US embassy cable - 04CARACAS2814

C O N F I D E N T I A L  CARACAS 002814 
 
SIPDIS 
 
 
STATE FOR WHA/AND 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 8/12/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: GOV TAKES FULL CREDIT FOR GDP GROWTH, BUT STILL 
PASSES BLAME 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A 
ND D 
 
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SUMMARY 
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1. (SBU) First half GDP statistics show a 23.1% increase over 
last year, which also represents the first improvement over 
2002 figures.  Second quarter growth was 13.6%, led by 
non-petroleum growth of 15.0%.  Considering these factors, 
the GOV has revised its 2004 growth estimate from 6 to 12%. 
Meanwhile, S&P raised Venezuela's long and short-term credit 
ratings to B.  The official GOV line, in public and private, 
is that things are good, are going to get better, and that 
the only reason they are not better now is because of the 
general strike of December 2002-February 2003, not the 
government.  In its annual report for 2003 as elsewhere, the 
GOV downplays the fact that good news are largely a result of 
the substantial increase in oil prices in 2003 and 2004.  END 
SUMMARY. 
 
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THINGS ARE GOOD - BUT IF NOT, IT'S NOT OUR FAULT 
--------------------------------------------- --- 
 
2. (U) New GDP statistics released recently by the Venezuelan 
Central Bank (BCV) indicate that not only did Venezuelan GDP 
grow 23.1% in 2004 compared to the same period of 2003 (with 
growth in all sectors of the economy for the first time in 
three years), but that it grew by 4.4% over the same period 
in 2002, before the two month general strike of 2002-2003. 
The increase is in part because the government also revised 
the first quarter growth upward, from 29.8% to 34.8%.  Second 
quarter growth was not only 13.6% compared to last year, but 
4.5% over the first quarter of 2004.  Almost simultaneous to 
these announcements, Standard and Poor's raised Venezuela's 
long and short-term credit ratings (from B- and C, 
respectively) both to B. 
 
3. (SBU) The GOV, while taking credit for the recent good 
news, has avoided all responsibility for Venezuela's economic 
problems by blaming the participants of the December 
2002-February 2003 general strike, as criticism of their 
economic policy has continued.  The Ministry of Finance's 
"Summary of Year 2003" (written in early 2004 but distributed 
only recently) starts and continues for much of the text by 
blaming the strike, and 2002 pre-strike activities, for all 
problems in the economy.  The report uses harsh language, 
repeatedly citing "financial blood-letting," the "devastating 
effect" of the strike, the "immense harm inflicted on the 
country," "traitors and conspirators," "political 
destabilization," and the "ferocious media campaign against 
the national economic policy."  Y2003 claims that the effects 
of the strike "cannot be erased for a long time," and adds 
that those who called for the strike, and now blame GOV 
policy for the current problems, "are conceptually and 
morally incapable of speaking to the nation."  It also 
asserts that the strikers have not put forth a recovery plan, 
and now "maintain biased positions which in no way favor 
improvement of the productive climate of the country." 
 
4. (SBU) The report also cites a study conducted by the 
Ministry of Finance to prove just how wrong some of its 
critics were with their own estimates about GDP and inflation 
in 2003.  These errors by "experts" led the Ministry to 
conclude that, "definitely, the country overcame an extremely 
difficult test, and has managed to set itself upon the path 
of economic recovery and growth."  When Finance Minister 
Tobias Nobrega was asked, in an interview televised on August 
28, what the GOV could have done better economically over the 
last five years, he could only come up with "perhaps a 
mistake was not to have applied exchange controls in February 
2002." 
 
