Search

 

Cablegate: Borrowing From Peter to Pay Paul

VZCZCXRO5016
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #1255/01 1761329
ZNR UUUUU ZZH
R 251329Z JUN 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9091
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEATRS/DEPT OF TREASURY
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 001255

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH, NGRANT, AND MMALLOY
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: BORROWING FROM PETER TO PAY PAUL

REF: A. 06 CARACAS 2622

B. CARACAS 1138

-------
SUMMARY
-------

1. (SBU) Banks have increased loan portfolios by over 54
percent in real terms in the past year and the financial
sector is riding this wave of credit to record profits. Fed
by excess liquidity and exchange controls that prevent money
from leaving Venezuela, Venezuelans are racing to invest in
non-tradable goods (real estate, cars, etc.) that maintain
value, and are doing so on credit. The rapid increase in
credit and the history of boom-bust cycles in Venezuela call
into question banks' risk profiles and their abilities to
handle a sharp drop in liquidity, which could result from a
drop in oil prices, decreases in government spending, or a
large devaluation.


-------------
GREED IS GOOD
-------------

2. (SBU) The banking sector's total assets grew by 21.3
percent (in real terms) for the 12 months ending May 2007.
The net loan portfolio grew 54.4 percent and deposits grew by
37.9 percent. Consumption loans make up 78.4 percent of the
loan portfolio and grew by 59 percent year on year. Credit
card debt grew by 114 percent and car loans by 117 percent in
the past 12 months.

3. (SBU) Banks in Venezuela remain incredibly profitable,
with returns averaging 31 percent for the sector, and with
one prominent western banker admitting to Econoffs that they
had over 50 percent in returns in 2006. Bank profits come
from fees, lending, and investments. The recent series of
dollar-denominated bond issuances have become profit centers
for banks (with one banker claiming an average of 20-30
percent return per transaction), which serve as
intermediaries for the purchasers, charging fees, making
loans for their clients to buy on margin, and purchasing
bonds themselves.

----------
FREE MONEY
----------

4. (SBU) Interest rates in Venezuela are fixed, with minimum
rates for deposits (6 percent) and CDs (10 percent) as well
as maximums for loans (28 percent, though many sectors have
lower fixed rates).

Table: Average bank interest rates (in percentages) as of
June 22, 2007.

Agriculture Industry Commerce Services
11.91 14.70 17.81 16.04

Mortgages Transport Tourism Communications
16.04 20.28 15.06 14.54

Vehicles Credit Cards Other Private Sector
19.89 26.16 13.63

(Source: Central Bank of Venezuela)

The average rate paid to depositors is 6.57 percent and the
average lending rate overall is 15.9 percent, providing a
handsome arbitrage for the sector. Given that the inflation
rate is running at 19.4 percent year on year, almost all
loans are currently below the rate of inflation, making money
in Venezuela almost free.

5. (SBU) Central Bank (BCV) regulations require banks devote
a certain percentage of their loan portfolios to agriculture
(18 percent), housing (10 percent), micro-credit (3 percent),
and tourism (1.5 percent) (reftel A). A new banking law,
expected to be issued via Chavez' decree powers during the
second half of 2007, will probably increase directed lending

CARACAS 00001255 002 OF 003


percentages, including adding sectors (such as industry). As
of the end of May, banks had completed their mandated housing
loans for the year, and obtaining a mortgage is expected to
become quite difficult for the remainder of 2007. The BRV's
obligatory savings fund (which receives one percent of
salaries and a two percent matching contribution from
employers) also offers mortgages, however its methodology is
opaque and the decision-making process overtly political.
Should supply not keep pace with demand, borrowers will be
forced into the informal sector, where rates are much higher,
or to chase precious formal loans with kickbacks or other
under the table negotiations.

6. (SBU) Negative interest rates, coupled with increasing
inflation and the continual threat of devaluation have
affected Venezuelan consumption habits, with premiums placed
on immediate gratification and on non-tradable goods that
hold their value, such as cars and homes. According to a
recent Economic Commission for Latin America and the
Caribbean (CEPAL) report, Venezuelans spend 45.3 percent more
on restaurants and hotels (per capita) than other Latin
Americans, as anyone out in Caracas on a Friday night can
attest. Car dealerships have waiting lists ranging from six
months to over a year for new models, and most models
increase in price after they are driven off the lot, as the
shortage of cars has made them more valuable in the secondary
market. A recent "El Universal" investigation estimated that
new cars sold in the secondary market cost up to 49 percent
more than from the dealership. The BRV has contributed to
demand through its "Venezuela Movil" program, which
subsidizes certain economy cars assembled in Venezuela,
providing two percent loans with little money down.


