US embassy cable - 04CARACAS3806

C O N F I D E N T I A L  CARACAS 003806 
 
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: 12/10/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: NEW MINISTER OF FINANCE - SAME AS THE OLD MINISTER 
 
REF: A. CARACAS 3331 
     B. CARACAS 3536 
     C. CARACAS 3711 
 
Classified By: ACTING ECONOMIC COUNSELOR DARNALL C. STEUART FOR REASON 
1.4 D 
 
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SUMMARY 
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1. (C) On December 5 President Chavez announced that Finance 
Minister Tobias Nobrega would be replaced by Nelson Merentes, 
a former Minister of Finance and current Minister of 
Development Finance and President of the National Bank for 
Economic and Social Development (BANDES).  While Chavez gave 
no explanation, local pundits noted that the announcement 
came on the heels of a December 2 statement by Nobrega that 
the devaluation planned in the 2005 budget (from 1920 to 2150 
bolivars/USD, see reftel A) would occur on January 1, a 
comment he rescinded the next day after a marked move in the 
parallel market.  While punishment for such an error seems 
plausible, many here believe that Nobrega is stepping down to 
facilitate his candidacy for President of the Central Bank, a 
position that will become vacant in January 2005.  We believe 
that Merentes's appointment will make little difference at 
the Finance Ministry.  END SUMMARY. 
 
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CHAVEZ'S ANNOUNCEMENT 
--------------------- 
 
2. (SBU) While formally closing the "Meeting of Intellectuals 
and Artists in Defense of Humanity" the night of Sunday, 
December 5, President Hugo Chavez casually mentioned that 
Nelson Merentes would become the new Minister of Finance, 
replacing Tobias Nobrega, who has held the position since May 
2002.  Merentes had been Minister of Finance for less than a 
year from 2001 to early 2002.  Merentes was then named 
Minister of Science and Technology.  After that, he became 
President of BANDES, and acquired the additional hat of 
Minister of Development Finance in September 2004.  (There is 
no word yet on who may fill those roles.)  He also held a key 
role in Chavez's recall referendum campaign structure. 
Merentes's tenure in various positions has been characterized 
by scandals.  The Comptroller Committee of the National 
Assembly cited him for at least three legal violations over 
the alleged misuse of 3.3 billion bolivars (about USD 4.4 
billion at the time) from the Investment Fund for 
Macroeconomic Stabilization (FIEM, which became the FEM in 
December 2003) during his first tenure as Finance Minister. 
He was never prosecuted.  While at BANDES, he is alleged to 
have diverted USD 2 billion to President Chavez's campaign. 
A more complete bio follows in paragraph 8. 
 
-------------------------------------------- 
NOBREGA - CUT FOR A MISTAKE, OR A PROMOTION? 
-------------------------------------------- 
 
3. (U) Nobrega attracted significant negative attention when 
he announced December 2 (while in New York to arrange the 
issuance of USD 500 million in new bonds) that "the 
Government will adjust the fixed rate of exchange to 2150 
bolivars per dollar from its current level of 1920 on January 
1."  This caused an immediate increase in the parallel rate 
(from about 2300 to 2500/USD), as well as widespread shock 
that the date of a devaluation would be announced in advance. 
 The next day Nobrega reversed himself, saying that the 
timing of the devaluation "will depend on the decision of the 
Venezuelan Central Bank (BCV) directors and is something that 
I can't know exactly when it will be."  He added that 
Planning Minister Giordani, as one of the BCV directors, 
would be part of that decision, not himself. 
 
4. (SBU) In the meantime, Nobrega's departure from Finance 
has been rumored for months.  He is thought to want the 
position of Central Bank President, which will become 
available at the end of January 2005.  There is speculation 
that Nobrega was replaced as Minister in order to facilitate 
such a move.  The Minister of Finance is a participant in the 
 
ad-hoc board that will consider who will replace the BCV 
president.  That board has already discussed who will replace 
one Director (Manuel Lago) whose term ends this month. 
Nobrega's departure avoids at least the appearance of 
conflict of interest by the committee. 
 
