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Cablegate: Parallel Rate Spikes As Demand for Dollars Grows

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RR RUEHWEB

DE RUEHCV #3434/01 3241530
ZNR UUUUU ZZH
R 201530Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7077
INFO RUEHAC/AMEMBASSY ASUNCION 0727
RUEHBO/AMEMBASSY BOGOTA 7124
RUEHBR/AMEMBASSY BRASILIA 5824
RUEHBU/AMEMBASSY BUENOS AIRES 1519
RUEHLP/AMEMBASSY LA PAZ NOV LIMA 0663
RUEHMN/AMEMBASSY MONTEVIDEO 0884
RUEHQT/AMEMBASSY QUITO 2495
RUEHSG/AMEMBASSY SANTIAGO 3827
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE

UNCLAS CARACAS 003434

SIPDIS

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: PARALLEL RATE SPIKES AS DEMAND FOR DOLLARS GROWS

REF: A. CARACAS 3375

B. CARACAS 1215
C. BOWEN/WELLS E-MAILS 11/15

1. (U) SUMMARY: The recently-issued Bonos del Sur (see
reftel A) were being re-sold in Venezuela at a rate in excess
of 3400Bs/USD this week as Venezuelans are increasingly
demanding dollars. The demand is driven by continued excess
liquidity, problems with the Commission for the
Administration of Foreign Exchange (CADIVI), concerns of a
potential 2007 devaluation, seasonal pressures, and general
economic and political uncertainty as elections approach.
END SUMMARY.

2. (U) The spike in the parallel exchange rate for
dollar-denominated bonds follows the USD 1 billion
bi-national Bonos del Sur issuance earlier this week (reftel
A). The issuance was oversubscribed by as much as much as 12
times. The Bonos del Sur issuance precipitated the spike in
the parallel rate as many companies and individuals had been
postponing foreign currency transactions to wait for the Bono
del Sur and when their requests for bonds were not fulfilled,
they had to rush to get dollars by other means. (Note:
According to one source, a request for a USD 5 million
allocation resulted in an actual allocation of USD 27,000.
End Note.) The bond issuance also raised trader interest in
dollars and led to speculation as people bid up the rate,
hoping to get bonds and then to be able to sell them for a
higher price.

3. (U) The most-often quoted parallel rate is the cost of
converting American Depository Shares of the local
telecommunications monopoly (CANTV) to shares on the New York
Stock Exchange (see reftel B), which as of November 15 was
hovering around 3100Bs./USD (or 44 percent above the official
rate of 2150Bs./USD). This rate has steadily increased over
the past few months. While CADIVI has increased approvals
for foreign exchange in recent weeks from an average of USD
90 million/day to USD 112 million/day, it appears that even
this amount does not meet demand. (Note: Consumer demand
has been at historical highs throughout 2006 and will only
increase in the run-up to Christmas. End Note.) In
addition, CADIVI does not approve requests for individuals
(except for USD 4,000 in credit card purchases while
traveling) or for certain products and types of transactions.
Some companies that have experienced delays in receiving
approvals (for example due to problems with the tax authority
or with completing their labor certification) also use the
parallel market as an assured means for obtaining dollars,
albeit at a much higher Bolivar to dollar rate.

4. (SBU) The increase in the parallel rate presages continued
problems for private industry and the Venezuelan economy.
The increase in the parallel rate (both the CANTV rate and
the "permuta" bond rate) increases inflation as some
importers price their goods based on this rate (rather than
the official one) and the costs of doing business in
Venezuela for companies that take advantage of parallel
mechanisms goes up. By keeping imports artificially cheap,
the official fixed, overvalued exchange rate encourages
conspicuous consumption, further fueling inflation and
causing shortages. The artificially cheap imports compete
with domestically produced goods and undermines local
production. (Note: One contact from Venezuela's industrial
heartland, Valencia, noted that over 600 factories and
producers have shut down in the region since Chavez took
power. End Note.)

5. (SBU) While Chavez and other senior BRV officials are
adamant that there will be no devaluation in 2007, the
widening gap between official and parallel rates make the
necessity of a devaluation harder to ignore. The last
devaluation occurred in March of 2005, when the parallel rate
was 40 percent higher than the official rate. The rate gap
causes inflationary pressures, about which the BRV seems
increasingly concerned and costs the BRV financially as they
implicitly lose money for every dollar to Bolivar transaction
(receiving 2150 Bs. for a dollar that is really worth 3000 or
more). In addition the Central Bank is spending hundreds of
millions to try and soak up excess liquidity caused by
government spending and exchange controls. As spending
continues to grow, there will be an added incentive to
devalue in order to make the BRV's dollar revenues (primarily
from oil) go further in the local economy.

6. (SBU) COMMENT: While the spike to 3400Bs./USD may be
temporarily related to the Bonos del Sur, the trend line
clearly shows an increasing overvaluation of the Bolivar.
Based on the number of public comments by BRV officials
recently about the parallel rate, it seems that the BRV is
preoccupied by the increasing numbers, if not the underlying
causes of liquidity, increasing demand, structural problems
with CADIVI and fears of the future. This problem is also
self-sustaining as the widening gap between the official and
parallel rate makes people eager to get their money out more
quickly, which in turn drives demand for dollars and raises
the parallel rate. END COMMENT.
BROWNFIELD

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