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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 002728

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 an economic rebound based on
increasing government expenditures. Levels of new foreign
direct investment remain low. A strong international
reserves position and high average oil prices have
contributed to reduce the country risk and facilitated the
partial public external debt refinancing.

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

2. (U) Total GDP increased by 23.1 percent in real terms
during the period January-June of 2004 compared with the
levels of economic activity registered during the same
period of the previous year. This is explained by depressed
activity during the first quarter of 2003 because of the
general strike that took place during December 2002-January
2003. Nonetheless, GDP growth for 2004 could be more than
10 percent, driven by the increase in 2004 public
expenditures. The Ministry of Finance is now predicting
2004 GDP growth of 12 percent.

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 (14.2) (6.0) (8.9)
2003 (2.1) (8.1) (7.6)
2004 (JAN-JUN) (1) 28.5 20.7 23.1

(1) Preliminary figures

SOURCE: Central Bank of Venezuela.

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

3. (U) First semester 2004 figures from the National
Institute of Statistics (INE) indicate an average
unemployment rate of 16.6 percent. This figure represents
2.00 million unemployed out of a labor force of 12.04
million, and a total population of 25.86 million. INE's
figures are disputed by the private sector. According to
Consecomercio (National Retail and Services Council,
representing the trade and services sector), the real
unemployment rate in Venezuela exceeds 20 percent and
affects some 2.4 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.

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
2004 (first semester) 16.6

SOURCE: GOV National Institute of Statistics (INE).

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

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

4. (U) The total value of oil exports reached USD 15.05
billion during the first semester of 2004 with an average
export price of USD 30.43 per barrel. Venezuela's OPEC
production quota has been 2.99 million barrels a day since
August 1, 2004. Venezuela's oil production has been below
the quota, according to OPEC figures. Oil prices
(Venezuelan basket) have been increasing during 2004,
reaching a record high of USD 39.52 per barrel during the
third week of August.
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 22,052
2004 (J-J) 2,516 2,149 30.4 15,049

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

SOURCE: Central Bank of Venezuela, Ministry of Energy and
Mines, OPEC, 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 is the
highest annual increase of the money supply in 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 continued growing during the
first half of 2004 as government expenditures increased.

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
APR 31,934,539 (1.2) 11,049,744 (16.4)
MAY 32,962,043 3.2 11,291,538 2.2
JUN 34,237,954 3.9 11,994,271 6.2

(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 21.8
percent from July 2003 to July 2004. Consumer prices lagged

producer prices, however, as wholesale prices increased by
30.6 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.) Core inflation removes the
most volatile categories from the CPI.

CONSUMER PRICE INDEX (1997 AVG 100) and CORE INFLATION
--------------------------------------------- ------------
END OF PERIOD PCT CHANGE CORE INFLATION
( change)
1996 84.6 103.2 N/A
1997 116.5 37.6 N/A
1998 151.3 29.9 N/A
1999 181.6 20.0 N/A
2000 206.0 13.4 12.8
2001 231.3 12.3 11.3
2002 303.5 31.2 31.2
2003 385.7 27.1 37.9

2004
JAN 395.4 2.5 1.7
FEB 401.6 1.6 2.6
MAR 410.2 2.1 3.6
APR 415.6 1.3 2.0
MAY 420.5 1.2 1.5
JUN 428.3 1.9 1.5
JUL 434.2 1.4 1.2

SOURCE: Central Bank of Venezuela.

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

7. (U) Interest rates reported by the Central Bank in 2004
continue the downward trend of 2003. Excess liquidity
arising from the strict application of exchange controls was
the most important cause of this trend. However, credit
card consumption, mortgages, and car loan rates have been
kept at levels that are more than double the average loan
rate for most consumers. The spread between lending and
deposit rates decreased from 6.59 percent in January 2004 to
5.55 percent in July 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
APR 17.97 4.56 12.46
MAY 17.68 4.43 13.11
JUN 17.08 4.33 12.75
JUL 17.22 4.17 11.67

SOURCE: Central Bank of Venezuela.

