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DE RUEHCV #0819/01 1821257
ZNY CCCCC ZZH
P 011257Z JUL 09
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 3295
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
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RUMIAAA/HQ USSOUTHCOM MIAMI FL
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RUEATRS/DEPT OF TREASURY

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000819 
 
SIPDIS 
 
ENERGY FOR CDAY AND ALOCKWOOD 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR RJARPE 
NSC FOR RKING 
USDOC FOR 4332 MAC/ITA/WH/JLAO 
 
E.O. 12958: DECL: 06/29/2019 
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA:  THE REVOLUTION ACCELERATES AS THE 
ECONOMY HEADS SOUTH 
 
REF: A. CARACAS 87 
     ¶B. CARACAS 368 
     ¶C. CARACAS 330 
     ¶D. CARACAS 778 
     ¶E. CARACAS 407 
     ¶F. CARACAS 305 
     ¶G. CARACAS 731 
     ¶H. CARACAS 690 
     ¶I. CARACAS 307 
     ¶J. CARACAS 581 
     ¶K. CARACAS 155 
     ¶L. CARACAS 149 
     ¶M. CARACAS 643 
     ¶N. CARACAS 750 
 
Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) 
and (d). 
 
¶1.  (C) Summary:  As we approach the halfway point of 2009, 
two trends are clear in Venezuela's economy:  state control 
is accelerating just as the economy enters a recession.  Most 
analysts predict economic output to decline by 1.5 to three 
percent in 2009 as lower oil prices force the government of 
the Bolivarian Republic of Venezuela (GBRV) to rein in 
spending.  This sobering outlook has not stopped the GBRV 
from expanding its control over the economy, however. 
Empowered by the removal of term limits in the February 
constitutional referendum, President Chavez has nationalized 
companies in additional industry sectors and pushed the 
National Assembly to pass several laws increasing the state's 
economic power.  These and other actions are damaging 
regional economies in key areas, including Zulia, Guayana, 
and Valencia.  Survey results suggest concerns about the 
economy's direction are playing a role in a recent dip in 
Chavez's popularity, but there is no way of knowing whether 
or how these concerns might translate into a more serious 
challenge for Chavez.  End summary. 
 
------------------------- 
Stagflation Approaches... 
------------------------- 
 
¶2.  (U) The Venezuelan Central Bank (BCV) reported anemic 
growth of 0.3 percent in the first quarter of 2009 (with 
respect to the same period in 2008).  After years of stellar 
but decreasing growth, the trend is clear:  Venezuela's 
economy is all but certain to enter into recession in 2009, 
with most local analysts predicting a two to three percent 
contraction.  With oil prices significantly lower than in 
2008, the GBRV has been forced to rein in spending, which had 
served as the main economic driver from 2004 on (ref A).  The 
latest BCV statistics available indicate central government 
spending declined by 7 percent in nominal terms in the first 
two months of 2009 (relative to the same period in 2008). 
 
¶3.  (SBU) The "anticrisis" economic measures announced by 
Chavez in March amount to little more than a plan to finance 
the projected budget deficit by issuing local debt (ref B), a 
plan the GBRV has been aggressively implementing.  To ensure 
a receptive local market, the BCV has loosened monetary 
policy.  While many analysts have lowered their expectations 
for inflation for 2009 (from roughly 35-40 percent to 28-35 
percent) as a result of a larger-than-expected contraction 
and GBRV efforts to control food prices, they generally 
expect inflation to be higher in 2010 than 2009, partly as a 
result of the BCV's accommodating monetary policy.  BCV data 
and pollsters' numbers indicate that many Venezuelans are 
suffering declining purchasing power.  In the last quarter of 
2008 and the first quarter of 2009, accumulated inflation was 
12.6 percent while compensation to salaried workers rose only 
2.7 percent, according to BCV figures. 
 
------------------------------------------ 
...And Chavez Tightens the Economic Screws 
------------------------------------------ 
 
¶4.  (SBU) Even as the economy heads toward stagflation, 
Chavez has stepped up his campaign to increase central 
government control after a relative hiatus beginning in the 
run-up to the November 2008 regional elections and lasting 
 
CARACAS 00000819  002 OF 003 
 
 
through the February 2009 referendum.  Specific GBRV actions 
in recent months include:  nationalizing ports and airports 
(March 12; ref C), and then port service companies (mid-June, 
ref D); announcing the seizure of Venezuelan carrier 
Aeropostal (March, ref E); nationalizing a Cargill rice plant 
(March, ref F); banning the sale of Coca Cola Zero for 
unsubstantiated health concerns (June, ref G); reaching an 
agreement for the nationalizations of Banco de Venezuela, 
which the GBRV will take over July 3, and steel-maker Sidor, 
which the GBRV had already taken over (May, ref H); taking 
over more agricultural lands (ongoing, ref I); expropriating 
the assets of numerous oilfield service companies, including 
several whose operations are critical to production (May, ref 
J); and, most recently, decreeing the nationalization of iron 
briquette companies in Guayana, making it illegal for 
construction companies to adjust prices for inflation, 
passing a law mandating state control over the petrochemical 
industry, and opening debate on a law over "social property." 
 
