOVERNMENT. SLOW
MINISTERIAL APPOINTMENTS, EVEN SLOWER SELECTION OF KEY DIRECTOR-
LEVEL POSITIONS WITHIN MINISTRIES, AND THE PRESIDENT'S TENDENCY TO
TALK TOO MUCH AND MAKE POLICY DURING PRESS CONFERENCES HAVE GIVEN
THE FIRST MONTH OF GOVERNMENT AN AD HOC, IMPULSIVE QUALITY.


8. (C) LACKING A TESTED, LOYAL PARTY CADRE, AND FACED WITH AN
ANXIOUS AND SOMETIMES INSOLENT GOVERNMENT BUREAUCRACY, CHAVEZ HAS
HAD TO LOOK FOR NEW WAYS TO TAKE CONTROL OF THE MACHINERY OF
GOVERNMENT. ONE WAY HAS BEEN TO NAME FORMER MILITARY OFFICERS TO
KEY POSITIONS WITHIN THE BUREAUCRACY. HIS ADVERSARIES ACCUSE HIM
OF "MILITARIZING" GOVERNMENT. ANOTHER INTERPRETATION WOULD BE THAT
HE IS USING PEOPLE HE KNOWS AND TRUSTS TO GAIN CONTROL AND SET
DIRECTION. IN SOME INSTANCES THIS STRATEGY HAS WORKED, IN OTHERS
IT HAS NOT. WHILE TRUSTWORTHY, MANY OF THE MILITARY APPOINTEES
HAVE NO EXPERIENCE IN CIVILIAN MINISTRIES, HAVE LITTLE POLICY
ORIENTATION, AND EVEN LESS UNDERSTANDING OF THE POLITICAL NATURE OF
THEIR WORK. THE RESULT HAS BEEN UNEVEN PERFORMANCE IN MANY
MINISTRIES.


9. (C) IT IS IMPORTANT TO NOTE THAT CHAVEZ IS IN THE PROCESS OF
SHRINKING THE NUMBER OF MINISTRIES FROM 26 TO APPROXIMATELY 15, AND
HAS DECIDED TO HOLD ALL MINISTRIES AND MINISTERS TO ACCOUNT. THIS
HAS NOT BEEN DONE IN THE PAST. (HE ALSO HAS TO TACKLE THE PROMISED
REDUCTION OF THE NUMBER OF GOVERNMENT EMPLOYEES, WHICH HE IS
AVOIDING FOR THE TIME BEING.) IN THIS REGARD, CHAVEZ HAS INVITED
SCRUTINY WHICH, WHILE IMPORTANT TO THE PROCESS OF CHANGE, WILL BE
PAINFUL FOR A NEW GOVERNMENT TRYING TO GET STARTED. IN SHORT, IT
WILL TAKE A WHILE FOR THE NEW GOVERNMENT TO SETTLE IN.

--------------
CONTINUITY OF ECONOMIC POLICY
--------------


10. (C) CHAVEZ'S CAMPAIGN RHETORIC HAD CREATED CONCERN WITHIN THE
PRIVATE SECTOR THAT THE NEWLY-ELECTED PRESIDENT WOULD IMPLEMENT
POPULIST ECONOMIC POLICY, DEEPENING VENEZUELA'S ALREADY SERIOUS
ECONOMIC PROBLEMS. DURING HIS FIRST FIVE WEEKS IN OFFICE, HOWEVER,
CHAVEZ HAS STEERED CLEAR OF SUCH POLICY, DECIDING INSTEAD TO
MAINTAIN THE REFORM-MINDED ECONOMIC POLICY OF HIS PREDECESSOR.
SPECIFICALLY, CHAVEZ HAS:

-- NAMED MARITZA IZAGUIRRE AS FINANCE MINISTER (SHE WAS CALDERA'S
FINANCE MINISTER AND THE GOV'S LINK TO THE MULTILATERAL BANKS);