-----------------------------------
EXCHANGE RATES AND BCV LIQUIDATIONS
-----------------------------------

8. (U) The exchange control system pegged the bolivar at
1,600/USD on February 5, 2003. One year later, on February 7,
2004, the Ministry of Finance and the Central Bank devalued the
Bolivar 20 percent, to 1,920.00. The National Exchange Control
Administration (CADIVI) oversees all official foreign exchange
transactions. With CADIVI not supplying enough foreign exchange
to fully meet demand, and the exchange rate remaining fixed

despite internal inflation, a parallel market, in which dollars
are traded at a substantial premium, has developed. Official
forex transaction, however, have increased dramatically in recent
months. The parallel market exchange rate closed at around
2,800/USD by the middle of August 2004.

END OF PERIOD EXCHANGE RATES (BS/USD)
AND BCV LIQUIDATIONS
--------------------------------------------- ------
OFFICIAL FOREX
OFFICIAL MARKET PARALLEL MARKET LIQUIDATIONS
(MILLIONS USD)
--------------- --------------- ----------------
1996 476.50
1997 504.25
1998 564.50
1999 648.25
2000 699.75
2001 763.00
2002 1,401.25
2003 1,600.00 2,875.00 4,594.52

2004
JAN 1,600.00 3,076.11 943.36
FEB 1,920.00 3,240.04 779.36
MAR 1,920.00 3,083.54 891.95
APR 1,920.00 2,981.48 643.39
MAY 1,920.00 2,913.59 811.02
JUN 1,920.00 2,622.83 1,265.83
JUL 1,920.00 2,645.78 1,297.00

SOURCE: Central Bank of Venezuela, Metroeconomica, and
Banco Provincial
-------------------------
MERCHANDISE TRADE BALANCE
-------------------------

9. (U) Non-oil exports increased 45.8 percent during
January-June 2004 compared with the same period of last
year. (There were no exports during the general strike in
January 2003.) According to the INE, exports of base metals
(aluminum, steel, and others) accounted for 34.6 percent of
total non-oil exports for the period January-May 2004,
followed by mineral products (29.2 percent), and chemicals
(14.7 percent). The United States was the largest recipient
of Venezuela's non-oil exports (38.0 percent), followed by
Colombia (12.1 percent), and Mexico (5.2 percent). Imports
increased by 67.8 percent during January-June 2004 compared
with the same period of last year. 2003 figures reflect the
general strike of December 2002 - February 2003, and the
fact that the approvals of foreign exchange during the first
months of 2003, when exchange controls were put into place,
were very slow.

MERCHANDISE TRADE BALANCE (USD MILLION)
---------------------------------------
January-June
2003 2003 2004(6)

OIL EXPORTS (A) 22,052 9,353 15,049

NON-OIL EXPORTS (B) 4,809 2,068 3,016

TOTAL EXPORTS (C) 26,861 11,421 18,065

TOTAL IMPORTS (D) (10,341) (4,271) (7,168)

MERCHANDISE TRADE
BALANCE (C)-(D) 16,520 7,150 10,897

(6) Preliminary figures.

SOURCE: Central Bank of Venezuela.

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

10. (U) Venezuela's balance of payments registered a
surplus of USD 1.90 billion during the first semester of
2004, compared with a surplus of USD 2.65 billion during the
same period of last year. Higher oil prices, exchange

controls, and the resulting fall in imports and capital
flights contributed to these results. BCV Director Armando
Leon, in comments to the press on August 2, projected a
balance of payments surplus of USD 6-7 billion for the whole
year 2004 if oil prices do not decrease during the rest of
the year.

BALANCE OF PAYMENTS SUMMARY
(USD MILLION)
--------------------------------------------- ---
January-June
2003 2003 2004(7)
CURRENT ACCOUNT (A) 11,524 4,581 7,086
EXPORTS, FOB 26,861 11,421 18,065
IMPORTS, FOB (10,341) (4,271) (7,168)
TRADE BALANCE 16,520 7,150 10,897
NET SERVICES AND RENT (5,003) (2,557) (3,694)
NET TRANSFERS 7 (12) (117)
CAPITAL AND FINANCIAL
ACCOUNT (B) (5,135) (936) (4,171)
DIRECT INVESTMENT 1,338 1,490 640
PORTFOLIO INVESTMENT (1,348) (68) (41)
OTHER INVESTMENT (5,125) (2,358) (4,770)
NET ERRORS AND
OMISSIONS (C) (946) (994) (1,013)
OVERALL BALANCE
(A)(B)(C) 5,443 2,651 1,902

(7) Preliminary figures.

