Cablegate: Saving for a Rainy Day? Brv Accumulates Cash

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RR RUEHAO
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ZNR UUUUU ZZH
R 151952Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7036
INFO RUEHAC/AMEMBASSY ASUNCION 0724
RUEHBO/AMEMBASSY BOGOTA 7117
RUEHBR/AMEMBASSY BRASILIA 5821
RUEHBU/AMEMBASSY BUENOS AIRES 1516
RUEHLP/AMEMBASSY LA PAZ 2406
RUEHPE/AMEMBASSY LIMA 0660
RUEHMN/AMEMBASSY MONTEVIDEO 0881
RUEHQT/AMEMBASSY QUITO 2492
RUEHSG/AMEMBASSY SANTIAGO 3824
RUEHAO/AMCONSUL CURACAO 1062
RUEHGL/AMCONSUL GUAYAQUIL 0711
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 003411

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: SAVING FOR A RAINY DAY? BRV ACCUMULATES CASH
RESERVES

REF: A. CARACAS 01291

B. CARACAS 02718
C. CARACAS 2622
D. CARACAS 3316
E. CARACAS 3374

1. (SBU) SUMMARY: Embassy estimates are that the BRV
currently has between USD 40 and 50 billion in available
funds, apart from the USD 35 billion in foreign exchange
reserves, distributed between the Central Bank (BCV) and
private and public sector banks. These funds represent
"excess" oil revenues, pilfered foreign reserves, and unspent
government funds and could cover government expenditures for
9-11 months. The fact that this huge, opaque reserve exists
is demonstrative of Chavez's propensity for parallel
networks, desire for a security blanket of money following
the 2002 coup and 2002-2003 strikes, and is representative of
the inherent corruption and dysfunctionality of the BRV
bureaucracy.

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SEVEN YEARS OF PLENTY
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2. (SBU) The price for the Venezuelan oil basket has risen
from USD 11 when Chavez came into office in 1999 to USD 57.19
on November 10, and BRV spending has increased over 100
percent (in dollar terms) and over 700 percent (in Bolivars)
during his tenure. The BRV is also hoarding money. While
these transactions are intentionally opaque, current Embassy
estimates are that the BRV had around USD 41 billion as of
the end of August in available funds in addition to the BCV
foreign exchange reserves. (Note: Our estimate is lower than
many other local economic consultancies, which estimate
around USD 45-48 billion. Our estimate represents an 18%
increase from April 2006 (see reftel A). End Note.) This
amount is divided between treasury funds held in the BCV (USD
5.7 billion), BRV deposits in private sector banks (USD 9.1
billion), The Bank for Social and Economic Development
(BANDES) (USD 10.2 billion), the Fund for National
Development (FONDEN) (USD 14 billion, held by the Treasury
Bank) and the Fund for Social and Economic Development
(FONDESPA) (USD 2 billion). (Note: These numbers are gleaned
from BCV reports and public comments by BRV officials. There
is some doubt as to the accuracy of BRV financial accounting
and many reports are significantly late. End Note.)
(Comment: In addition to the rainy day funds and official
reserves, PDVSA has tens of millions of dollars in escrow
accounts tied to the Faja strategic associations. PDVSA can
only draw on the accounts by presenting audited financial
statements. It is very possible that PDVSA has additional
funds held in off-shore accounts, but we have no way of
verifying their existence. End Comment.)

3. (SBU) These funds have varying degrees of availability.
BRV funds held in treasury accounts at the BCV represent
government revenues not yet expended and technically cannot
be spent without National Assembly (AN) approval. The AN has
authorized almost USD 14 billion in additional credits (9
percent of GDP) in 2006 and this money remains in treasury
accounts until requested by the relevant ministry or agency.
(Comment: It is unlikely that the BRV will be able to spend
all of this money due to bureaucratic inefficiency and
capacity problems (see reftel D). We also note that PDVSA
has had problems in the past executing on its investment
budget. End Comment.) If the money is not spent in 2006, it
will have to be re-authorized as an additional credit to the
2007 budget. The BCV is holding around USD 5.7 billion in
treasury accounts.