-----------------
INCREASING ACCESS
-----------------

7. (SBU) Venezuela's bank network remains small, with 3,200
branches throughout the country of 27 million people (albeit
up by 45 percent in the past three years). Total deposits
have reached 30 percent of GDP, though loans as a percentage
of GDP are only 12 percent and banking penetration remains
low. Government and private initiatives to expand bank
access to the barrios via micro credit schemes have had some
success, however much work remains (septel).

8. (SBU) Most middle and upper class Venezuelans rely on
credit cards to make it through the month, routinely spending
their biweekly paycheck the weekend they receive it. For
those with insufficient salaries to obtain credit cards, a
common perk offered by employers is to co-sign on a card.
Once the employee has a credit card s/he can obtain future
cards and will maintain access to the system for life.

---------------
RISKY BUSINESS?
---------------

9. (SBU) Non-performing loan rates remain low in Venezuela,
hovering between 1.1 and 1.2 percent. However, given the
glut of liquidity and ease of obtaining credit cards, it is
hard to say how many loans are being paid off with other
loans. Many analysts admit that individuals and their banks
maintain "off-budget" liabilities by borrowing from one
another--from Peter to pay Paul. Venezuela's third largest
bank, Banco Mercantil, currently offers up to a six month's
advance on one's salary in credit card purchases and most
banks have similarly permissive lending practices.

10. (SBU) The capitalization requirement (debt over equity)
was reduced from 12 to 8 percent in 2006 and capitalization
levels have since fallen, from 12.41 percent in May 2006 to
9.67 percent as of the end of May 2007. Thirty percent of
assets acquired after July 14, 2006 (and 15 percent of older
assets) must be held in reserve at the Central Bank. Banks
can hold up to 30 percent of their assets in foreign
currency, which helps them hedge against inflation and future
devaluation.

11. (SBU) Senior bankers admit the theoretical problem of

CARACAS 00001255 003 OF 003


non-performing loans in the event of a liquidity crunch.
Many have confided to Econoff their concerns for the sector,
while at the same time insisting that, in the case of their
bank, risk was being well-managed. Given the government's
history of bailing out failing banks, financial institutions
here may see their risk capped by the knowledge that the
government will step in if things get too bad. In addition,
banks have been actively moving money offshore through
accelerated dividend payments to protect against inflation
and a potential devaluation, thus reducing their commitment
in Venezuela should their bank ever require government
intervention (reftel B).

-------
COMMENT
-------

12. (SBU) The explosion in credit in recent years has been
caused by and contributed to the massive increase in
liquidity. It has led mainly to increases in consumption (in
non-tradable goods and massive import growth) that have
raised prices considerably in Venezuela, though done little
to increase investment or create jobs. Imports are expected
to exceed USD 40 billion this year, up from USD 32.2 billion
in 2006 and USD 23.7 billion in 2005. Banks seem to be well
aware of the risk posed by expanding credit portfolios, yet
hard-pressed to curtail such a valuable profit center.
Reserve requirements, assets held in hard currencies, and the
theoretical guarantee of government protection may cushion a
future downturn, but should liquidity retract quickly, many
Venezuelans would be hard-pressed to pay off their debt,
though would be similarly loath to give up their goods.

BROWNFIELD

© Scoop Media

 
 
 
World Headlines

 

New IPCC Report: ‘Unprecedented Changes’ Needed To Limit Global Warming

Limiting global warming to 1.5°C will require “far-reaching and unprecedented changes,” such as ditching coal for electricity to slash carbon emissions, says a special report that finds some of the actions needed are already under way, but the world must move faster… More>>

ALSO:

Jamal Khashoggi: UK, France, Germany Join Calls For Credible Investigation

Germany, the United Kingdom and France share the grave concern expressed by others including HRVP Mogherini and UNSG Guterres, and are treating this incident with the utmost seriousness. More>>

ALSO:

MSF Not Wanted: Nauru Government Shows Continued Callousness

The Nauruan Government’s decision to ask Doctors Without Borders to immediately leave shows continued callousness towards asylum seekers desperately seeking a safe place to call home, Green MP Golriz Ghahraman said today. More>>

ALSO:

Sulawesi Quake, Tsunami: Aid Response Begins

Oxfam and its local partners are standing by to deploy emergency staff and resources to the Indonesian island of Sulawesi, as an estimated 1.5 million people are thought to be affected by the massive earthquake and tsunami that hit on Friday. More>>

ALSO:

Decriminalising Same-Sex Relationships: UN Rights Chief Applauds Indian Decision

“This is a great day for India and for all those who believe in the universality of human rights," Bachelet said. "With this landmark decision, the Indian Supreme Court has taken a big step forward for freedom and equality...” More>>

ALSO:

 
 
 
 
 
 
  • Pacific.Scoop
  • Cafe Pacific
  • PMC