US embassy cable - 04CARACAS3575

C O N F I D E N T I A L  CARACAS 003575 
 
SIPDIS 
 
 
STATE FOR WHA/AND 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM FOR POLAD 
BUENOS AIRES FOR TREASURY (MHAARSAGER) 
 
E.O. 12958: DECL: 11/15/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: CAUTION: THE ROAD IS WET - TREASURY REP GETS VIEWS 
OF VENEZUELAN ECONOMY 
 
REF: CARACAS 3015 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A 
ND D. 
 
------- 
SUMMARY 
------- 
 
1. (C) U.S. Treasury representative for South America Mathew 
Haarsager visited Caracas from November 2-5, and in a series 
of meetings with the Venezuelan private and public sectors 
was treated to a variety of perspectives.  GOV officials 
asserted that, with the strike, presidential referendum, and 
regional elections behind them, high fiscal spending would 
continue to create sustained economic growth.  Private sector 
representatives, while acknowledging that economic indicators 
are currently healthy, believe that short-term growth depends 
entirely on maintaining current oil prices, and long-term 
growth will require the unlikely occurrence of structural 
reforms.  Multilateral lenders are trying to avoid any 
appearance of controversy, even if that means reducing their 
portfolios in Venezuela and not pressing the GOV to make 
needed reforms.  END SUMMARY. 
 
--------------------- 
GOV - NO MORE TROUBLE 
--------------------- 
 
2. (C) GOV officials took the view that things are good, and 
are going to get better.  Guillermo Ortega, General 
Coordinator for Public Policy at the Ministry of Finance, 
emphasized increased non-oil revenues and a drop in debt/GDP 
ratio.  Luis Rafael Quiaro and William Grillet, respectively 
Vice President of Planning and General Manager of the 
state-owned Economic and Social Development Bank (BANDES) 
cited the rapid increase of their lending portfolio to small 
businesses in particular.  Jose Rojas, Vice President of 
Finance of state oil corporation PDVSA, noted that it is 
currently contributing about half of 2004 GOV revenue (USD 15 
billion) in taxes and royalties, and added that PDVSA was 
spending close to USD 5 billion more (NOTE: at least USD 2 
billion is off-budget END NOTE) on social/infrastructure 
needs. 
 
3. (C) The GOV officials made it clear that they saw the 
government as the engine of growth for the economy.  Ortega 
said it was essential for expenditure to be sufficient to 
maintain growth, and that the GOV is still trying to bring 
spending up to its desired level.  Quiaro stated that BANDES 
has a special emphasis on micro-credit, especially to spur 
import substitution and in services, but also certain 
domestic "value chains," citing cocoa as an example.  Rojas 
cited PDVSA's ability to spend more quickly and efficiently 
than the GOV in general as their contribution to growth. 
Generally, GOV officials emphasized that their development 
strategy - termed "endogenous growth" - is based on greater 
state involvement in the economy, import substitution, and 
reliance on domestic resources - ideas that were in vogue in 
the 1950s and 1960s, as freely admitted by Quiaro. 
 
4. (C) Venezuelan Central Bank (BCV) directors Domingo Maza 
Zavala (noted for his independence and hence widely seen as a 
thorn in the GOV's side) and Bernardo Ferran, while 
recognizing the difficulties of dependence on oil revenues, 
were critical of GOV policy.  They stressed that GOV policy 
is to spend oil revenue now rather than invest it to create 
conditions for growth, a problem shared by previous 
administrations.  They noted that, though Venezuela has never 
suffered from hyperinflation, the current inflation rate is 
much higher than the 40-year average.  They asserted that it 
would be much higher if not for BCV operations.  Maza Zavala 
and Ferran praised the idea of the Macroeconomic 
Stabilization Fund (FEM - a separate account created in 1999 
to save high oil revenues to spend when revenue is low), but 
criticized the GOV for spending what had been saved (NOTE: 
the balance peaked at over USD 7.1 billion in 2001, but is 
currently only USD 708 million), plus increasing debt 
simultaneously.  Finance's Ortega, however, thought the FEM 
 
 
needed to be reformed, in part by setting the reference value 
(currently defined as the average of oil revenues for the 
last five calendar years) in real terms rather than nominal. 
A better guide, he said, would be determining the proper 
level of primary expenditure necessary for continued strong 
economic growth and saving anything above that. 
 
