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Cablegate: Venezuela Macroeconomic Update

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS CARACAS 001479

SIPDIS


STATE FOR WHA/AND, WHA/EPSC, EB
TREASURY FOR OASIA - GIANLUCA SIGNORELLI
USCINCSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN PGOV VE
SUBJECT: VENEZUELA MACROECONOMIC UPDATE


--------
OVERVIEW
--------

1. (U) Venezuela's most recently published economic
indicators illustrate the negative effects of deep
recession, exchange and price controls, and chronic fiscal
deficits. Strong international reserves position and high
average oil prices have contributed to reduce the country
risk and facilitated the partial public external debt
refinancing. However, the current political uncertainty is
affecting the economic decision-making for both the private
and public sectors. NOTE: Most official data reported here
does not include Q1 of 2004.

---------------
ECONOMIC GROWTH
---------------

2. (U) Total GDP decreased 9.2 percent in real terms during
2003 compared with the previous year. This figure was the
steepest decline in Venezuelan history. The hardest-hit
sectors were construction (-37.4 percent), commerce (-12.0
percent), petroleum (-10.7 percent), and manufacturing
(-10.6 percent). During the last quarter of 2003, Venezuela
registered a GDP increase of 9 percent after seven
consecutive quarters of economic recession. A recovery is
foreseen during 2004 after two consecutive years of severe
economic contraction.

REAL GDP GROWTH RATE
(PERCENTAGE)
--------------------

OIL NON-OIL TOTAL

1994 4.6 (4.5) (2.8)
1995 7.1 2.5 4.0
1996 7.7 (2.5) (0.2)
1997 9.4 4.2 6.4
1998 2.0 (0.9) 0.2
1999 (7.4) (5.4) (6.1)
2000 3.2 3.0 3.2
2001 (0.9) 4.0 2.8
2002 (12.6) (6.5) (8.9)
2003(1) (10.7) (8.0) (9.2)

(1) Preliminary figures

SOURCE: Central Bank of Venezuela.

------------
UNEMPLOYMENT
------------

3. (U) Second semester 2003 figures (the latest published as
of April 28, 2004) from the National Institute of Statistics
(INE) indicate an unemployment rate of 16.8 percent. This
figure represents 2.01 million unemployed out of a labor
force of 12.01 million, and a total population of 25.63
million. Shifts in the work force from the formal to the
informal sector of the economy, which accounts for more than
a half of the occupied working labor force, have mitigated
unemployment to some extent. However, some economists
suggest that the informal sector may have reached its
capacity to absorb new entrants.

UNEMPLOYMENT (percentage in second semester)
--------------------------------------------

1996 12.4
1997 10.6
1998 11.0
1999 14.5
2000 13.2
2001 12.8
2002 16.2
2003 16.8

SOURCE: GOV National Institute of Statistics (INE).

--------------------------

OIL PRODUCTION AND EXPORTS
--------------------------

4. (U) Oil production and export reductions during 2003 were
partially offset by the increase in the average export price
during the year. The total value of oil exports reached USD
20.8 billion in 2003 with an average export price of USD
25.7 per barrel. Venezuela's OPEC production quota is 2.704
million barrels a day starting on April 1, 2004. Oil prices
have been increasing during 2004, reaching a record high of
USD 30.9 per barrel during the last week of March.

OIL PRODUCTION AND EXPORTS (THOUSAND B/D)
-----------------------------------------
AVERAGE
EXPORT PRICE EXPORTS
PRODUCTION(2) EXPORTS (USD/B) (USD MILLION)

1996 2,984 2,752 18.4 18,523
1997 3,248 3,052 16.3 18,180
1998 3,279 3,116 10.6 12,111
1999 2,950 2,785 16.0 16,419
2000 3,060 2,791 25.9 27,884
2001 3,044 2,711 20.2 21,574
2002 2,567 2,432 22.0 21,530
2003 (3) 2,330 1,963 25.7 20,831

(2) Crude oil, including condensates.
(3) Preliminary figures.

SOURCE: Central Bank of Venezuela, and private sector
estimates.

---------------
MONEY SUPPLY/M2
---------------

5. (U) Monetary liquidity increased 57.5 percent during
2003, largely as a result of exchange controls. This the
highest money supply annual increase of the last six years.
Most of the excess liquidity accumulated in the economy
during these months was withdrawn by the BCV by allocating
government bonds and certificates of deposits to domestic
banks. Liquidity could continue to grow during the first
half of 2004 because of the expected government expenditure
increase.

MONEY SUPPLY/M2 (4) MONETARY BASE
-------------------- ---------------------

End of: (million Bs.) Pct.Chg. (million Bs.) Pct.Chg.

