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Cablegate: Venezuela's Debt: Manageable for Now

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PP RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHMT
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DE RUEHCV #1270/01 2741342
ZNR UUUUU ZZH
P 011342Z OCT 09
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 3764
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL
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RUEATRS/DEPT OF TREASURY

UNCLAS SECTION 01 OF 02 CARACAS 001270

SENSITIVE
SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MKACZMAREK
NSC FOR DRESTREPO AND LROSSELLO
USDOC FOR 4332 MAC/ITA/WH/JLAO

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA'S DEBT: MANAGEABLE FOR NOW

REF: A. CARACAS 1209
B. CARACAS 304
C. CARACAS 368
D. CARACAS 494

1. (SBU) Summary: As of June 30, Venezuela's sovereign
external debt officially stood at USD 30 billion and its
internal debt at 44 billion bolivars (USD 20 billion at the
official exchange rate). These levels appear quite
manageable given the size of Venezuela's economy. However
several factors make Venezuela's debt situation somewhat more
problematic than the numbers above indicate. There has been a
significant increase in internal debt over the course of the
year, which could lead to higher inflation if the trend
continues. On the external side, the official numbers do not
take into account what are presumably large sovereign
obligations to China (for the China-Venezuela joint fund) and
potentially to Russia (for arms purchases). Venezuelan debt
is considered one of riskiest of the major Latin American
economies, making further external issuances more expensive.
Finally, PDVSA, the state-owned oil company, has increased
its debt substantially in recent years with little to show
for it. End summary.

--------------
By the Numbers
--------------

2. (U) According to the Ministry of Economy and Finance
(MEF), on June 30, 2009, Venezuela's external debt stood at
USD 29.9 billion and its internal debt at USD 20.5 billion
(when converting bolivars (Bs) to USD at the official rate).
According to PDVSA's 2008 audited financial Qatement, as of
December 31, 2008, PDVSA's debt stood at USD 13.5 billion
(all denominated in hard currencies). The table below shows
the amortization profiles of government and PDVSA debt, with
the addition of USD 3 billion in zero coupon debt PDVSA
issued in July 2009 that matures in 2011. (Note: This table
does not include the USD 3 billion in sovereign external debt
whose issuance is currently being processed. We will report
on this issuance septel. End note.)


Year GBRV PDVSA
External Internal
2009 0.7 2.0 0
2010 2.2 1.5 0.9
2011 2.3 1.9 3.6
2012 0.7 3.1 1.2
2013 2.1 2.4 0.9
Beyond 21.9 9.2 9.8

Total 29.9 20.1 16.5

3. (U) By conventional standards, this debt level is quite
moderate. Venezuela's external debt as of June 30, 2009,
represented only 10 percent of its 2008 GDP (as expressed in
dollars at the official exchange rate) and 32 percent of its
2008 exports. In contrast, Colombia's external debt at the
end of the first quarter of 2009 represented about 13 percent
of its 2008 GDP and 67 percent of its 2008 exports. PDVSA's
USD 16.5 billion in debt is about 13 percent of its stated
2008 revenues.

-----------------------------
What the Numbers Don't Reveal
-----------------------------

4. (SBU) The numbers presented above do not take into
account a number of factors, which, when taken together, make
Venezuela's debt situation appear somewhat less rosy, though
still quite manageable. First, the MEF's external debt
statistics do not take into account several key obligations
of the Government of the Bolivarian Republic of Venezuela
(GBRV). These include the China-Venezuela joint fund, for
which many observers believe China (through the China
Development Bank) has loaned the GBRV USD 8 billion, and
credit possibly extended by the Russian government to finance
GBRV arms purchases (ref A). As these and similar deals lack
transparency, there is no way of knowing how much the GBRV
owes to whom and at what interest and maturity. There are
also a number of pending international arbitration cases over
GBRV expropriations that may result in significant GBRV

CARACAS 00001270 002 OF 002


obligations.

5. (U) Second, any comparison of Venezuela's external debt
to GDP begs the question of what exchange rate to use when
converting Venezuela's GDP to dollars. Using the official
exchange rate (2.15 Bs/USD), which is clearly overvalued and
becoming increasingly less relevant to Venezuela's economy
(ref B), makes Venezuela's GDP appear artificially high and
the debt to GDP ratio artificially low. In contrast, the
parallel exchange rate is currently 5.6 Bs/USD. Using a more
realistic exchange rate and including an estimate for the
GBRV's other external obligations, Venezuela's external debt
to GDP ratio could easily be above 20 percent - still
manageable, but not as good as a cursory analysis would
suggest.

6. (SBU) Third, looking at debt levels hides two problematic
trends related to flows. The GBRV has chosen to finance its
2009 deficit by issuing large amounts of internal debt. The
National Assembly in March approved issuance of up to Bs 34
billion (USD 15.8 billion at the official exchange rate) in
internal debt in 2009 (ref C), and the GBRV issued Bs 11.5
billion of internal debt in the second quarter. If the GBRV
continues to issue internal debt at this pace, internal debt
will approximately double over the course of 2009 (from
roughly USD 15 to 30 billion at the official exchange rate).
While this trend may lead to greater inflationary pressures
in the future, it does not involve any dollar constraints and
is less problematic than a similar increase in external debt
would be. The second problematic trend is the increase in
PDVSA's debt without a corresponding increase in crude oil
production (or, to all appearances, investment). PDVSA's
debt has grown from just over USD 2 billion at year-end 2006
to USD 16.5 billion today. Again, the level is manageable
given PDVSA's recent revenue stream and the current price of
oil. However, the money raised has not been used for new
investment and PDVSA's output has been falling, trends which
raise serious questions about PDVSA's management.

7. (SBU) Finally, it is costly for the GBRV or PDVSA to
issue new external debt. Venezuela generally beats out
Argentina for the dubious honor of having the highest
sovereign risk of a major Latin American economy, and most of
its bonds are currently yielding in the 11-13 percent range.
PDVSA bonds are considered even riskier and have a slightly
higher yield. Our conversations with analysts indicate
Venezuela's risk is high - despite Venezuela having an
excellent repayment record - because of President Chavez's
unpredictability, concerns about Venezuela's economic model,
and the GBRV's lack of transparency. (Note: It is not
costly at the moment for the GBRV to issue new internal debt.
The real interest rate is negative (a byproduct of currency
controls and monetary policy), and the Central Bank has
ensured the necessary liquidity for banks to buy the debt
(ref D). End note.)

-------
Comment
-------

8. (SBU) As with most economic matters in Venezuela, the
parts of the GBRV's debt strategy that make little economic
sense have a political explanation. For example,
conventional economics would suggest the GBRV ought to close
its 2009 deficit, at least partially, by devaluing rather
than doubling its internal debt. For Chavez, however, to
devalue would be to admit defeat (ref B). Similarly, it is
hard to believe Chavez would ever voluntarily take the
necessary steps to bring down the yield on sovereign external
debt. These steps would almost certainly benefit Venezuela's
economy, but they would reduce Chavez's control and
discretionary power. As Venezuela's debt levels are
manageable, he will probably not be forced to take such steps
in the near future. End comment.
DUDDY

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