US embassy cable - 04CARACAS2487

C O N F I D E N T I A L  CARACAS 002487 
 
SIPDIS 
 
 
STATE FOR WHA/AND 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 08/04/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: ECONOMY ON UPSWING AS REFERENDUM DRAWS NEAR 
 
REF: A. CARACAS 1554 
 
     B. CARACAS 2034 
     C. CARACAS 2198 
     D. CARACAS 2365 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.5 D 
 
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SUMMARY 
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1. (SBU) In accordance with a decree issued by President 
Chavez in May, the minimum wage rose 10% on August 1, after 
having increased 20% on May 1.  Meanwhile, the parallel 
dollar rate remains steady at lower levels than before, much 
more foreign currency is available than at any time since 
exchange controls were instituted, and Venezuelan oil prices 
continue to hover near record levels, which has facilitated a 
significant increase in government spending.  Some business 
activity may be slowing down, as retailers in particular face 
pre-referendum jitters.  But two weeks before the referendum, 
President Chavez could hardly ask for anything more from the 
economy, given its structural flaws. 
 
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THE GOVERNMENT KEEPS GOING FOR STIMULUS 
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2. (U) August 1 marked the implementation of a 10% increase 
of the minimum wage to 321,235.20 bolivars per month, the 
second and last phase of a May presidential decree that 
raised it 20% at that time (ref a).  This puts it ahead of 
inflation, which according to GOV figures is running at 12.6% 
for the year to date.  The new minimum wage, USD 167 per 
month at the official exchange rate, however, is still 0.3% 
less than the most recent (June) official value of the basic 
food basket for a family of five. 
 
3. (SBU) Meanwhile, there are plenty more US dollars 
available in the economy, thanks to the Commission for 
Foreign Exchange Administration (CADIVI).  June liquidations 
by the Central Bank, while only 46% of what CADIVI approved, 
were still 56% greater than in May, and preliminary July 
results are show a pace to more than double June.  This may 
be a temporary surge only, as the GOV just increased (from 
USD 2000 to 3000) the amount Venezuelans traveling abroad can 
spend each calendar year, and also approved up to USD 1500 
annually for purchases via the internet.  Since this has just 
taken effect, this amount may be high as people rush to take 
advantage.  (Caracas newspapers are full of advertisements 
from banks selling debit cards to allow consumers to access 
these dollars.) 
 
4. (U) The GOV is even more directly involved, with spending 
growing briskly.  (See ref c.)  In just the first two weeks 
of July, primary government spending was equal to the entire 
amount spent in April of this year (USD 1.4 billion), and 
three-quarters of what was spent in June.  Budgeted primary 
spending for all of 2004 was only USD 18.0 billion (1.5 
billion per month) at the current exchange rate.  The GOV is 
giving no sign that it will stop soon, as it has recently 
announced USD 364 million will be spent from the new PDVSA 
social fund (ref b). 
 
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WHILE THE REST OF THE ECONOMY MOSTLY COOPERATES 
--------------------------------------------- -- 
 
5. (U) Other economic indicators show good news, as well. 
The parallel exchange rate continues to appear strong for the 
government, as it has fallen fully half the distance from its 
high of 3350 in early March to its current rate of 2620. 
While up a bit from 2525 in early July, it has remained close 
to its current level for about two months.  This is somewhat 
surprising, considering that monetary liquidity has increased 
10% over roughly the same period.  It is partly attributable 
to oil prices, which continue to float at record levels, 
putting the average price for the Venezuelan basket of crudes 
at USD 35.71 per barrel, the highest price of 2004.  The 
average price for 2004 to July 17 was USD 30.66.  The 
Venezuelan stock market is booming, up over 22% in 2004 after 
a 177% climb in 2003.  CANTV, the principal Venezuelan phone 
 
company, announced on July 29 that its second quarter 
revenues increased over 15% since 2003, and looking up in the 
future, as rate increases had just been approved by the GOV. 
 
6. (SBU) There are, however, some signs that some economic 
activity is being adversely affected by the lead-up to the 
recall referendum.  An executive with a U.S. bank which 
handles correspondent banking relationships for several 
Venezuelan banks (principally letters of credit for imports) 
said that in the last two weeks business had begun to 
slacken.  Similarly, a businessman whose firm produces 
cosmetics advised us that orders were off.  Both individuals 
suggested that retailers were not re-stocking supplies for 
the time being, mainly because of a fear that post-referendum 
violence could lead to some of that stock being destroyed by 
looters. 
 
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COMMENT 
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7. (C) Combined with the recent VAT tax reduction (ref d) 
(which, though passed into law, has yet to take effect since 
it has not been published in the Official Gazette), the 
aggressive government spending and increased foreign exchange 
conversion demonstrate that Chavez is pulling out all the 
short-term stops to create an atmosphere of economic 
well-being ahead of the referendum.  With oil prices so high, 
he can afford it.  Any throttling back will have to await the 
end of the current cycle of political events (referendum, a 
possible presidential election, gubernatorial elections), 
and/or a break in oil prices. 
Shapiro 
 
 
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      2004CARACA02487 - CONFIDENTIAL