CARACAS 00003411 002 OF 003

4. (SBU) Another result of BRV inability to absorb and spend
all of its authorizations has been for ministries and
government institutions to store their money in private
sector banks. Fifteen of the 50 active Venezuelan financial
institutions count on 30 percent or more of their deposits
from the BRV and thus are more or less reliant on BRV
deposits for profitability, if not solvency. This dependency
has led to widespread corruption, wherein banks pay off
government officials to obtain deposits and to ensure that
they stay in place. (Comment: A large-scale withdrawal of
BRV funds could precipitate a banking crisis as the banks
dependent on government deposits begin to fail, which could
snowball as the Venezuelan banking system has many inter-bank
ties and off-the-books relationships (see reftel C). Such a
dependence on government deposits also gives BRV officials
leverage over a large portion of the banking sector. End
Comment.) Our current estimates are that there are USD 9-10
billion in private sector banks (representing about 1/5 of
the assets of the Venezuelan banking sector). This does not
include trust funds and other off balance sheet financial
holdings by the banking sector.

5. (U) BANDES is a public sector bank run by the Vice
Minister of Finance Behrens. Originally founded as the
Venezuelan Investment Fund in 1974, it was revived by Chavez
in 2001 and renamed. BANDES received cash infusions from
PDVSA after its re-constitution, but has since been nominally
independent. Its deposits, while not intended for budgetary
spending, could easily cover for potential shortfalls by
paying for projects that the government found itself
incapable of funding. At the end of August, 2006 BANDES had
USD 10.2 billion in assets and USD 736 million in outstanding
loans.

6. (U) FONDEN and FONDESPA essentially function as a
parallel budget subject to Chavez's whims, and already cover
budgetary shortfalls (for example by funding portions of the
missions) (see reftel A). FONDEN received USD 4.2 billion
from BCV reserves over the past year and is receiving between
USD 120 and 200 million weekly from PDVSA. It currently has
about USD 14 billion in assets. (Note: Chavez has returned
to the "excess" foreign reserves theme and expectations are
that, if re-elected, he will demand another transfer of USD
5-6 billion from the BCV to FONDEN early in 2007. End Note.)
FONDEN is expected to spend USD 6-8 billion in 2006 and
FONDEN's assets are held in the Treasury Bank in trust funds.

7. (U) In addition to these parallel mechanisms, PDVSA spent
USD 5.384 billion in 2005 on "social expenses" and spending
in 2006 should be even higher than in 2005 due to the higher
average oil price USD 46.03 (for the Venezuelan basket in
2005) instead of USD 57.19 (the Venezuelan basket so far in
2006) and increased PDVSA participation in social activities.
(Comment: PDVSA's duties seem to be branching out daily.
In addition to being an oil company, it is now involved in
agricultural projects (see reftel E), power generation, and
the construction of infrastructure such as roads and schools.
End Comment.)

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SEVEN YEARS OF FAMINE?
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8. (SBU) While experts differ as to whether the size of
financial holdings is demonstrative merely of BRV
incompetence or specific Chavez planning, these funds will
give the BRV a solid cushion against possible future falling
oil prices. Total BRV spending (including PDVSA social
spending and FONDEN) could reach USD 60 billion in 2006 (39
percent of GDP). Spending has increased around 35 percent in

CARACAS 00003411 003 OF 003

real terms in 2006 and has increased 100 percent in real
terms since 1999. The consensus estimate for the Venezuelan
oil basket next year is around USD 55, near this year's
average, and oil production is not increasing. (Note: It is
currently estimated at 2.4 to 2.6 million barrels/day. End
Note.) (Comment: If government revenues remain steady (oil
prices do not spike) and spending (including budget and
parallel/off-budget) continues to increase, the BRV will
begin to run significant deficits (in excess of 3 percent of
GDP), starting as early as 2007. End Comment.)

9. (SBU) Comment: This cushion of USD 40-50 billion (USD
75-85 billion if international reserves at the BCV are
included) provides a security blanket for Chavez and the BRV.
If there are further economic disruptions or a sharp
decrease in oil prices or production, Chavez will be able to
maintain government services and spending and thus his base
of support. A rough estimate is that even given a complete
cessation of revenues (similar to the general strike of
December 2002-January 2003), this money would allow the
government to maintain current spending levels for nine
months. Should the price of the Venezuelan oil basket fall
below the USD 40 a barrel that most experts agree represents
Venezuela's break even point, the excess funds could cover
budgetary deficits for 2 years or more. End Comment.

BROWNFIELD

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