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WE'RE DOING THINGS RIGHT, BUT DON'T ASK FOR SPECIFICS 
--------------------------------------------- -------- 
 
5. (SBU) Not until page 9 of the 36 page text does the study 
mention a single action by the GOV - the imposition of 
 
 
exchange controls.  It then lauds the work of the Foreign 
Exchange Control Administration (CADIVI): "the objective of 
protecting the international reserves and avoiding the 
financial blood-letting of the country has been achieved. 
International reserves closed 2003 above USD 20 billion.  The 
specter of a moratorium or cessation of payments has 
dissipated.  The patrimony of the Venezuelans was preserved." 
 Some of the alleged achievements are dubious, such as noting 
that CADIVI liquidated 50% of the forex it approved in 2003, 
It also claimed that CADIVI approved - NOT/NOT liquidated - 
"about" what the BCV provided before the "petroleum 
sabotage," though BCV statistics indicate that liquidations 
in 2003 were only about 60% of those in 2002. 
 
6. (C) The improvement of the economy has raised the question 
as to why CADIVI still exists.  The report reminds us that it 
was conceived to be temporary, but "its dismantling can only 
be a response to the disappearance of conditions that gave 
rise to its adoption, that is, the definitive extinction of 
the environment of irrationality and political and economic 
destabilization that has dominated since 2002."  In a private 
conversation with econoff on September 1, Finance Ministry 
Director of Public Credit Alejandro Dopazo confirmed that 
exchange controls will not be lifted until the GOV has the 
mechanisms "to control the capital account."  Nobrega, in the 
August 28 interview, implied that CADIVI was needed because 
Venezuelans still lacked confidence in the economy.  He said 
that exchange controls were "the only manner to guarantee 
that the foreign currency...stays here." 
 
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HERE ARE (SOME OF) THE STATISTICS TO PROVE IT 
--------------------------------------------- 
 
7. (SBU) The GOV has endeavored to justify its performance by 
citing various statistics, but it consistently tells only a 
part of the story.  For example, total GOV income for 2003 
was 88.9% of goal, despite the strike.  However, Customs 
collections were only 57.4% of goal, a side effect of the 
initial sluggishness of CADIVI's operations.  The report says 
that "Plan Zero Evasion" (a program to increase tax 
collections by SENIAT, the Venezuelan tax and Customs agency) 
brought in an additional USD 7.5 million - which is only 
0.13% of total tax revenues - ignoring the fact of increased 
revenue from high petroleum prices.  It lauds the dramatic 
drop in the EMBI Plus risk rating (a measure of credit risk 
of government debt relative to U.S. Treasury bonds) from its 
high in early 2003, but fails to mention that it reached 
similar peaks four other times during Chavez's tenure 
(including February, July and October of 2002), and remains 
higher than Colombia's rating. 
 
8. (C) On government spending, the report cites a budget 
reduction in January 2003, but does not mention - as 
statistics from the Ministry of Finance website show - that 
year-end spending increased by 34.4%.  The budget portion is 
long on names of projects funded, but short on details such 
as amounts spent.  It notes that internal debt increased, but 
not how much.  (According to the Ministry website, it grew 
48.0%.)  On external debt, the report claims that investor 
efforts to sell Venezuelan debt were triggered by the 
"campaign launched against the Republic."  The GOV response 
was to "take advantage of the circumstances in the financial 
market" and lists in great detail - over 15% of the total 
text - the terms of new dollar-denominated bonds that were 
issued that year, but neglects to mention how the total 
external debt was affected (it increased 13.0%, according to 
the website, and from 20.9% of GDP to 26.8%, according to 
VENAMCHAM).  Dopazo was evasive when asked if debt would 
increase this year, saying only that the Ministry is 
"studying" bond options. 
 
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COMMENT 
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9. (C) Comparing 2004 results to strike-affected 2003 is of 
limited utility, but that the first semester improvement is 
an increase over the first half of 2002 (though still 5.3% 
lower than the GDP in the first half of 1998, before Chavez 
assumed the Venezuelan presidency) is a positive sign.  The 
 
 
deficit, however, continues to grow, as government spending 
for the year, which may be the primary cause for GDP growth, 
is projected to be 32% of GDP, a 21-year high.  GOV 
officials, while touting their good numbers, seem to be 
determinedly avoiding the obvious, that Venezuela is hitting 
one of its cyclical petroleum booms, and the Chavez 
government is doing what previous governments have done - 
spend the money as fast as possible. 
Brownfield 
 
 
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      2004CARACA02814 - CONFIDENTIAL