VZCZCXYZ0005
RR RUEHWEB

DE RUEHCV #0632/01 0672050
ZNR UUUUU ZZH
R 082050Z MAR 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 3490
RHEHNSC/NSC WASHDC
INFO RUEHBO/AMEMBASSY BOGOTA 6107
RUEHLP/AMEMBASSY LA PAZ MAR LIMA 9947
RUEHQT/AMEMBASSY QUITO 1813
RUEHSG/AMEMBASSY SANTIAGO 3307
RUEHGL/AMCONSUL GUAYAQUIL 0337
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY

UNCLAS CARACAS 000632 
 
SIPDIS 
 
SIPDIS 
 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR KLINGENSMITH AND NGRANT 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV VE
SUBJECT: BRV DEBT MANAGEMENT STRATEGY 
 
REF: CARACAS 03782 
 
¶1.  (U) SUMMARY:  Since Chavez assumed office in 1999, BRV 
debt stock increased 70 percent, to USD 46.6 billion at the 
end of 2005.  In 2005, debt stock grew by USD 5.4 billion, 
despite an estimated 2005 total central government fiscal 
surplus of approximately USD 3 billion.  Despite the increase 
in public debt, most analysts agree that the current 35 
percent debt-to-GDP ratio is very manageable, given current 
economic growth rates (9.3 percent in 2005).  For 2006, 
Finance Minister Merentes announced the BRV debt management 
strategy would be to use oil windfall revenue to prepay USD 
4.7 billion in foreign debt (USD 3.9 billion in Brady bonds 
and USD 700 million in bilateral and multilateral debt) and 
improve the maturity profile of domestic debt.  The BRV's new 
goal is to reduce debt as a percentage of GDP to 31.4 in 2006 
and to 27.4 percent in 2007.  The Finance Ministry estimates 
saving USD 676 million in debt service in 2006 and USD 450 
million in debt service a year starting 2007.  END SUMMARY. 
 
------------------- 
OVERALL DEBT BURDEN 
------------------- 
 
¶2.  (U) Despite increases in public debt, most analysts agree 
that debt as a percentage of GDP is manageable, given the 
strong economic growth (9.3 percent in 2005).  At the end of 
1998, just before Chavez assumed office, public debt as a 
percentage of GDP was 29.6 percent, as compared to 35 percent 
for 2005.  From 1998 to 2005, domestic debt stock increased 
from USD 4.1 billion to USD 15.5 billion and foreign debt 
stock increased from USD 23.3 billion to USD 31.1 billion. 
The BRV has been actively refinancing its debt since 2003. 
Finance Ministry data show that debt service payments as a 
percentage of GDP decreased from 9.8 percent in 2002 to 5.1 
percent in 2005 (equivalent to the pre-Chavez 1998 level). 
However, during this time, GDP increased 17.4 percent in 2004 
and 9.3 percent in 2005. 
 
¶3.  (U)  In February 2006, Finance Minister Merentes 
announced BRV plans to reduce debt to 27.4 percent of GDP in 
¶2007. The BRV hopes this will improve the country risk 
ratings (measured as the spread between the Venezuela 
benchmark and U.S Treasury) from 213 to 200 basis points by 
the end of September, and that Venezuela's bonds will be 
considered investment grade.  The BRV also hopes to free up 
resources for social needs, such as health and education. 
The Finance Ministry estimates saving USD 676 million in debt 
service in 2006 and USD 450 million in debt service a year 
starting 2007.  However, Finance Minister Merentes also 
announced that it could issue up to USD 4 billion of new 
bonds this year.  Merentes denied BRV interest in issuing 
dollar-denominated bonds, fueling speculation that the BRV 
would issue euro-denominated bonds, payable in Bolivars, to 
ease exchange rate and inflationary pressures. 
 
---------------------- 
DOMESTIC DEBT STRATEGY 
---------------------- 
 
¶4.  (U) The BRV's domestic debt strategy is focused on 
extending the maturity profile of the domestic debt that 
matures in years 2006-2008 to 2015.  Approximately 78 percent 
of the outstanding domestic debt balance (USD 12 billion) is 
scheduled to come due in years 2006-2008, in contrast to the 
foreign debt payments which are not particularly 
concentrated.  Approximately 85 percent of the domestic debt 
is in BRV public bonds.  Local media report that the Finance 
Ministry is negotiating with banks to trade the BRV bonds for 
bonds with longer maturities, and potentially, a protection 
clause against a devaluation and interest rate decrease.  The 
BRV has significant negotiating power with banks because 
banks hold approximately USD 6 billion in BRV deposits and 
roughly USD 6 billion in BRV bonds.  As a result of this 
restructuring, the BRV expects to generate savings from 
refinancing at a lower interest rate and ensure that the 
costs to buy back maturing bonds and interests payments do 
not exceed USD 3 billion a year until year 2027. 
 