-------------------------------- 
PRIVATE SECTOR - WAITING IN VAIN 
-------------------------------- 
 
5. (C) Meanwhile, the private sector, after an extended 
period waiting to see if there would be a change in 
administration, is acknowledging that - fairly or not - 
Chavez is firmly in charge until at least 2006, and quite 
possibly more.  There is consensus that GDP growth will 
exceed 12% for 2004 (which still will not be enough to return 
economic output to 2001 levels), and be around 5% in 2005. 
Efrain Velazquez, President of the National Economic Council, 
thinks growth will continue through 2006, as long as oil 
prices remain high.  Inflation is dropping and could be even 
lower (but still above 10%) next year, and foreign exchange 
liquidations are at their highest since exchange controls 
were imposed in January 2003.  (September liquidations were 
more than the 2002 average.)  Alejandro Grisanti, economic 
advisor to Banco Santander, noted that public/private sector 
dialogue to promote growth has begun. 
 
6. (C) However, behind the recognition of good news, there is 
still a call for the GOV to implement structural reform, and 
little hope that it will.  Albis Munoz, President of business 
umbrella group FEDECAMARAS, opined that the public/private 
dialogue would be limited, as neither group trusted each 
other.  She cited continued punitive behavior by the 
Venezuelan tax authority (SENIAT - see reftel) and exchange 
control administration (CADIVI) as examples that political 
retaliation would not end.  She stated that both entities 
were using the list of those who signed in support of the 
presidential referendum as criteria for actions.  Banesco (a 
major private bank) Vice President and Chief Economist Pedro 
Coa noted that, should investors lose confidence in 
short-term GOV/BCV bonds, the money supply could quickly 
double, with terrible inflationary results.  He added that 
the BCV is indeed combating inflation through constant 
sterilization, but having to do so is putting its solvency at 
risk. since they are offering high interest bonds (currently 
over 11%, but some outstanding bonds have rates over 21%) to 
reduce liquidity.  Grisanti opined that increased CADIVI 
liquidations, given the artificially low official exchange 
rate, were like subsidies for the import sector - "how can 
anyone compete with the price of imports from China?" - which 
will further undermine local investment. 
 
----------------------------------- 
MULTILATERALS - DON'T ROCK THE BOAT 
----------------------------------- 
 
7. (C) Multilateral development bank lending in Venezuela is 
currently below traditional levels, which local 
representatives attribute to efforts to avoid politically 
sensitive issues.  The World Bank, for example, according to 
consultant Angel Cardenas, does not plan to move forward with 
a new loan to the Venezuelan Supreme Court, despite pleasure 
with the results of a similar project that was recently 
completed, but will seek projects only in areas of 
infrastructure and urban development.  He also mentioned 
being "afraid (the GOV) would change the rules of the game" 
as another reason to avoid sensitive loans.  The 
Inter-American Development Bank (IADB) and the Andean 
Development Corporation (CAF) also plan to focus on 
infrastructure projects.  IADB rep Roman Mayorga and CAF Vice 
President Fidel Jaramillo both cited inefficiency in the 
public sector as limiting factors for greater disbursement. 
Cardenas added that the GOV thinks it is doing things right, 
and therefore does not want help from multilaterals.  Such 
help would, of course, also require greater transparency. 
 
------- 
COMMENT 
 
 
------- 
 
8. (C) The stark disparity between public and private 
perspectives on the future of the Venezuelan economy 
underlines the uncertainty that the country faces.  The GOV 
appears hell-bent on not just spending its oil boom as 
quickly as possible, but taking on new debt to ensure the 
highest possible growth in advance of the 2006 presidential 
elections, ignoring the fact that it will leave Venezuela 
extremely ill-equipped to deal with a fall in oil prices. 
The new "Bolivarian" economic model - which is still only 
loosely defined - will also do nothing to address the 
uncompetitiveness of the non-oil sector.  Instead, it 
reverses the trend during the 1990,s toward both 
privatization and decentralization, forces the private sector 
into a position of dependence on the government and gives the 
central government an increasing role in industry and 
commerce, with little concern for efficiency or waste.  At a 
minimum, these mark a return to the failed policies of the 
70,s and 80,s.  This model seems certain to depress foreign 
investment and entrepreneurial activity (though we may see 
some new decisions to put money into deals which offer 
relatively rapid returns as recovery lasts).  As the 
multilateral lenders have no leverage with which to influence 
the GOV toward policy reform, and high oil prices require no 
change, the GOV will continue to set the agenda.  However, 
until it is clear which way it is pushing the Venezuelan 
economy, the conditions for private sector commitments will 
remain elusive.  Judicial insecurity, uncertainty over GOV 
macro-economic management, and high inflation (by regional 
standards) all lead to a situation which reduces the 
probability of significant investment - foreign or domestic - 
and takes the initiative from the private sector.  Without 
the job creation that those would bring, growth will last 
only as long as high oil prices can sustain the spending boom. 
 
9. (U) Treasury representative Haarsager has reviewed this 
cable. 
Brownfield 
 
 
NNNN 
      2004CARACA03575 - CONFIDENTIAL