VZCZCXYZ0006
RR RUEHWEB

DE RUEHCV #0485/01 0531910
ZNR UUUUU ZZH
R 221910Z FEB 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 3303
INFO RUEHBO/AMEMBASSY BOGOTA 6039
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RUEHQT/AMEMBASSY QUITO 1759
RUEHGL/AMCONSUL GUAYAQUIL 0304
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
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RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS CARACAS 000485 
 
SIPDIS 
 
SIPDIS 
 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR KLINGENSMITH AND NGRANT 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV VE
SUBJECT: THE CENTRAL BANK: THE BRV'S ELEPHANT BRIGADE 
 
 
This message is Sensitive But Unclassified, please treat 
accordingly. 
 
¶1.  (SBU) SUMMARY: Central Bank (BCV) Director Domingo Felipe 
Maza Zavala told Econoffs February 15 that the BCV's primary 
role these days is to mitigate/accommodate the monetary 
affects of the BRV's "enormous" fiscal expenditures.  The 
always understated and professorial Maza maintained that the 
BCV was an autonomous public institution with a 
constitutional mandate to support state goals; noted that, 
with the passage of the July 2005 Central Bank Law, the BCV 
no longer had the exclusive rights to the country's 
petroleum-driven foreign exchange earnings; and asserted that 
the accumulated foreign exchange holdings of various BRV 
institutions exceeded those of the BCV (currently USD 28.79 
billion).  He also added that the BCV continues its efforts 
to manage the country's growing money supply, which are 
hindered by exchange controls, election year spending, debt 
accumulation, and interest rate controls.  END SUMMARY. 
 
--------------------------------------------- ---- 
BCV ROLE: MITIGATING AFFECTS OF BRV FISCAL POLICY 
--------------------------------------------- ---- 
 
¶2.  (SBU) According to Maza, the Central Bank (BCV) derives 
its autonomy from the 1999 BRV Constitution, but, must also 
cooperate with the BRV to promote economic stability, 
economic growth and economic welfare.  He noted that the BCV 
and the Executive Branch have an annual requirement, 
established by constitution and law, to set goals for 
economic growth, inflation, the current account, and the 
maximum fiscal deficit each year.  This year will mark the 
first time this agreement will be formalized, which was not 
possible in prior years because of "political turmoil" (read: 
strike, referendum, etc).  Each BRV entity must, in turn, 
work to support these goals. 
 
¶3.  (SBU) Maza, in a non-critical tone, said the BRV 
determined fiscal policy, and the BCV has tried to mitigate 
the monetary effect of BRV expenditures, which would be 
"enormous" in 2006 (Note: In 2006, BRV expenditures will be 
at least 30.5 percent of GDP, with additional significant 
off-budget expenditures in the neighborhood of an additional 
10 percent of GDP expected. End Note.)  Maza added that the 
issuance of domestic bonds (new domestic debt) helped the 
banking sector, which lacked options to place money to 
complement their other portfolio investments.  The BRV also 
benefited, by using debt to pay for its needs.  Maza 
described the Venezuelan debt-to-gdp profile (currently 37.8 
percent) as more manageable than Brazil's, Argentina's, and 
Mexico's.  Despite Venezuela's ability to assume more debt, 
Maza said that it did not have the need and a good option 
would be to pay down some of the foreign debt with current 
petroleum income. (Comment: Maza's caution and professorial 
nature often make him a master of the obvious.  End Comment.) 
 
 
----------------------- 
THE CENTRAL BANK REFORM 
----------------------- 
 
¶4.  (SBU) In the past, the BCV exclusively managed the 
foreign exchange earnings of Petroleos de Venezuela (PDVSA). 
Under the 2005 Central Bank law, the BCV was required to make 
a one-time transfer to the National Development Fund (FONDEN) 
of USD 6 billion.  Under the new law, Maza said, PDVSA 
negotiates the amounts needed to meet Venezuela's currency 
needs with the BCV, maintains foreign currency for its needs 
abroad, and transfers the rest to FONDEN (for 2006 PDVSA 
plans to transfer around USD 100 million a week to the fund 
according to public statements by Chavez and other senior BRV 
officials.  FONDEN currently has around USD 8 billion 
available to spend). 
 
