US embassy cable - 05CARACAS1501

C O N F I D E N T I A L  CARACAS 001501 
 
SIPDIS 
 
 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM ALSO FOR POLAD 
BUENOS AIRES FOR TREASURY-MHAARSAGER 
 
E.O. 12958: DECL: 05/15/2015 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: BANKS FACE INTEREST RATE CONTROLS 
 
REF: A. CARACAS 806 
     B. CARACAS 288 
 
Classified By: ACTING DCM RICHARD M. SANDERS FOR REASON 1.4 D 
 
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SUMMARY 
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1. (C) On April 28, the Venezuelan Central Bank published new 
regulations capping the interest rates at which Venezuelan 
banks can lend money, as well as setting minimum interest 
rates for both savings accounts and time deposits, effective 
May 1.  Embassy economic contacts agree that while this will 
cut into bank profits, it will not have a particularly 
harmful short-term effect, and is essentially a political 
decision.  However, this is yet one more way in which the GOV 
is attempting to control the economy.  END SUMMARY. 
 
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AT THIS RATE... 
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2. (SBU) The Venezuelan Central Bank (BCV) published new 
requirements on April 28 for lending and savings rates at 
Venezuelan banks.  The new rates were effective on May 1, 
just one full business day after the publication.  The new 
maximum lending rate was set to 28%, or 0.5% below the 
re-discount rate (rate at which BCV lends to banks when loans 
exceed available cash).  The minimum rate for deposits was 
set at 6.5%, which is 5% less than the "28-day absorption" 
rate (the interest rate paid by the BCV to combat inflation 
by reducing liquidity).  Time deposits also received a 
minimum rate of 10%, or 1.5% less than the "28-day 
absorption" rate.  In addition, several commissions 
previously collected by banks were eliminated.  On May 3 the 
BCV published an additional regulation which limited 
additional interest on overdue loans to 3% more than the 
original rate.  The last time the GOV fixed any such rates 
was from June 1995-April 1996, but only for temporary 
employee investment accounts and mortgages indexed to 
inflation.  Cristina Rodriguez, president of economic 
consultancy Metroeconomica, told econoff May 6 that rate 
fixing was common up until 1989, though less extensively than 
is the case with the new regulations. 
 
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THE NEW BOTTOM LINE 
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3. (SBU) It appears this decision will have little immediate 
effect on the rate paid on time deposits, which presently 
average 11.2%, though some 30-day rates will increase. 
Savings rates will rise more, from their current 4.8% 
average, but they represent only 19% of all deposits.  Credit 
cards, while representing only 9.9% of the total lending 
portfolio, will be affected more, as current rates are 
generally above 40%.  Miguel Octavio, President of BBO 
Financial Services, noted in an April 29 newsletter that 
"blue chip banks like Citibank and Banco Venezolano de 
Credito were paying savings rates near 2% and will be 
strongly affected by the new regulation."  He also opined, 
"The new regulations will likely push up lending rates for 
good corporate risks," while Alejandro Grisanti, president of 
consultancy Ecoanalitica, wrote in a May 3 newsletter that 
banks will probably soon be "increasing the interest rates 
the banks collect from the big corporations and businesses." 
 
4. (C) Overall, Rodriguez predicted "not much impact" on 
banks, since "the margins are pretty wide," though she noted 
that the BCV can easily adjust them in the future, now that 
the precedent has been set.  Jesus Bianco, chief economist of 
the National Banking Association, told econoff May 4 that 
these controls, in effect for a full year, would reduce 
banks' return on equity by 7%, based both on actual 2004 
numbers and 2005 projections.  He noted that it would affect 
different banks in different ways, commenting that "the 
asymmetries are brutal."  Others agreed, but Rodriguez 
predicted worse effects for the big banks, which will have to 
adjust their rates farther, while Luis Zambrano, chief 
 
economic analyst for Banco Mercantil, told econoff May 4 that 
"small banks are less efficient, and will suffer more from 
this measure."  Bianco, however, said that if inflation were 
to increase much, the net worth of banks could be placed at 
risk. 
 
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THE WHYS AND THE WHEREFORES 
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5. (C) Rodriguez believes that the rate increase was "more of 
a political action" than economic, while Rafael Munoz, a 
Banco Mercantil economist, said the GOV's entire economic 
policy is "only political, in our judgment."  Grisanti thinks 
the key is "the political dividend, that from these measures 
the President of the Republic could obtain the benefit." 
Octavio wrote that "perhaps its most negative aspect is the 
introduction of another form of control into an already over 
controlled economy."  Rodriguez echoed that comment, stating 
that "the public sector is expanding, expanding, expanding 
its scope."  She also expects this to be a lasting measure, 
as "politically, it's extremely hard to increase rates" after 
fixing them. 
 
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COMMENT 
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6. (C) GOV control over the financial sector continues to 
creep forward.  Combined with previously existing 
requirements directing lending to housing, agriculture and 
microcredit, and setting caps on the mortgage an agriculture 
rates (ref A), 39% of all bank lending is either directed to 
certain areas, has controlled (preferential) rates, or both. 
That number is all but certain to increase soon, as the 
National Assembly recently approved a report which would 
require publicly owned banks to commit 10% of their portfolio 
to tourism, and private banks 20%.  (A tourism requirement is 
probable in the near future, but it is unlikely for the final 
percentage to be that high.)  Venezuela's banks have made a 
lot of money since the imposition of exchange controls, which 
has in effect given them a large base of depositors who 
cannot take their money out of the country and have had to 
accept low interest rates, even as the banks, given the risk 
factors, have set lending rates high.  The GOV solution, 
however, represents yet another distortion built on other 
distortions, and entails long-term risk for the bulk of 
Venezuela's financial sector.  The BCV is now giving high 
priority to populist economic ideas, making it appear that 
the new GOV supporters in its leadership (ref B) were enough 
to end the autonomy of the institution. 
McFarland 
 
 
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      2005CARACA01501 - CONFIDENTIAL