-- REQUESTED, IN THE ENABLING LAW HE SUBMITTED TO CONGRESS,
EMERGENCY POWERS TO REINFORCE IZAGUIRRE'S APPROACH TO VENEZUELA'S
FISCAL CRISIS THROUGH COST CUTTING AND REVENUE RAISING MEASURES;

-- LEFT ANTONIO CASAS AS DIRECTOR OF THE CENTRAL BANK

-- MAINTAINED CASAS' SCORCHED-EARTH DEFENSE OF THE STRONG BOLIVAR;

-- BEGUN TALKS WITH THE IMF.


11. (C) CHAVEZ, COGNIZANT THAT HE DOES NOT HAVE THE ECONOMIC
WHEREWITHAL TO MEET VENEZUELA'S PRESSING SOCIAL NEEDS, IS
ATTEMPTING TO ENHANCE GOVERNMENT REVENUES. AGAIN, HE HAS FORSAKEN
A POPULIST APPROACH. INSTEAD, HE HAS:

-- REQUESTED AUTHORITY TO IMPOSE NEW TAXES, INCLUDING A VALUE
ADDED TAX, FINANCIAL TRANSACTIONS TAX, AND REFORM OF THE INCOME TAX
LAW;

-- ORDERED IMPROVED TAX COLLECTION AT SENIAT AND CUSTOMS;

-- LIMITED PUBLIC SECTOR WAGE INCREASES TO TWENTY PERCENT (BELOW
THE 30 PERCENT INFLATION REGISTERED IN 1998, AND THE GOV'S LATEST
PROJECTED INFLATION RATE OF 25 PERCENT IN 1999);

-- AUTHORIZED THE STATE OIL COMPANY PDVSA TO BORROW USD 1 BILLION
(WHICH MATCHES PDVSA'S ANTICIPATED ROYALTIES AND TAXES) ON THE
INTERNATIONAL CAPITAL MARKETS;

-- DECIDED TO FINANCE THE BS 800 BILLION DEFICIT FOR THE FIRST
QUARTER OF 1999 THROUGH REDUCTION IN MONETARY STABILIZATION
INSTRUMENT (TEMS) ISSUANCES AND AN EVEN GREATER EXPANSION IN
ISSUANCE OF NATIONAL PUBLIC DEBT BONDS (DPNS).

--------------
RACE AGAINST TIME
--------------


12. (C) CHAVEZ'S DECISION TO MAINTAIN CONTINUITY OF ECONOMIC
POLICY IS DRIVEN BY THE PRIMACY OF HIS POLITICAL AGENDA. CONCERNED
THAT DRAMATIC ENGAGEMENT WITH THE ECONOMY WOULD EXPOSE HIM TO
POLITICAL ATTACK, CHAVEZ HAS DECIDED TO PUSH HIS POLITICAL AGENDA
AS FAR AND AS FAST AS HE CAN BEFORE TURNING TO DEAL WITH THE
ECONOMY. CONTINUITY OF ECONOMIC POLICY BUYS HIM SOME POLITICAL
SPACE, SINCE THE CONSENSUS AROUND THIS POLICY ALREADY EXISTS.


13. (C) HOWEVER, CHAVEZ CAN ONLY CARRY THIS CONTINUITY FORWARD FOR
SO LONG. HE KNOWS THAT HIS GOVERNMENT SITS ON A CRUMBLING ECONOMIC
BASE. STILL DECLINING OIL PRICES AND SELF-IMPOSED PRODUCTION CUTS
HAVE AGGRAVATED THE CURRENT RECESSION. HIGH INTEREST RATES AND THE
INCREASINGLY OVERVALUED EXCHANGE RATE HAVE UNDERMINED THE HEALTH OF
THE MANUFACTURING, AGRICULTURAL, AND TOURISM SECTORS. INFLATION IS
STILL HIGH.