¶5.  (SBU) Maza said he originally opposed the transfer of 
Central Bank reserves to FONDEN, but added that FONDEN may 
actually help alleviate the excess liquidity problem as 
foreign exchange earnings that go directly from PDVSA to 
FONDEN do not enter the monetary base (i.e., are not 
transferred into Bolivars).  FONDEN would only make requests 
of the Central Bank when it needed Bolivars, Maza said. 
(Note: FONDEN resources were originally intended to be spent 
for imports or to pay foreign debt. End Note.)  He added 
that, in addition to FONDEN, other public entities, such as 
the Fund to Guarantee the Deposits of Financial Institutions 
(FOGADE), the Economic and Social Development Bank (BANDES), 
the Ministry of Finance, and PDVSA also hold foreign 
exchange, in amounts that exceed the gross international 
reserves of the BCV (Currently, USD 28.79 billion).  However, 
he distinguished these foreign exchange holdings from 
&reserves8, because they are not under BCV control and they 
do not have the function of reserves. 
 
¶6.  (SBU) The Central Bank Law (July 2005) also established 
the concept of  "adequate level of reserves.8  Maza noted 
that the Central Bank must determine how much is needed to 
meet Venezuela's external obligations and pay for 
international transactions.  Maza said that the figure was 
confidential for strategic reasons. (Comment:  We anticipate 
 
SIPDIS 
that the adequate reserve level will be around USD 25 
billion, as Chavez has announced in the past. In February 
2005, Chavez proposed the BCV transfer another USD 4 billion 
to FONDEN. End Comment.)  Eventually the BCV will need to 
transfer to FONDEN the excess reserves, but  current law does 
not provide a mechanism to do so, said Maza. 
 
------------------ 
MONETARY LIQUIDITY 
------------------ 
 
¶7.  (SBU) Monetary liquidity is very high (M2 grew around 53 
pct growth year on year) and will continue to grow, Maza 
said, due primarily to the strong inflow of petrodollars, 
fiscal spending levels, and exchange controls.  In an effort 
to mop up liquidity, the BCV has issued the Bolivar 
equivalent of around USD 14 billion in CDs, which is costly 
(around USD 871 million in 2005).  To lower costs, the BCV 
earlier this month lowered CD interest rates and eliminated 
the 56-day CDs, now offering just 14 and 28 day issuances. 
Maza said that BANDES, PDVSA, and FONDEN investments abroad 
help contain some of the liquidity growth. 
 
¶8.  (SBU) With exchange controls in place and BRV legislative 
branch and executive mandates setting certain interest rates, 
Maza said that the BCV does not have many options to control 
liquidity.  Exchange controls were established in February 
2003, following the coup, the strike, and the fall of 
petroleum prices, all of which exacerbated to capital flight 
according to Maza.  He described that traditionally the 
Venezuelan balance of payments' current account has been 
strong while the capital account traditionally has been weak 
and negative because of capital flight.  Under the current 
regime, the legal forms of exchange include requesting 
dollars through the Foreign Exchange Control Commission 
(CADIVI), or purchasing BRV dollar denominated bonds or CANTV 
ADRs, which can be purchased locally for Bolivars and then 
sold abroad for dollars.  Maza noted that the parallel market 
is another option for exchange, though not legal, and that 
the official rate and parallel rate differ. 
 
------- 
COMMENT 
------- 
 
¶9.  (SBU) The 83-year old Maza has publicly called for 
regulations for the management of FONDEN and publicly 
defended the BCV's independence.  He has been an academic for 
most of his career, a former deputy in the legislature, and 
an author of economic textbooks that are widely used 
throughout Venezuela.  While choosing his words carefully, he 
has demonstrated, through public statements and press 
interviews, a greater willingness to be open about his 
opinions (which in economic terms are seemingly orthodox), 
particularly when they relate to defending perceived BCV 
prerogatives.  While hewing close to the official line, 
Maza's comments underscored the challenges BRV fiscal policy 
and quasi-monetary policy (selective interest rate controls) 
have for the country's principal monetary authority. 
WHITAKER