¶5.  (U)  However, the BRV also is concerned about the 
potential monetary impact of restructuring domestic debt and 
 
is coordinating with the Central Bank to avoid increasing 
liquidity (reftel).  If the BRV were to purchase the domestic 
debt, this would inject Bolivars into the economy, increasing 
inflationary pressures.  Instead, the BRV is leaning towards 
refinancing to change the maturity profile and costs of the 
domestic debt. 
 
---------------------- 
FOREIGN DEBT STRATEGY 
---------------------- 
 
¶6.  (U) On February 28, 2005, Finance Minister Nelson 
Merentes announced that Venezuela will pre-pay Brady Bonds, 
and some of the bilateral and multilateral debt, reducing 
foreign debt stock by USD 4.7 billion (15 percent) to USD 
26.350 billion.  The BRV plans to use oil revenue to save 
Venezuela the interest costs on the debt, as well as push 
Chavez' agenda of reducing Venezuela's dependence on 
multilateral and bilateral institutions.  Venezuela's 
bilateral and multilateral debt, which many economists 
described as largely low-interest and long-term, totals USD 
4.787 billion.  Approximately 68 percent of foreign debt is 
public bonds, 79 percent is at fixed rates, and 88 percent is 
dollar denominated.  In a private transaction in late 
February or early March 2005, the BRV initiated its buyback 
strategy by pre-paying almost USD 700 million in Series A 
Brady bonds and Series B Discount Bradies.  This debt is 
among Venezuela's highest cost foreign debt. 
 
¶7.  (U)  The BRV also announced plans to use the National 
Development Fund (FONDEN) to pay off foreign debt. 
Reportedly, the BRV used USD 1 billion from FONDEN for the 
recent buy-back of Brady Bonds, and bilateral and 
multilateral debt, and funds from prior debt issuances. 
(Note: FONDEN was created by the Central Bank Law (July 2005) 
with USD 6 billion in "excess reserves" from the Central 
Bank. Estimates are that total FONDEN deposits since its 
creation could approach around USD 17 billion by year's end. 
This would include direct transfers from PDVSA of USD 1.5 
billion in 2005 and USD 100 million per week in 2006 and an 
additional transfer of USD 4 billion from the BCV reserves. 
End Note.) 
 
------------------------ 
BRV FINANCIAL MANAGEMENT 
------------------------ 
 
¶8. (SBU) The Chief of the Finance Ministry's Office of Public 
Credit, Rudolf Romer told EconOffs, that because the BRV 
intentionally underestimates oil income in the national 
budget, the BRV traditionally uses debt in the national 
budget to reach its desired spending total.  In the end, 
Romer explained, the National Assembly passes additional 
credits to pay interest costs incurred.  For 2006, USD 6.7 
billion, 16.6 percent of the original budget expenditures 
(USD 40.5 billion), was allocated to cover debt service.  USD 
1.2 billion would come from ordinary revenues and USD 5.5 
billion from public debt.  The 2006 budget also included 
proposed USD 1.8 billion in new debt for specific projects. 
The BRV received authorization from the National Assembly to 
issue this debt (Annual Debt Law for 2006, Extraordinary 
Official Gazette 5,794, December 20, 2005), however, we do 
not know if the BRV will use the full authorization. 
 
¶9. (SBU) Jose Guerra, former Manager of Economic Research for 
the Central Bank, criticized the BRV for issuing debt when it 
has sufficient resources in its accounts in the Central Bank 
and the private banking system.  Guerra calculates that the 
net increase in debt cost the BRV USD 624 million in 2004 and 
2005 in interest costs.  Guerra argued that the management of 
the debt and public deposits has created powerful incentives 
for corruption (read: e.g. payment of "commissions" to BRV 
officials for preferential treatment in transactions). In 
local media, Guerra claimed that the projects funded under 
prior Annual Debt Laws were never completed.  (Note: Economic 
contacts have widely reported corruption in the management of 
BRV resources in private banks.  Private banks may use BRV 
deposited funds for lending or investments.  As a result, the 
BRV may have additional need to borrow if deposited BRV funds 
are not accessible, when needed. End Note.) 
------- 
COMMENT 
------- 
 
¶10. (U) Overall, the new direction in the debt management 
strategy reduces the BRV's future liabilities with current 
oil windfall revenue.  As in other BRV financial 
transactions, we have heard rumors of BRV officials earning 
"commissions" on debt transactions, which could potentially 
compromise the BRV debt management strategy.  Also, election 
year spending pressures could delay the plan's full 
implementation.  The BRV could also emphasize refinancing 
strategies over pre-paying debt with current revenues (e.g. 
revenues other than debt).  Still, assuming a stable oil 
price scenario, the BRV will be swimming in oil revenue in 
2006 and will have a great deal of flexibility to address its 
priorities. 
 
BROWNFIELD