¶5.  (C) While nationalizations are not new to Venezuela, the 
pace has picked up again.  The best explanation we have heard 
as to why comes from Rafael Munoz (strictly protect 
throughout), a political economist at Banco Mercantil.  On 
the one hand, Munoz argues, Chavez has sufficient liquid 
reserves in quasifiscal funds that he is not forced to 
negotiate with other economic actors.  On the other hand, the 
current window between the February referendum and future 
electoral challenges, such as National Assembly elections 
scheduled for 2010, offers Chavez an important opportunity to 
consolidate his political and economic control in what is at 
its core a totalitarian project.  The actions mentioned in 
the preceding paragraph represent the gamut of GBRV tactics 
for increasing economic control, from outright expropriation 
to harassment of private companies to legal changes that pave 
the way for future state actions. 
 
------------------------------- 
The Revolution is Coming Closer 
------------------------------- 
 
¶6.  (C) While the general economic situation affects all 
Venezuelans, several of our contacts believe Chavez's 
specific actions are directly affecting a growing proportion 
of the population.  Munoz believes there is a palpable sense 
among even Venezuelans of modest means that "the revolution 
is coming closer" in the sense of potentially affecting their 
humble aspirations.  Another contact, who advises on mergers 
and acquisitions, noted recent government actions are harming 
key regional economies, including Zulia (via recent service 
company nationalizations); Guayana (via the briquette 
nationalizations and the continued consolidation of economic 
activity under the state-owned Corporacion Venezolana de 
Guayana; and Valencia (where government control over key 
imports for automobile assemblers (ref K) has led to 
widespread work stoppages).  The government's accelerated 
drive to control the economy is having international 
repercussions as well.  Media reports indicate that the 
Japanese Bank for International Cooperation is rethinking a 
potential USD 1.5 billion loan to PDVSA and that Argentine 
industrialists have expressed their displeasure to President 
Kirchner over the ongoing nationalizations.  (Note:  Both 
Japanese and Argentine companies had interests in the 
briquette manufacturers; Japanese companies have interests in 
the petrochemical sector as well.  End note.)  On the other 
hand, there are indications that companies from countries 
considered friendly by the GBRV are being favored in other 
situations (ref L). 
 
----------------------------------- 
Increasing Tension, No Clear Outlet 
----------------------------------- 
 
¶7.  (C) If many of our contacts think economic tensions are 
rising, no one has a clear sense of whether or how they might 
translate into a political challenge for Chavez.  There are 
some preliminary indications that more Venezuelans believe 
President Chavez is responsible for the country's economic 
problems, but no clear evidence of a trend.  There has been 
an increase in labor unrest, but the labor movement as a 
whole is divided and confused, according to a prominent labor 
 
CARACAS 00000819  003 OF 003 
 
 
analyst (ref M).  Munoz, who has studied the political, 
social, and economic factors behind the 1989 uprising known 
as the Caracazo, believes current conditions are equally ripe 
for large-scale public unrest.  He points to the 
deteriorating economy, a growing sense that one cannot get 
one's problems resolved through current political 
institutions (including opposition parties, and especially 
given the possibility of indefinite reelection), and the 
feeling that the revolution is hitting closer to home.  Just 
because the conditions are ripe, Munoz cautions, does not 
mean a generalized reaction will happen, nor does it allow us 
to predict when, where, and why it might. 
 
------- 
Comment 
------- 
 
¶8.  (C) Even with the steady rise in oil prices from January 
through June, 2009 is shaping up as a grim year economically 
for Venezuela.  While economic problems could conceivably 
cause or contribute to a serious political challenge for 
President Chavez, it would be wrong to assume they will. 
Given Chavez's already significant political and economic 
control and ability to repress selectively actors who 
challenge this control (ref N), there is no obvious channel 
for discontent over economic problems to express itself in a 
generalized way.  End comment. 
CAULFIELD