Cablegate: Brv Releases 2007 National Budget

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UNCLAS SECTION 01 OF 03 CARACAS 003316

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E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: BRV RELEASES 2007 NATIONAL BUDGET

REF: A. CARACAS 2718

B. CARACAS 3224

1. (U) SUMMARY: The Minister of Finance delivered the
proposed 2007 budget for Venezuela to the National Assembly
(AN) on October 17, 2006. The budget calls for spending
115.2 trillion Bolivars (USD 53.6 billion) in 2007. The
proposal assumes an exchange rate of 2150 Bs/USD, an average
oil export price of USD 29/barrel, an inflation rate of 12
percent, a real GDP growth of 5 percent and a 1.7 percent of
GDP deficit. The 2007 budget represents a 32 percent nominal
increase over the original 2006 budget (inflation for 2006 is
expected to end around 15-16 percent), though a 11.2 percent
decrease from the 2006 budget with all additional credits.
This does not include off-budget expenditures which in 2006
we estimate amounted to an additional USD 15 billion in BRV
spending. Passage is expected in mid-November with cosmetic
changes. Once again the "official" budget underestimates
revenues, expenditures, inflation and growth. We do no
expect the BRV to face any significant fiscal vulnerabilities
during 2007. END SUMMARY.

2. (U) Two days after the constitutionally mandated deadline
of October 15, Finance Minister Merentes delivered the 2007
budget to the National Assembly (AN). The proposed 2007
budget calls for total expenditures of USD 53.6 billion, or
33 percent of GDP (which is in line with the current 2006
budget). This marks a 32.4 percent increase in nominal terms
over the budget proposed for 2006, though is 11.2 percent
less than the 2006 budget when all additional credits are
factored in. (Comment: The BRV bureaucracy is having
capacity problems and is unable to spend all of the money it
is receiving. One respected economic consultancy estimates
that by year-end 2006 the BRV will have only spent USD 48.9
billion (31.5 percent of GDP), although USD 60.3 billion (39
percent of GDP) has been authorized with the additional
credits. End Comment.)

3. (U) The 2007 budget breaks little new ground and follows
the trends in the 2006 budget and subsequent additional
credits. Social spending continues to increase and remains
by far the largest segment of BRV expenditures (44.6
percent). The table below shows budget figures for 2005,
2006 and 2007 and demonstrates the huge spending increases of
the past two years. (Note: This does not/not include
off-budget spending. End Note.)

Year Social Transfers Debt Defense Other Total
Spending to states Service

(in USD millions)

2005 16,576 7,858 6,599 3,195 6,619 40,847
2006* 16,562 9,080 6,709 2,999 5,129 40,479
2006** 21,053 13,342 12,081 3,482 10,363 60,321
2007 23,917 13,459 5,931 2,566 7,698 53,571

Other includes the ministries of infrastructure, agriculture,
energy and mines, industry and tourism.

*Original 2006 budget. **2006 budget with all additional
credits. 2007 numbers are from the proposed budget for this
year.
Sources: Ministry of Finance, National Assembly.

4. (SBU) According to this budget, the BRV will spend
approximately USD 2.7 billion (1.7 percent of GDP) more than
it will take in during 2007. This will be met mostly through
the sales of bonds and CDs on the local market. Total
internal debt is currently 14.5 billion (9.3 percent of GDP)
and external debt is 26.7 billion (17 percent of GDP).

CARACAS 00003316 002 OF 003

(Comment: The fiscal outlook and debt load appear completely
manageable for the duration of 2007, barring drastic drops in
the price of oil. Standard and Poor's recently raised its
short term rating for Venezuelan debt to B status and that of
long term debt to BB. End Comment.)