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WHAT DOES IT MEAN? 
------------------ 
 
5. (SBU) Efrain Velazquez, President of the National Economic 
Council, told econoff December 6 that he did not believe the 
switch would have a significant impact on short-term economic 
policy, though he thought that bond issuances could be more 
inefficient at first, given that Merentes is a mathematician, 
not an economist like Nobrega.  The only major longer-term 
effects he saw would be if Nobrega became BCV President. 
Should that occur, Velazquez foresees a loosening of monetary 
policy, which would have inflationary results by 2006 and 
2007.  Other opinions were mixed.  Credit Suisse analyst Jan 
Dehn was quoted as saying the move "represents a policy shift 
to the left and a move further away from orthodoxy in 
economic policy."  Caracas Stock Exchange President Nelson 
Ortiz (who, unlike Dehn, lives in Venezuela) told the press 
"I don't believe there will be a huge impact." 
 
6. (C) Alejandro Dopazo, an advisor to Nobrega who until two 
months ago was Director of Public Credit at the Finance 
Ministry, told econoff December 7 that he expects no change 
in policy at the Ministry.  He also downplayed the rumor of 
Nobrega going to the BCV, saying that Nobrega was concerned 
about the optics of being associated so closely with the 
current administration and making such a move so quickly.  He 
did not, however, discount Nobrega for a position as Bank 
Director.  He implied that the leaving the Ministry was 
largely Nobrega's choice, that he had been waiting for the 
right time to leave after having such a difficult tenure 
through 2002 and 2003. 
 
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COMMENT 
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7. (C) Nobrega's own comment December 3 about the lack of a 
role for the Finance Minister in deciding when the planned 
devaluation will occur underscores the relative unimportance 
of the Minister's role in economic policy formation in 
Chavez's government, as does the fact that five Ministers 
have now left the position in less than six years.  Nobrega's 
first New York announcement about the devaluation date could 
have been a misstatement, or it could have been a trial 
balloon floated just before moving to another position.  This 
happened recently with Ali Rodriguez, who barely a month 
before his appointment as Foreign Minister floated a 
suggestion that the GOV was considering raising the price of 
gasoline (reftel C).  While this was roundly denied by other 
GOV officials, the precedent is out there. 
 
8. (C) Nobrega had a certain amount of credibility with some 
investors, and he was recognized for his success and 
creativity in restructuring Venezuela's debt.  Merentes's 
appointment will probably mean little at the Ministry of 
Finance.  Velazquez told econoff on November 2 that the GOV 
treated Finance as just "an ATM machine," a ready source of 
cash on demand and not a policy advisor.  Given that Merentes 
is more revolutionary and less of an economist than Nobrega, 
that could change, though perhaps Chavez already considers 
such advice from Merentes.  The biggest potential change from 
this switch will depend on where Nobrega lands.  If indeed he 
takes a key role at the Central Bank, it will be a major step 
towards achieving GOV control of that institution.  END 
COMMENT. 
 
9. (SBU) Bio data on Merentes: 
 
Born May 6, 1954, Merentes earned a degree in Mathematics 
from the Central University of Venezuela in 1978 and a Ph.D. 
in Mathematics (summa cum laude) from the Scientific 
University of Budapest in 1991. 
 
Prior to his role as Minister of Finance from July 2001 to 
February 2002, he was Vice Minister of Regulation and Control 
at Finance from October 2000 until becoming Minister. 
Merentes was a founder of the Fifth Republic Movement (MVR, 
Chavez's political party) and participated in the Constituent 
Assembly that drafted the 1999 Constitution.  He was also 
head of the Finance Committee in the Provisional Congress 
that followed the ratification of the Constitution until the 
first National Assembly elections were held. 
 
More recently, Merentes was President of the National Bank 
for Economic and Social Development (BANDES) and had also 
been named Minister of State for Development Finance in 
September 2004.  While head of BANDES, he also served as 
Director of Technology in Comando Maisanta, the organization 
designated to run Chavez's recall referendum campaign.  In 
our meetings with him he has been engaging, while always 
defending the Chavista line.  He comes across as sharp, 
shrewd and ambitious. 
Brownfield 
 
 
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      2004CARACA03806 - CONFIDENTIAL