US embassy cable - 04CARACAS549

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000549 
 
SIPDIS 
 
DEPARTMENT FOR WHA/AND, EB 
NSC FOR CHRIS BARTON 
    TREASURY FOR OASIA - GIANLUCA SIGNORELLI 
USCINCSO FOR POLAD 
 
E.O. 12958: DECL: 02/13/2009 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: AFTERMATH OF DEVALUATION: INFLATION AND PRIVATE 
ECONOMIC ASSESSMENTS 
 
REF: (A) CARACAS 429 (B) CARACAS 103 
 
CLASSIFIED BY: AMBASSADOR CHARLES S. SHAPIRO FOR REASON 1.4 (B) AND (D) 
 
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SUMMARY 
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1. (C) THE GOV FOLLOWED ITS FEBRUARY 9 DEVALUATION (REF A) 
WITH PRICE INCREASES ON SOME IMPORTANT PRICE-CONTROLLED 
STAPLES THE NEXT DAY.  THE CHIEF ECONOMISTS OF VENEZUELA'S 
TWO LARGEST BANKS SAW THE DEVALUATION DIFFERENTLY IN 
CONVERSATIONS WITH ECONOFF.  LUIS ZAMBRANO OF BANCO MERCANTIL 
SAID THE DEVALUATION SURPRISED HIM BECAUSE OF ITS EXPECTED 
NEGATIVE POLITICAL IMPACT FOR THE CHAVEZ GOVERNMENT. 
GIOVANNI DI PLACIDO OF BANCO PROVINCIAL BELIEVED THE TIMING 
OF THE DEVALUATION WAS INTENDED TO LOWER THE GOV'S COSTS ON 
EXPECTED BOND SWAPS.  WHILE THE DEVALUATION'S IMPACT ON THE 
MAGNITUDE OF INFLATION IS DEBATABLE, THE EFFECTS OF CHRONIC 
HIGH INFLATION ON THE VENEZUELAN ECONOMY ARE SURE TO BE FELT. 
 END SUMMARY. 
 
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    IMMEDIATE PRICE HIKES 
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2. (U) THE INFLATIONARY PASS-THROUGH FROM THE GOV'S FEBRUARY 
9 DEVALUATION OF THE BOLIVAR WAS RAPID.  ON FEBRUARY 10, THE 
MINISTRY OF PRODUCTION AND COMMERCE RAISED THE CEILINGS ON A 
RANGE OF PRICE-CONTROLLED STAPLES INCLUDING CORN FLOUR, 
PASTEURIZED WHITE CHEESE, COFFEE AND CORN AND SUNFLOWER OILS. 
 THE PRICE HIKES RANGED FROM 10 PERCENT ON CORN FLOUR TO 30 
PERCENT ON COFFEE.  THE MINISTRY COMPLETELY REMOVED PRICE 
CONTROLS ON PASTEURIZED MILK.  THE INCREASES CAME AFTER 
PUBLIC PRONOUNCEMENTS FROM MINISTER OF FINANCE TOBIAS NOBREGA 
DISCOUNTING IMMEDIATE INFLATIONARY EFFECTS FROM THE 
DEVALUATION. 
 
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SURPRISED? YES, AND... 
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3. (SBU) LUIS ZAMBRANO, CHIEF ECONOMIST OF BANCO MERCANTIL, 
VENEZUELA'S LARGEST BANK, TOLD ECONOFF FEBRUARY 11 THE TIMING 
OF THE DEVALUATION WAS A SURPRISE.  HE SAID BANCO MERCANTIL 
HAD EXPECTED A DEVALUATION IN 2004, BUT NOT UNTIL A 
RESOLUTION OF THE CURRENT POLITICAL CRISIS.  ZAMBRANO 
PRESENTED THE BANK'S THREE NEW ECONOMIC SCENARIOS FOR THE 
YEAR BASED ON CONTINUATION OF THE CURRENT ADMINISTRATION OR 
POLITICALLY STRONGER OR WEAKER SUCCESSOR GOVERNMENTS TO THE 
CHAVEZ REGIME.  UNDER ALL THREE SCENARIOS, HE EXPECTED 
INFLATION TO BE MUCH HIGHER THAT THE GOV PROJECTED 25 PERCENT 
FOR THE YEAR.  THE ESTIMATES RANGED FROM 35 PERCENT UNDER A 
WEAK SUCCESSOR GOVERNMENT TO JUST OVER 40 PERCENT SHOULD 
    CHAVEZ CONTINUE IN POWER.  DESPITE HIGHER INFLATION, ZAMBRANO 
FORESAW POSITIVE ECONOMIC GROWTH FOR 2004 RANGING BETWEEN 7.6 
PERCENT UNDER A CONTINUED CHAVEZ REGIME AND 9.2 PERCENT UNDER 
A WEAKER TRANSITION GOVERNMENT.  BANCO MERCANTIL PROJECTED 
BETWEEN USD 3 AND 4 BILLION IN DEBT PLACEMENTS THIS YEAR. 
 