1996 5,493,813 55.4 1,675,799 92.1
1997 8,956,161 63.0 3,004,685 79.3
1998 10,621,645 18.6 3,717,323 23.7
1999 12,740,836 20.0 4,909,822 32.1
2000 16,284,578 27.8 5,790,841 17.9
2001 16,976,364 4.2 6,478,295 11.9
2002 19,573,369 15.3 7,701,120 18.9
2003 30,835,975 57.5 11,274,439 46.4

2004 (5)
JAN 30,279,535 (1.8) 10,752,425 (4.6)
FEB 31,815,818 5.1 10,762,152 0.1
MAR 32,311,341 1.6 13,219,845 22.8

(4) M2 includes currency, demand deposits, savings
and certificates of deposit.
(5) Preliminary figures.

SOURCE: Central Bank of Venezuela.

--------------------
CONSUMER PRICE INDEX
--------------------

6. (U) The Central Bank of Venezuela (BCV) reported that
consumer prices for the Caracas metropolitan area rose 21.9
percent from February 2003 to February 2004. Consumer prices
lagged producer prices, however, as wholesale prices
increased by 36.7 percent during the same period. (Note: The
GOV imposed price controls February 11, 2003 on some primary

food items, pharmaceuticals, and personal care products as a
complement to the exchange control regime.)

CONSUMER PRICE INDEX (1997 AVG =100)
------------------------------------
END OF PERIOD PCT CHANGE


1992 10.7 31.9
1993 15.6 45.8
1994 26.6 70.5
1995 41.6 56.4
1996 84.6 103.2
1997 116.5 37.6
1998 151.3 29.9
1999 181.6 20.0
2000 206.0 13.4
2001 231.3 12.3
2002 303.5 31.2
2003 385.7 27.1

2004
JAN 395.4 2.5
FEB 401.6 1.6
MAR 410.2 2.1

SOURCE: Central Bank of Venezuela.

--------------
INTEREST RATES
--------------

7. (U) Interest rates reported by the Central Bank in 2004
continue the downward trend of 2003. Weak credit demand and
excess liquidity because of the strict application of
exchange controls were the most important causes of this
trend. The spread between lending and deposit rates
decreased from 6.59 percent in January 2004 to 4.72 percent
in March 2004.

AVERAGE INTEREST RATES OF THE SIX MOST IMPORTANT
COMMERCIAL AND UNIVERSAL BANKS
--------------------------------------------- ---
Loans Deposits
------- -------------------
Savings 90 days

1996 37.22 18.36 26.85
1997 22.16 6.84 14.62
1998 45.21 10.25 38.02
1999 31.89 7.05 18.90
2000 23.91 3.35 14.80
2001 25.64 2.40 14.13
2002 37.08 3.90 28.29
2003 24.05 6.17 17.58

2004
JAN 18.38 5.19 11.79
FEB 18.08 4.54 10.84
MAR 17.56 4.56 12.84

SOURCE: Central Bank of Venezuela.

-------------
EXCHANGE RATE
-------------

8. (U) The exchange control system pegged the bolivar at
1,600/USD on February 5, 2003. One year later, on February 5,
2004, the Ministry of Finance and the Central Bank devalued the
Bolivar 20 percent, to 1,920.00. A National Exchange Control
Administration (CADIVI) oversees all official foreign exchange
transactions. CADIVI's heavy bureaucratic burden on official
exchange, Venezuela's dependence on imported food and
manufactured goods, and the petroleum sector's need for access to
dollars have resulted in the official exchange rate being
overvalued again. The parallel market exchange rate closed at
around 3,100/USD at the end of March 2004.

ANNUAL AND MONTHLY EXCHANGE RATES
(SELL RATE) (BS/USD)
------------------------------------------

AVERAGE
END OF PERIOD AVERAGE PCT CHANGE

1996 476.50 417.34 136.1
1997 504.25 488.59 17.0
1998 564.50 547.55 12.1
1999 648.25 605.70 10.6
2000 699.75 679.93 12.3
2001 763.00 723.67 6.4
2002 1,401.25 1,160.95 60.4
2003 1,600.00 1,608.63 38.6

2004
JAN 1,600.00 1,600.00 -0.5
FEB 1,920.00 1,825.88 14.1
MAR 1,920.00 1,920.00 0.0

SOURCE: Central Bank of Venezuela.

-------------------------
MERCHANDISE TRADE BALANCE
-------------------------

9. (U) Non-oil exports decreased 4.0 percent to USD 4.92
billion during 2003 compared with 2002. According to the
INE, exports of base metals (aluminum, steel, iron, etc.)
accounted for 37.9 percent of total non-oil exports for the
period, followed by mineral products (19.5 percent), and
chemicals (15.8 percent). The United States was the largest
recipient of Venezuela's non-oil exports (40.5 percent),
followed by Colombia (11.9 percent), and Mexico (6.4
percent). Imports decreased by 21.4 percent during 2003,
largely because of the imposition of exchange controls.

