US embassy cable - 05CARACAS1336

C O N F I D E N T I A L  CARACAS 001336 
 
SIPDIS 
 
 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM ALSO FOR POLAD 
BUENOS AIRES FOR TREASURY-MHAARSAGER 
 
E.O. 12958: DECL: 04/30/2015 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: CAN YOU SPARE A BILLION?  NO?  HOW ABOUT SEVEN? 
 
REF: A. 04 CARACAS 2034 
     B. CARACAS 288 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D 
 
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SUMMARY 
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1. (C) As Venezuela's international reserves continue to grow 
- to over USD 27 billion - the GOV continues to pursue 
methods to gain control of part of them.  The amount the GOV 
wants also continues to rise.  While a year ago Chavez wanted 
a "mere billion" ("un millardito"), and later that year got 
(at least) two, now the GOV wants as many as eight, and 
perhaps the means to guarantee more in the future.  While GOV 
officials, including President Chavez, seem to acknowledge 
that this will require a legislative solution, getting one 
should not be difficult.  The questions are what form the 
control would take, and what the effect on the economy would 
be.  No matter the answers, two things are clear: that the 
autonomy of the Central Bank is being further diminished, and 
that the GOV wants more cash.  END SUMMARY. 
 
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ARE THERE "EXCESS" RESERVES? 
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2. (U) The GOV's international reserves have grown USD 3 
billion during 2005, reaching an all-time high of just over 
USD 27 billion (including USD 715 million placed in the once 
almost empty in the Macroeconomic Stabilization Fund - FEM) 
on April 25.  This is to be expected, with outflows 
restricted by foreign exchange controls and income increased 
by record oil prices.  (The Venezuelan oil basket has 
averaged USD 40.57 through April 22, 22% higher than the 2004 
average price.)  This increase, combined with the perception 
that it will continue to grow, has renewed discussion of what 
should be considered "excess" reserves, and calls by the GOV 
to have access to these funds.  President Chavez said on 
April 10 that "There must be a cap on the reserves, we can't 
 
continue accumulating millions and millions of 
dollars...Venezuela with 18 or 20 billion dollars in reserves 
is plenty.  That would be more than enough for the size of 
our economy."  Just three says later, he said "I believe (the 
cap) should be between 15 and 18 billion dollars, no more 
than 18 billion dollars," and noted that this left over 8 
billion dollars of "excess" reserves.  (A year ago, when 
Chavez was asking for a "mere billion" dollars, he opined 
that USD 14 billion in reserves was sufficient.)  Finance 
Minister Nelson Merentes said on March 29 that "all accounts 
say that Venezuela, with fewer international reserves, could 
have a pretty healthy economy." 
 
3. (C) Central Bank (BCV) Director Domingo Maza Zavala has 
cautioned publicly that the current amount of reserves was 
over-stated, given the amount of foreign currency that has 
been approved for exchange by the Foreign Exchange 
Administration Commission (CADIVI), but not yet liquidated, 
which he estimated at about USD five billion.  He also 
recommended saving as much as possible to "compensate for the 
possible unfavorable effects of a reduction in oil prices." 
Asdrubal Oliveros and Milton Guzman, economists at Banco de 
Venezuela (owned by Spanish group Santander) told econoff 
April 22 the very idea of excess reserves was ridiculous, 
since their purpose was to back the local currency in 
circulation.  Guzman said that if you were to reduce the 
reserves, "you'd have to take the equivalent number of 
bolivars out of circulation."  Chavez tried to preempt these 
arguments in the April 10 speech, saying that "there are 
economists who deny that there are excess (reserves), but I 
say that there is an excess and that the country has the 
right to use these excess reserves." 
 
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WHAT TO DO WITH THE MONEY? 
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4. (U) Observers suggest the GOV could use excess reserves 
for public spending, to pay off external debt, or to create a 
 
new, larger fund than the PDVSA special development fund 
(reftel A), which would also be administered by BANDES, the 
GOV-owned Bank of Economic and Social Development.  This 
could also be accomplished by modifying the FEM law to give 
BANDES, rather than the BCV, control of the funds in the FEM. 
 BANDES is purportedly using the funds thus far allocated 
(USD 2 billion) for large development projects, as well as 
micro-loans, but it is unclear how those dollars are being 
converted to bolivars for local spending. 
 
5. (C) Salomon Centeno, National Assembly Deputy from the 
Accion Democratica (opposition) party and member of the 
National Assembly Finance Committee, told econoff April 27 
that the GOV "will surely use (diverted reserves) for current 
spending."  He noted that the GOV is already violating the 
current FEM law, which required savings into that account to 
re-start on January 1, and has yet to happen.  He also 
expressed "deep doubts" about the way the PDVSA fund is being 
managed, since BANDES control is less objective, less 
transparent, has no National Assembly oversight, and makes 
"rational use" of the funds less likely.  Centeno expects 
that the solution will most likely come via modification of 
the BCV law.  Jesus Caldera, President of FOGADE 
(FDIC-equivalent), told press April 14 that such a 
modification was "in the hands of Chavez and not the BCV." 
 
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COMMENT 
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6. (C) Credit Suisse First Boston analyst Jan Dehn wrote in 
an April 14 newsletter that this proposal is two-pronged: "to 
secure (Chavez's) re-election in 2006," and is "consistent 
with the government's overall strategy of increasing control 
over institutions, various sectors of the economy, and in the 
political sphere."  We agree, and expect that the end result 
of these efforts to be several billion additional dollars 
available for spending, with perhaps a token amount used to 
pay down foreign debt.  Should, however, oil prices drop, 
given the enormous commitments it has made for social 
spending, the GOV may be unpleasantly surprised at how fast 
reserves can melt away. 
Brownfield 
 
 
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      2005CARACA01336 - CONFIDENTIAL