SOURCE: Central Bank of Venezuela.

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

11. (U) BCV-held international reserves increased nearly
continuously after exchange controls were imposed in
February 2003 until May 2004. PDVSA's sales of dollars to
the Central Bank were suspended in order to direct oil
revenues to a USD 2.0 billion Social Development Fund, the
creation of which has been very controversial. The reserves
dropped USD 2,509 million on August 2, after PDVSA completed
the buyback of part of its external debt.

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 21,623 701 22,324
FEB 21,929 702 22,631
MAR 22,560 702 23,262
APR 23,591 703 24,294
MAY 23,453 703 24,156
JUN 22,522 704 23,226
JUL 23,297 705 24,002

SOURCE: Central Bank of Venezuela.

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

12. (U) Total ordinary expenditures increased by 81.3
percent during the period January-May 2004 in comparison
with the same period of last year. Increased spending
during 2004 has continued the same trend of expansion
initiated in mid-2003. This has been possible because of
stronger oil prices, as well as higher collection of
internal taxes.

CENTRAL GOVERNMENT FINANCIAL RESULTS

(TRILLIONS OF BOLIVARS)
-----------------------------------------
January-May
2002 2003 2004

TOTAL ORDINARY REVENUES 27.0 6.9 14.9
Oil income 15.5 3.1 6.8
Non-oil income 11.5 3.8 8.1

TOTAL ORDINARY EXPENDITURES 31.5 9.1 16.5

FISCAL DEFICIT (4.5) (2.2) (1.6)
Sources: BCV and Metroeconomica

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

13. (U) The government actively refinanced 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)
-------------------------------------------

2003 2004(8)
FOREIGN DEBT 33.2 30.1

CENTRAL GOVERNMENT 23.0 22.8

RESTRUCTURED DEBT 5.8 5.7
NON-RESTRUCTURED DEBT 17.2 17.1

AGENCIES 1.2 1.2

PDVSA 9.0 6.1

DOMESTIC DEBT (9) 17.9 21.5
---- ----
TOTAL PUBLIC SECTOR DEBT 51.1 51.6

(8) Projection.
(9) Includes Central Bank debt.

SOURCES: Ministry of Finance, Metroeconomica, and Santander
Investment.

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

14. (U) Credit demand increased during the first semester
of 2004 as a result of the rebound of the economy, although
at a lower level than 2002. The percentage of past due
loans decreased from December 2003 to June 2004. This
figure has been decreasing since 2002 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 JUN 04
Past due loans/
gross loans 6.76 4.47 2.81

Credit portfolio allowance/
past due loans 132.64 179.50 206.39

Equity/total assets 16.08 14.44 14.45

Net financial margin/
average asset 5.32 6.19 7.01

Net financial margin/

average equity 35.65 43.95 52.87

Net loans/
total deposits 54.46 36.33 42.41

Source: SUDEBAN

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

15. (U) The Superintendency of Foreign Investments (SIEX)
registered new direct foreign investment in the amount of
USD 170.5 million during the period January-April 2004.
Although the overall investment climate remains uncertain,
there are sectors (particularly oil, gas, and
communications) in which new investments are contemplated.

DIRECT FOREIGN INVESTMENT
(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)

2004
JAN 55.2
FEB 47.0
MAR 24.4
APR 43.9

(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 28,595.46 on August 13, 2004, which was the
working day just before the Presidential Referendum,
increasing 28.8 percent from its close in December. 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 27,484.76
MARCH 6,828.04 8,506.59 26,579.69
APRIL 6,712.57 8,631.60 25,879.34
MAY 7,422.64 12,799.62 25,405.73
JUNE 7,452.09 13,666.40 25,285.17
JULY 7,134.00 14,052.35 25,611.20
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
-
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

McFarland


NNNN
2004CARACA02728 - UNCLASSIFIED

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