14. (C) ADDITIONALLY, CHAVEZ STILL HAS TO CONVINCE THE
INTERNATIONAL FINANCIAL INSTITUTIONS (IFIS) AND THE FOREIGN BANKS
THAT HE HAS THE POLITICAL AND ECONOMIC SITUATION IN HAND, AND THE
POLITICAL WILL TO MAKE TOUGH DECISIONS. TO DO THIS HE NEEDS AN
ARRANGEMENT WITH THE IMF AND PERSONAL EXPOSURE IN NEW YORK.
CHAVEZ'S TWO POSTPONED VISITS HAVE HURT HIM, AND HE AND HIS TOP
ADVISORS ARE ONLY NOW UNDERSTANDING HOW MUCH.


15. (C) VENEZUELA'S BATTERED ECONOMIC AGENTS HAVE RESPONDED TO
THESE WEAK ECONOMIC SIGNALS BY PREPARING FOR EVEN MORE DIFFICULT
TIMES:

-- INVESTORS CONTINUE TO SIT ON THEIR WALLETS;

-- BANKS ARE PULLING BACK ON LOAN PORTFOLIOS AND INCREASING
PROVISIONS FOR BAD DEBT;

-- COMPANIES ARE SHUTTING DOWN PLANTS AND ASSEMBLY LINES AND
LAYING OFF WORKERS TO REDUCE COSTS;

-- WHOLESALERS AND RETAILERS ARE LOWERING PRICES TO CUT
INVENTORIES;

-- CONSUMERS ARE FORGOING LUXURY ITEMS, POSTPONING LARGE
PURCHASES, AND PAYING OFF CONSUMER DEBT.


16. (C) AS CHAVEZ ENTERS HIS SECOND MONTH OF GOVERNMENT, THE BIG
QUESTION IS HOW LONG HE CAN POSTPONE MAJOR ECONOMIC REFORMS WHILE
HE FULFILLS HIS POLITICAL AGENDA. THE REFERENDUM FOR THE HOLDING
OF A CONSTITUENT ASSEMBLY IS SCHEDULED FOR APRIL 25. THE ELECTION
OF THE ASSEMBLY, THE WRITING OF A NEW CONSTITUTION, A REFERENDUM TO
ACCEPT THE NEW CONSTITUTION AND THE ELECTION OF A NEW CONGRESS WILL
PROBABLY RUN THROUGH THE END OF THE YEAR.


17. (C) CHAVEZ'S EFFORTS TO MAINTAIN CONTINUITY OF ECONOMIC
POLICY MAY NOT LAST THAT LONG. THE GOV HAS ENOUGH INTERNAL DOLLAR
RESOURCES (THE REMAINING USD 680 MILLION IN TREASURY BONDS RELEASED
FROM THE 1997 GLOBAL BOND SWAP AND USD 160 MILLION IN NON-
MONETARIZED GOLD) TO MEET VENEZUELA'S FOREIGN DEBT PAYMENTS THROUGH
THE END OF MARCH. AFTER THAT IT WILL HAVE TO RELY ON STATE OIL
COMPANY PDVSA'S EFFORTS TO RAISE FUNDS IN THE INTERNATIONAL CAPITAL
MARKETS AND THE CENTRAL BANK OF VENEZUELA'S DECLINING INTERNATIONAL
RESERVES TO FINANCE FUTURE DEBT PAYMENTS. THE PDVSA BORROWING WILL
BE COSTLY (300 TO 400 BASIS POINTS OVER TREASURY RATES) BECAUSE THE
MARKETS KNOW THAT THESE FUNDS WILL END UP IN THE GOV'S ACCOUNTS.
THE GOV WILL ALSO HAVE TO RELY ON THE ISSUANCE OF ADDITIONAL DPNS
TO MEET THE GOVERNMENT PAYROLL. THIS QUIET SCRAMBLE FOR FOREIGN
AND DOMESTIC RESOURCES SHOULD PAY THE GOV'S BILLS THROUGH THE END
OF THE SECOND QUARTER.