5. (SBU) The budget proposal assumes an average oil price
for the Venezuelan oil basket of USD 29/barrel, which is
considerably less than the average for 2006 (USD 57.33 YTD as
of November 3) and consensus estimates for 2007 (around USD
55). According to Finance Minister Merentes, the budget
assumes 3.4 million barrels per day (mbpd) in production
(although the budget as submitted to the AN doesn't include
this figure). The production figure was contradicted
publicly by Central Bank (BCV) governor Zavala on October 14,
who put actual production at around 2.6 mbpd (which is in
line with our estimates). Thus, while continuing to
underestimate the price of oil, the revenue surplus will not
be as large as it first appears. Given that actual
production is considerably less, the price of the Venezuelan
oil basket would have to fall below USD 37.92/barrel (rather
than below USD 29) for government revenues to fall below
budgetary expectations. (Note: As part of the announced OPEC
production cuts, Venezuela is supposed to cut production by
138,000 bpd. The BRV appears in some cases to be cutting
production (rather than simply lowering the numbers on
paper), so this break even point may be even higher.
However, the extent of actual production cuts is not clear
(see reftel B). The weekly price for the Venezuelan oil
basket on November 2 was USD 49.38. End Note.)

6. (U) The current exchange rate of 2150 Bolivars to the
dollar was instituted in March of 2005 and Chavez has
publicly stated that there will be no devaluation in 2007.
The parallel rate for Bolivars is currently hovering around
2900 Bs/USD, indicating the Bolivar is overvalued by between
30 and 35 percent. (Comment: There is much debate as to
whether or not the Bolivar will be devalued in 2007. Most
experts agree that if a devaluation does occur, it will be
minor (5-8 percent) an would be based more on the
government's desire to increase its spending power than to
reduce the spread between official and parallel rates. In
addition, foreshadowing a devaluation would have negative
consequences for the economy, as consumers would splurge
(exacerbating shortages and increasing inflation) and capital
flight would increase before the money lost value. End
Comment.)

7. (U) Official inflation is expected to close the year in
excess of 15 percent, although official figures are
misleadingly low (see reftel A). The 2006 budget presaged an
unrealistic inflation rate of 10 percent and given increasing
liquidity and government spending, 2007 inflation will likely
be near, if not higher than 2006 levels.

8. (SBU) Planning Minister Giordanni noted on October 20 that
GDP would grow from USD 150 billion to USD 200 billion in
2007. This implies a 33 percent nominal increase. (Comment:
It is unlikely that more than 10 percent would come from GDP
growth, although the remainder of Giordanni's estimate could
be from inflation. This neat little trick of a 33 percent
nominal GDP increase in USD terms is achieved by keeping the
overvalued exchange rate anchored at 2150 Bs/USD and is not
without its costs. End comment.)

9. (SBU) Comment: The draft budget for 2007 is just that, a
draft. Given the lack of opposition in the AN it seems
likely that there will be little debate on the budget and it
will pass with cursory changes, probably in mid to late
November. This election year the AN has already increased
the budget by almost 49 percent through the approval of

CARACAS 00003316 003 OF 003

additional credits, and that trend seems likely to continue
in 2007. (Note: The BRV's inability to obligate all of its
authorizations means that actual spending in 2006 is forecast
to be only 29 percent higher than the original 2006 budget.
End Note). In addition, the BRV spends substantial amounts
of money using "off/parallel-budget" mechanisms including the
Fund for National Development (FONDEN) and PDVSA which fund
many social programs and large segments of the BRV missions.
Off-budget spending for 2006 may reach USD 15 billion, though
exact numbers are hard to come by. The BRV currently has
around USD 40 billion in unspent reserves (in USD and
Bolivars held in treasury accounts at the BCV, the Bank for
Economic and Social Development (BANDES), the Treasury Bank
(which holds FONDEN assets) and private sector banks
(septel). (Note: This figure does not include BCV foreign
exchange reserves, which as of November 2 are USD 34.7
billion. End Note.) Debt stock is relatively low and if
necessary, the BRV could cover all of its financing needs for
2007 with these unspent reserves. The conservative forecasts
for GDP growth by the Ministry of Finance will allow the BRV
to take credit when GDP growth exceeds estimates. The low
ball price for oil means that the government can continue to
increase spending throughout the year and avoid additional
constitutionally mandated payments to state governments or
the macroeconomic stabilization fund as the "unexpected"
windfall comes in. End Comment.
BROWNFIELD

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