VZCZCXRO7525
PP RUEHLMC
DE RUEHLP #0279/01 0371929
ZNR UUUUU ZZH
P 061929Z FEB 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 7962
INFO RUEHAC/AMEMBASSY ASUNCION 5580
RUEHBO/AMEMBASSY BOGOTA 2845
RUEHBR/AMEMBASSY BRASILIA 6715
RUEHBU/AMEMBASSY BUENOS AIRES 3928
RUEHCV/AMEMBASSY CARACAS 1289
RUEHPE/AMEMBASSY LIMA 1188
RUEHMN/AMEMBASSY MONTEVIDEO 3547
RUEHQT/AMEMBASSY QUITO 3927
RUEHSG/AMEMBASSY SANTIAGO 8443
RUEHLMC/MILLENNIUM CHALLENGE CORP
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 LA PAZ 000279 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV BL
SUBJECT: BANKING UPDATE: CENTRAL BANK, DEVELOPMENT BANK, 
DEPOSITS 
 
 
¶1. (SBU) Summary:  Bolivia's Central Bank President plans to 
soon complete his 10-year stint as President, leaving the 
country in a stellar macroeconomic state, but with many 
uncertainties looming on the horizon.  Several Venezuelan 
government officials recently met with Bolivia's Bank 
Superintendent to discuss opening branches and purchasing a 
Bolivian state bank, which the Superintendent speculates may 
be transformed into a national development bank that would 
give low-rate loans to farmers and microentrepreneurs, 
possibly at the expense of Bolivia's model microfinance 
sector.  Compounding the risk to the sector, the press 
reported that the GOB plans to implement a 10% interest rate 
cap on loans.  Although banking deposits decreased slightly 
during the last week of December, they recovered and even 
increased somewhat by the middle of January.  End summary. 
 
Central Bank Leaders to Change 
------------------------------ 
¶2. (SBU) The Central Bank President, Juan Antonio Morales, 
told us on February 2 that the Bolivian macroeconomic 
situation, including the state of the banking system, is in 
top shape, but the future is murky due to the many 
uncertainties associated with the new government, including 
its stance on natural resource exploitation, trade, and the 
"neoliberal economic model" in general.  On the bright side, 
the Central Bank has USD 2 billion in reserves, deposits are 
under control, international prices for Bolivia's main 
commodity exports are high (i.e., silver, zinc, gas), and 
Bolivia recently received IMF debt forgiveness and is 
scheduled to receive World Bank debt forgiveness in June. 
Morales added that the MAS is also in a good position, vis a 
vis domestic politics, to pull off selling gas to Chile and 
concluding a free trade agreement with the U.S.  Despite all 
of these positive factors, Morales fears that the GOB may not 
capitalize on this opportunity to stimulate economic growth 
because of the many conflicting promises that it has made to 
a variety of interest groups and the deficiency in talented 
government personnel likely to result from the GOB decision 
to cut executive branch salaries by 50%. 
 
¶3. (SBU) Morales explained that the congress would likely 
soon be choosing short lists of candidates to replace both 
himself and 4 members of the Bank's 5-person Board of 
Directors.  Morales added that after 10 and a half years as 
Central Bank President, he is ready for private life.  He 
explained that the new directors would have the authority to 
replace high level managers, but that the rest of the Bank 
staff are permanent civil service.  Furthermore, the new 
administration has indicated that it will leave most of the 
Bank and the Finance Ministry staff intact, in recognition of 
the needed technical expertise.  However, Morales did express 
concern about the likely diminished independence of the 
Finance Minister, who it seems will report to Carlos 
Villegas, Planning Minister, and the possible loss of 
personnel due to the pay cuts. 
 
Development Bank Under Discussion -- Venezuela Link? 
--------------------------------------------- ------- 
¶4. (SBU) A recent press article outlined the Bolivian 
government's plan to create a state development bank to 
provide subsidized loans, with rates as low as 5%, to farmers 
and small business owners.  It is unclear whether this bank 
would be a first tier institution, providing loans directly 
to the public, or whether it would be a second tier 
institution, providing capital to lenders.  The latter option 
would do much less harm to the financial sector than the 
former, particularly microfinance institutions, which could 
not compete with a first tier bank offering substantially 
below-market rates.  According to our contacts at the Bank 
Superintendency and the Central Bank, two Venezuelan state 
banks have been inquiring about permission to open branches 
in Bolivia.  One of these, the Industrial Bank of Venezuela, 
 
LA PAZ 00000279  002 OF 002 
 
 
may seek to buy the Bolivian state-owned bank, Banco de la 
Union.  In furtherance of these goals, the Venezuelan 
Minister of Finance Nelson Morantes, the Venezuelan President 
of the National Securities Commission Fernando Jose de 
Candia, and the Venezuelan Bank Superintendent Trino Diaz 
recently met with Bolivia's Bank Superintendent in La Paz. 
The President of the Central Bank told us that he suspects 
that the Venezuelan government may be seeking to buy Banco de 
la Union to convert it into the Bolivian state development 
bank that was described in the press.  If that is the case, 
the state development bank would likely be a first tier, 
direct lending organization which could substantially harm 
Bolivia's banking system. 
 
¶5. (SBU) However, in subsequent articles, the press reported 
that the GOB plans to consolidate several second tier state 
lending funds, including the Financial System Development 
Fund (Fondesif), to create two banking entities in Santa Cruz 
and Potosi that would form the base of the state development 
bank.  In this version of the story, the development bank 
would be a second tier bank that would lend to other 
financial institutions at a rate of 8%.  According to the 
same report, the GOB plans to implement an interest rate cap 
of 10% on all lenders, which is an unsustainable rate for 
microlenders, particularly in rural areas.  Thus, even if the 
state development bank turns out to have a second tier 
structure, the microfinance sector may be facing tough times. 
 
Deposits Increased in 2005 and in First Half of January 
--------------------------------------------- ---------- 
¶6. (SBU) Deposits and portfolios increased during 2005 from 
USD 3.339 billion to USD 3.678 billion and from USD 3.223 
billion to USD 3.360 billion respectively.  Despite the 
political uncertainty surrounding Bolivian elections on 
December 18, the banking system has remained stable, although 
deposits showed a slight dip during the last week of 
December.  From December 20 to January 13, deposits increased 
from USD 3.656 billion to USD 3.701 billion.  During that 
same time period, total liquidity of the system also 
increased from USD 1.441 billion to USD 1.510 billion. 
Although we have not yet received figures for the end of 
January, according to the Central Bank President, deposits 
declined slightly during the last week of the month, but the 
system regained almost all of the amount lost at the end of 
January during the first day of February. 
 
¶7. Comment:  Although the new administration has taken office 
under promising macroeconomic conditions, it remains to be 
seen if they will capitalize on the present opportunity to 
stimulate growth.  Government attempts to provide credit to 
the many in need may backfire if they damage current 
institutions and prove unsustainable, as Bolivian state banks 
have in the past.  End comment. 
GREENLEE