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NO 
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4. (SBU) FROM BANCO MERCANTIL'S CHIEF RIVAL, BANCO 
PROVINCIAL, THE VIEW WAS SOMEWHAT DIFFERENT.  BANCO 
PROVINCIAL CHIEF ECONOMIST GIOVANNI DI PLACIDO TOLD ECONOFF 
FEBRUARY 12 THAT THE DEVALUATION WAS NOT A SURPRISE TO HIM 
PRECISELY BECAUSE OF EXPECTED DEBT ISSUANCES.  HE SAID GOV 
REFINANCING OF INTERNAL DEBT WITH EXTERNAL DOLLAR-BOND ISSUES 
WAS IMMINENT AND THE DEVALUATION WAS SIMPLY A WAY OF LOWERING 
THE UP-FRONT COSTS OF THOSE EXERCISES.  UNLIKE ZAMBRANO, DI 
PLACIDO STRESSED THE IMPORTANCE OF CHAVEZ'S RECENT BOUNCE IN 
PUBLIC OPINION POLLS AS PROVIDING A POLITICAL MARGIN FOR 
ERROR THAT WOULD CUSHION ANY NEGATIVE FEEDBACK FROM THE 
DEVALUATION AND THE ENSUING UP-TICK IN INFLATION.  DI PLACIDO 
ALSO WAS MORE CONSERVATIVE IN HIS ASSESSMENT OF THE 
INFLATIONARY IMPACT OF THE DEVALUATION WITH A PROJECTION OF 
ANOTHER 4.5 TO 5 PERCENT ON TOP OF THE EXPECTED GOV RATE OF 
25 PERCENT.  HIS PROJECTION FOR ECONOMIC GROWTH FOR THE YEAR 
 
CARACAS 00000549  002 OF 002 
 
PLACIDO'S CONVICTION THAT THE INFLATIONARY 
EFFECT OF DEVALUATION WILL BE RELATIVELY MILD, THE FISCAL 
POLICIES OF THE GOV LIKELY WILL FUEL HIGHER INFLATION THAN 
LAST YEAR'S 27.1 PERCENT (REF B).  THAT FIGURE INCLUDED A 
HOST OF PRICE-CONTROLLED STAPLES THAT WILL HAVE TO BE 
ADJUSTED TO THE BOLIVAR'S NEW VALUE.  HOWEVER, THE GOV HAS 
BEEN REMARKABLY SUCCESSFUL IN ITS BOND OPERATIONS OVER THE 
PAST YEAR AND THE HIGH YIELD BONDS ARE ATTRACTIVE VEHICLES 
FOR INVESTORS.  THE NET RESULT FROM FUTURE DOLLAR-CONVERTIBLE 
BOND ISSUES WILL BE SOME TEMPORARY PULL BACK ON THE 
UNOFFICIAL EXCHANGE RATE, WHICH HAS AT TIMES TOPPED TWICE THE 
OFFICIAL RATE, AND A SOFTENING OF INFLATION FROM THAT 
QUARTER.  THE HIGH-SPENDING WAYS OF THE CHAVEZ GOVERNMENT 
ALSO FIGURE IN THE MIX, SO THAT INFLATION WILL PROBABLY 
NECESSITATE ANOTHER DEVALUATION BEFORE YEAR'S END. 
SHAPIRO 
 

 
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      2004CARACA00549 - CONFIDENTIAL