MERCHANDISE TRADE BALANCE (USD MILLION)
---------------------------------------

2002 2003 (6)

OIL EXPORTS (A) 21,530 20,831

NON-OIL EXPORTS (B) 5,126 4,919

TOTAL EXPORTS (C) 26,656 25,750

TOTAL IMPORTS (D) (13,622) (10,707)

MERCHANDISE TRADE
BALANCE (C)-(D) 13,034 15,043

(6) Preliminary figures.

SOURCE: Central Bank of Venezuela.

-------------------
BALANCE OF PAYMENTS
-------------------

10. (U) Venezuela's balance of payments registered a surplus
of USD 5.44 billion during 2003, compared with a deficit of
approximately USD 4.43 billion during 2002. Exchange
controls and the resulting fall in imports and capital
flight have contributed in Venezuela's shift from net debtor
to net creditor.

BALANCE OF PAYMENTS SUMMARY
(USD MILLION)
--------------------------------------------- -

2002 2003(7)

CURRENT ACCOUNT (A) 7,423 9,624
EXPORTS, FOB 26,656 25,750
IMPORTS, FOB (13,622) (10,707)
TRADE BALANCE 13,034 15,043
NET SERVICES AND RENT (5,446) (5,417)
NET TRANSFERS (165) (2)
CAPITAL AND FINANCIAL
ACCOUNT (B) (9,365) (3,171)
DIRECT INVESTMENT (241) 1,388
PORTFOLIO INVESTMENT (2,304) (1,060)
OTHER INVESTMENT (6,820) (3,499)

NET ERRORS AND
OMISSIONS (C) (2,485) (1,010)
OVERALL BALANCE
(A)+(B)+(C) (4,427) 5,443

(7) Preliminary figures.

SOURCE: Central Bank of Venezuela.

----------------------
INTERNATIONAL RESERVES
----------------------

11. (U) BCV-held international reserves have been increasing
continuously since the exchange controls were imposed in
February 2003. Reserves are currently 53.6 percent above
their levels one year ago, as foreign exchange transactions
remain suppressed. Of the total amount of reserves (USD 23.3
billion) at the end of March 2004, around USD 4.6 billion
(or 19.7 percent) were in monetary gold.

INTERNATIONAL RESERVES (USD MILLIONS)
---------------------------------------
BCV FIEM TOTAL

1996 DEC 15,229 - 15,229
1997 DEC 17,818 - 17,818
1998 DEC 14,849 - 14,849
1999 DEC 15,164 215 15,379
2000 DEC 15,883 4,588 20,471
2001 DEC 12,296 6,227 18,523
2002 DEC 12,003 2,857 14,860
2003 DEC 20,666 700 21,366

2004
JAN 21,588 701 22,289
FEB 21,906 702 22,608
MAR 22,560 702 23,262

SOURCE: Central Bank of Venezuela.

------------------------------------
CENTRAL GOVERNMENT FINANCIAL RESULTS
------------------------------------

12. (U) The fiscal deficit increased as the government spent
more than expected during 2003, particularly in the fourth
quarter. The most important sources of non-oil income were
the value added tax, the income tax, the Central Bank
profits, and the bank debit tax. The economic recession
affected the other non-oil incomes such as customs revenues.
The 2003 fiscal deficit was mostly financed with domestic
debt facilitated by the excess liquidity in the financial
sector due to the exchange controls that were imposed in
February.

CENTRAL GOVERNMENT FINANCIAL RESULTS
(as a percentage of GDP)
----------------------------------------

2002 2003

TOTAL REVENUES 20.5 22.7
Oil income 10.0 11.1
Non-oil income 10.5 11.6

TOTAL EXPENDITURES 25.3 28.5

FISCAL DEFICIT (4.8) (5.8)

Source: BCV

------------------
PUBLIC SECTOR DEBT
------------------

13. (U) The government was actively refinancing its domestic
and external debts during 2003. Domestic bonds and treasury
promissory notes dramatically increased both in the share of
domestic banks' portfolio holdings and in the share of the
GOV's debt. During March 2004, the Ministry of Finance
allocated bonds for the equivalent of USD 3.0 billion, of

which one third were USD denominated with maturity in six
months, while the rest were in local currency with
maturities in 2008, 2009, and 2010.

PUBLIC SECTOR DEBT (USD BILLION)
-------------------------------------------

2002 2003(8)

FOREIGN DEBT 22.5 22.8

CENTRAL GOVERNMENT 20.8 21.5

RESTRUCTURED DEBT 8.0 8.3
NON-RESTRUCTURED DEBT 12.8 13.2

AGENCIES 1.7 1.3

DOMESTIC DEBT 11.0 14.1
---- ----
TOTAL PUBLIC SECTOR DEBT 33.5 36.9

(8) Preliminary figures.

