US embassy cable - 04CARACAS3927

C O N F I D E N T I A L  CARACAS 003927 
 
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: 12/23/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: THE GOOD, THE BAD, AND THE MESSY - VENEZUELAN 
MACRO NEWS 
 
REF: CARACAS 3747 
 
Classified By: ACTING DCM RICHARD M. SANDERS FOR REASON 1.4 D 
 
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SUMMARY 
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1. (C) Recent economic news in Venezuela is mixed.  Third 
quarter GDP growth is an impressive 15.8%, and total 2004 
growth estimates are being revised upward to as much as 18%, 
though the GOV predicts 15-16%.  Venezuelan oil prices for 
December, on the other hand, are 28% below their October 
high.  Meanwhile, pressure on the Venezuelan Central Bank 
continued, as Chavez demanded the resignation of the Bank's 
President - whose term is just weeks away from its end.  END 
SUMMARY. 
 
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THE GOOD - GDP GROWTH EXCEEDING OLD ESTIMATES 
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2. (U) The Venezuelan Central Bank (BCV) announced in 
November that 2004 3rd quarter GDP was 15.8% higher than the 
same period in 2003, including 18.6% growth in the non-oil 
sector.  The overall result was 4.6% higher than the 2nd 
quarter, and the cumulative growth through September is 
20.4%.  This positive result has influenced various 
economists to raise estimates for total 2004 growth.  Albis 
Munoz, President of business umbrella group FEDECAMARAS, 
while conservatively estimating growth at 12-13%, called 2004 
the year of "economic reactivation" in a press conference 
December 20.  Planning Minister Jorge Giordani, noting the 
traditional fourth quarter GDP jump, told press on December 
15th that there was no doubt growth would be "greater than 15 
or 16 percent."  Central Bank Director Domingo Maza Zavala 
predicted December 21 a year-end result "between 14 and 16%." 
 Credit Suisse calls these figures "conservative," predicting 
a 17.8% increase for the year, as does the Andean Development 
Corporation (CAF), while the UN's Economic Commission for 
Latin America and the Caribbean (ECLAC) has estimated 18%. 
 
3. (C) Munoz, however, was critical of government 
performance, calling it "not very efficient," and exhorting 
the GOV to resume "institutional dialogue," "create friendly 
environments for investment," and to give space to the 
private sector, especially to allow job creation.  Despite 
the GDP recovery, and the fact that unemployment in November 
(according to the National Statistics Institute, INE) was 
12.8% (2.6% below November 2003), it is not clear that jobs 
are being created.  There are nearly 14,000 fewer people 
employed than in November 2003; the statistical reduction is 
due to an increase of over 800,000 people who are not 
actively seeking employment.  Local pollster and consultant 
Datanalisis estimates that true unemployment is around 14%. 
 
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THE BAD - OIL PRICES DROPPING FROM RECORD HIGHS 
--------------------------------------------- -- 
 
4. (C) According to the Ministry of Energy, the average price 
for the Venezuelan "basket" of oil was USD 31.57 per barrel 
in December, 28% off the record high of USD 44 per barrel set 
in October, and even 3% below the second quarter average, 
when the steady price increase began.  A continued drop would 
put the 2005 budget at risk, given that GOV spending is 
estimated at 30.9% of GDP and dollar-denominated oil income 
represents about half of ordinary GOV revenue.  Lower oil 
prices might force a devaluation in order for the reduced 
amount of USD income to cover local expenses in bolivars. 
Eduardo de las Casas, Citibank Country Treasurer, told 
econoff in October that he thought USD 25/barrel was the 
threshold of risk for such a devaluation, which could perhaps 
be even greater than the 12% (from 1920 to 2150/USD) assumed 
in the recently approved budget. 
 
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THE MESSY - THE LATEST ON CHAVEZ VS. THE CENTRAL BANK 
--------------------------------------------- -------- 
 
 
5. (C) The row between President Chavez and the Central Bank 
(BCV) over foreign exchange profits (see reftel) took a 
negative turn when Chavez said December 20 that "there will 
have to be a trial," implying that BCV President Diego 
Castellanos should go to jail.  He said that "Castellanos is 
of the age that he would be confined to home if a judge 
sentenced him to prison.  So he will be in his house or he 
should quit his job and leave and make way for someone who 
wants to fulfill their duty to the country, because that Bank 
is not the bank of the Central Bank President," and added 
that it was "the Board of the BCV that doesn't want to 
understand, they don't understand, there are the completed 
calculations, once and again and corrected."  Just four days 
before, Arlex Fuentes, a banking superintendency employee 
involved in the negotiations with the BCV, told econoff that 
an agreement had been completed and the BCV would give 2.2 
trillion bolivars (1.15 billion USD) to the GOV during the 
week of December 20. 
 
6. (SBU) Domingo Maza Zavala, one of the BCV Directors, told 
the press on December 21 "the BCV owes nothing to the 
government, to the national treasury; the assigned foreign 
exchange profits have been given."  He added that a trial 
would be "very inconvenient" for the interests of the 
country, and argued that "the Directors, including the Bank 
President, have no other interest but the higher interests of 
the Republic, nor are we interested in retaining money that 
belongs to the national treasury." 
 
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COMMENT 
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7. (C) GDP growth, while expected to be high after two years 
of heavy downturn, is better than expected.  However, the 
lack of job creation implies that this is primarily a 
spending boom, which will only last as long as oil income can 
support it.  The drop in oil prices will need to be sustained 
for a considerable period before the GOV, committed to using 
the exchange peg as an inflation fighting tool, considers a 
devaluation beyond the 12% assumed in the 2005 budget.  The 
latest demand for cash was probably not motivated by the drop 
in oil prices, since this has been as ongoing event. 
However, the price drop sets the latest demand for cash in 
stark relief, underscoring the amount of funds the GOV needs 
to fulfill its spending plans.  When Maza Zavala says that 
the BCV's methodology "is in accordance with the law" and 
international accounting standards, his background (and that 
of other BCV directors) leads us to believe that any 
calculation errors are on the part of the GOV.  We doubt that 
the GOV will back down from its demands, so this dispute may 
well end up in court.  The question is, will Castellanos too? 
McFarland 
 
 
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      2004CARACA03927 - CONFIDENTIAL