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Cablegate: Venezuela's Parallel Exchange Rate Resumes Its Rise

VZCZCXYZ0025
PP RUEHWEB

DE RUEHCV #1304 2621434
ZNR UUUUU ZZH
P 181434Z SEP 08
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 1809
INFO RUEHBO/AMEMBASSY BOGOTA 7856
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 1083
RUEHQT/AMEMBASSY QUITO 2897
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY

UNCLAS CARACAS 001304

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MMALLOY
NSC FOR JSHRIER
COMMERCE FOR 4431/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA'S PARALLEL EXCHANGE RATE RESUMES ITS RISE

REF: A. CARACAS 376
B. CARACAS 1127
C. CARACAS 1274

1. (U) After remaining largely stable since March,
Venezuela's parallel exchange rate has jumped by more than 40
percent over the past month, from 3.4 bolivars (Bs) to the
dollar on August 14, to 4.8 Bs/USD as of September 15. The
BRV has been regularly intervening in the parallel market
since November 2007, attempting to reduce inflationary
pressures by selling dollar-denominated instruments for
bolivars in local markets with the aim of lowering monetary
liquidity and increasing the supply of dollars (ref A).
However, the BRV has not sold any of these instruments since
early August, and press reports hinting at possible sales
have so far had little effect on the rate. The sudden rise
in the parallel rate also follows recent BRV actions that
have likely raised concerns about the future of the
Venezuelan economy and increased demand for dollars,
including the issuance of 26 decree laws increasing state
control of the economy (ref B) and Chavez's September 11
announcement expelling the US Ambassador (ref C).

2. (SBU) Comment: The recent runup in the parallel exchange
rate probably does not indicate an end to BRV intervention in
the market, but it could reflect a change in priorities at
the Ministry of Finance. Keeping the rate steady for five
months did not remedy Venezuela's persistent inflation. The
BRV has already expended all but about USD 650 million worth
of the structured debt notes it has been using as one of its
tools to control the market, and consistent intervention
could prove increasingly costly in the future. Nevertheless,
the BRV is unlikely to ignore the market completely and risk
allowing the parallel rate to rise to levels similar to those
seen at the end of last year. Local analysts think another
sovereign debt issuance payable in bolivars is possible
before the end of 2008. Such an issuance could absorb some
of the excess liquidity expected from spending in advance of
the November elections and reign in the parallel rate by
increasing the supply of dollars.
CAULFIELD

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