18. (C) AFTER THAT, IT IS TOO DIFFICULT TO PREDICT. OIL PRICES
MAY RECOVER, BUDGET CUTS AND REVENUE MEASURES MAY BEGIN TO TAKE
EFFECT, AND THE GOV MAY BE ABLE TO MAKE IT TO THE END OF THE YEAR.
ALTERNATIVELY, THE MARKET COULD LOOSE CONFIDENCE IN THE GOV'S
ABILITY TO FINANCE ITS DEFICIT, PROVOKING A RUN ON THE BOLIVAR AND
A SUDDEN LOSS OF RESERVES. THIS COULD FORCE THE GOV TO IMPLEMENT
PRICE AND EXCHANGE CONTROLS OR A MAXI-DEVALUATION. THE RESULTING
SURGE IN INFLATION COULD THEN UNDERMINE CHAVEZ' POLITICAL SUPPORT
AND INVIGORATE HIS POLITICAL OPPOSITION IN THE MIDST OF THE
POLITICAL REFORM PROCESS.

--------------
WHAT IT ALL MEANS
--------------


19. (C) CHAVEZ WAS ELECTED TO BRING ABOUT SIGNIFICANT POLITICAL
CHANGE IN VENEZUELA. IT IS UP TO HIS GOVERNMENT, THROUGH
CONSTITUTIONAL CHANGE, IMPROVED GOVERNMENT, AND ECONOMIC REFORM, TO
MAKE DEMOCRACY AND ITS INSTITUTIONS MEANINGFUL TO THE EVERYDAY
CONCERNS OF VENEZUELANS. HE UNDERSTANDS THAT HE IS THE
CONSEQUENCE, AND NOT THE CAUSE, OF CHANGE IN VENEZUELA.


20. (C) HE ALSO UNDERSTANDS THAT HIS POLITICAL AGENDA IS MOVING
THROUGH A NARROWING ECONOMIC SPACE. HE MIGHT NOT BE ABLE TO
COMPLETE HIS IMMEDIATE POLITICAL AGENDA BEFORE HE IS CAUGHT IN AN
ECONOMY IN DEEP CRISIS. HOWEVER, HE INTENDS TO GET AS FAR ALONG
THE PATH OF POLITICAL CHANGE AS POSSIBLE. AT THE LEAST, HE HOPES
TO HAVE A CONSTITUTIONAL ASSEMBLY IN PLACE THAT SUPPORTS HIS
POLITICAL AGENDA.


21. (C) CHAVEZ'S FIRST FIVE WEEKS IN OFFICE HAVE BEEN DRAMATIC AND
HIGHLY-CHARGED. NO VENEZUELAN PRESIDENT HAS BROUGHT SUCH
EXPECTATION TO OFFICE. NO VENEZUELAN PRESIDENT HAS SET SUCH A HIGH
STANDARD FOR HIMSELF AND HIS ADMINISTRATION. NO VENEZUELAN
PRESIDENT HAS EVER ANTICIPATED SUCH DIRE RESULTS SHOULD HE FAIL.
GIVEN THIS, CHAVEZ'S IS OFF TO A DECENT START. HOWEVER, TO
SUCCEED, CHAVEZ MUST USE THE NEXT MONTHS TO MAINTAIN THE MOMENTUM
OF HIS POLITICAL AGENDA, IMPROVE HIS ADMINISTRATION, AND HOPE THE
ECONOMY CONTINUES TO HOLD TOGETHER AS HIS INHERITED REFORMIST
ECONOMIC POLICY, WITH HELP FROM THE IFIS AND FOREIGN BANKS, FALLS
INTO PLACE. THIS IS A TALL ORDER, BUT ONE THAT HE APPEARS TO BE
DOGGEDLY COMMITTED TO CARRY THROUGH.


MAISTO