SOURCES: Ministry of Finance, BBVA Banco Provincial, and
Embassy's estimates.

--------------
BANKING SYSTEM
--------------

14. (U) Recession and low consumer confidence have depressed
credit demand. The percentage of net loans to total deposits
decreased from 54.46 percent in December 2002 to 32.69 in
February 2004. The contraction of the economy during 2003
also affected debtors' ability to pay. The percentage of
past due loans increased from December 2003 to February
2004. This figure is lower than a year before, as banks have
been cleaning up their credit portfolios, declaring more of
the past due loans as outright losses.

BANKING SYSTEM KEY INDICATORS
(percentages)

DEC 02 DEC 03 FEB 04
Past due loans/
gross loans 6.76 4.47 4.81

Credit portfolio allowance/
past due loans 132.64 179.50 174.61

Equity/total assets 16.08 14.44 14.64

Net financial margin/
average asset 5.32 6.19 7.79

Net financial margin/
average equity 35.65 43.95 55.93

Net loans/
total deposits 54.46 36.33 32.69

Source: SUDEBAN

-------------------------
DIRECT FOREIGN INVESTMENT
-------------------------

15. (U) New direct foreign investment registered during 2003
increased to USD 1,174.2 million. Much of this influx was a
result of major foreign investment in Venezuelan telecom
giant CANTV.

DIRECT FOREIGN INVESTMENT(9)
(MILLIONS OF USD)
-------------------------------

1996 1,114.4
1997 690.1
1998 1,583.8 (10)
1999 985.4
2000 642.9

2001 948.1
2002 297.0
2003 1,174.2 (11)


(9) Includes investment in the hydrocarbon,
petrochemical, mining and natural gas sectors.
(10) Privatization of state steel company (SIDOR).
(11) This high figure consists largely of investments in
former state-owned telecoms giant CANTV, made in 1996,
but for technical reasons only registered by the GOV
in 2003.

SOURCES: SIEX, CONAPRI, and Metroeconomica.

----------------------------
CARACAS STOCK EXCHANGE INDEX
----------------------------

16. (U) The Caracas Stock Exchange (CSE) index closed at a
record high of 26,579.69 at the end of March 2004,
increasing 19.7 percent from its close in December. The
index increased 212.5 percent from its level in March 2003.
A primary catalyst in this rise is the use of CSE shares to
acquire American Depositary Receipts on the New York Stock
Exchange that are then used as foreign exchange vehicles.
However, the CSE has also benefited from the lack of other
investment opportunities in the broader economy.

CARACAS STOCK EXCHANGE CAPITALIZATION INDEX
(DECEMBER 1993 = 1,000)
-------------------------------------------

2002 2003 2004

JANUARY 6,293.89 8,286.65 27,956.14
FEBRUARY 6,958.39 8,509.56 27,348.36
MARCH 6,828.04 8,506.59 26,579.69
APRIL 6,712.57 8,631.60
MAY 7,422.64 12,799.62
JUNE 7,452.09 13,666.40
JULY 7,134.00 14,052.35
AUGUST 6,793.30 14,497.20
SEPTEMBER 7,447.71 16,956.29
OCTOBER 7,741.81 20,413.00
NOVEMBER 8,015.17 21,397.36
DECEMBER (12) 22,203.95

(12) The CSE was closed during December 2002 because of the
general strike.

SOURCE: Caracas Stock Exchange and Metroeconomica.

------------------
INTERNET RESOURCES
------------------

17. INTERNET RESOURCES:

AMEMBASSY CARACAS WEBSITE: www.embajadausa.org.ve
-
EXCHANGE RATES AND INTERNATIONAL RESERVES: www.bcv.org.ve
-
STOCK EXCHANGE: www.caracasstock.com
-
TRADE AND LABOR FORCE STATISTICS: www.ine.gov.ve
-
BUSINESS INFORMATION: www.venamcham.org
-
INVESTMENT OPPORTUNITIES: www.conapri.org
-
PETROLEUM INFORMATION: www.pdvsa.com,
www.mem.gov.ve
-
PUBLIC FINANCE INFORMATION: www.mf.gov.ve
-
FINANCIAL INDICATORS: www.sudeban.gov.ve
-
ECONOMIC PUBLICATIONS: www.metroeconomica.com.ve,
www.veneconomy.com, www.bancomercantil.com,
www.provincial.com
-
E

NEWSPAPERS: www.eluniversal.com,
www.el-nacional.com
-
LEGAL PUBLICATIONS: www.datalegis.com.ve,
www.bpmaw.com, www.traviesoevans.com,
www.tpa.com.ve
-
VENEZUELAN GOVERNMENT: www.venezuela.gov.ve,
www.platino.gov.ve

Shapiro


NNNN

2004CARACA01479 - UNCLASSIFIED

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