VZCZCXRO1086
RR RUEHAO
DE RUEHCV #3316/01 3102029
ZNR UUUUU ZZH
R 062029Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 6911
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UNCLAS SECTION 01 OF 03 CARACAS 003316 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
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COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: BRV RELEASES 2007 NATIONAL BUDGET 
 
REF: A. CARACAS 2718 
 
     ¶B. CARACAS 3224 
 
¶1.  (U) SUMMARY: The Minister of Finance delivered the 
proposed 2007 budget for Venezuela to the National Assembly 
(AN) on October 17, 2006.  The budget calls for spending 
115.2 trillion Bolivars (USD 53.6 billion) in 2007.  The 
proposal assumes an exchange rate of 2150 Bs/USD, an average 
oil export price of USD 29/barrel, an inflation rate of 12 
percent, a real GDP growth of 5 percent and a 1.7 percent of 
GDP deficit.  The 2007 budget represents a 32 percent nominal 
increase over the original 2006 budget (inflation for 2006 is 
expected to end around 15-16 percent), though a 11.2 percent 
decrease from the 2006 budget with all additional credits. 
This does not include off-budget expenditures which in 2006 
we estimate amounted to an additional USD 15 billion in BRV 
spending.  Passage is expected in mid-November with cosmetic 
changes.  Once again the "official" budget underestimates 
revenues, expenditures, inflation and growth.  We do no 
expect the BRV to face any significant fiscal vulnerabilities 
during 2007.  END SUMMARY. 
 
¶2.  (U) Two days after the constitutionally mandated deadline 
of October 15, Finance Minister Merentes delivered the 2007 
budget to the National Assembly (AN).  The proposed 2007 
budget calls for total expenditures of USD 53.6 billion, or 
33 percent of GDP (which is in line with the current 2006 
budget).  This marks a 32.4 percent increase in nominal terms 
over the budget proposed for 2006, though is 11.2 percent 
less than the 2006 budget when all additional credits are 
factored in.  (Comment: The BRV bureaucracy is having 
capacity problems and is unable to spend all of the money it 
is receiving.  One respected economic consultancy estimates 
that by year-end 2006 the BRV will have only spent USD 48.9 
billion (31.5 percent of GDP), although USD 60.3 billion (39 
percent of GDP) has been authorized with the additional 
credits. End Comment.) 
 
¶3. (U) The 2007 budget breaks little new ground and follows 
the trends in the 2006 budget and subsequent additional 
credits.  Social spending continues to increase and remains 
by far the largest segment of BRV expenditures (44.6 
percent).  The table below shows budget figures for 2005, 
2006 and 2007 and demonstrates the huge spending increases of 
the past two years.  (Note: This does not/not include 
off-budget spending.  End Note.) 
 
Year     Social   Transfers  Debt    Defense Other  Total 
         Spending to states  Service 
 
(in USD millions) 
 
2005     16,576   7,858      6,599   3,195   6,619  40,847 
2006*    16,562   9,080      6,709   2,999   5,129  40,479 
2006**   21,053   13,342     12,081  3,482   10,363 60,321 
2007     23,917   13,459     5,931   2,566   7,698  53,571 
 
Other includes the ministries of infrastructure, agriculture, 
energy and mines, industry and tourism. 
 
*Original 2006 budget.  **2006 budget with all additional 
credits.  2007 numbers are from the proposed budget for this 
year. 
Sources: Ministry of Finance, National Assembly. 
 
¶4. (SBU)  According to this budget, the BRV will spend 
approximately USD 2.7 billion (1.7 percent of GDP) more than 
it will take in during 2007.  This will be met mostly through 
the sales of bonds and CDs on the local market.  Total 
internal debt is currently 14.5 billion (9.3 percent of GDP) 
and external debt is 26.7 billion (17 percent of GDP). 
 
CARACAS 00003316  002 OF 003 
 
 
(Comment: The fiscal outlook and debt load appear completely 
manageable for the duration of 2007, barring drastic drops in 
the price of oil.  Standard and Poor's recently raised its 
short term rating for Venezuelan debt to B status and that of 
long term debt to BB.  End Comment.) 
 
¶5. (SBU) The budget proposal assumes an average oil price 
for the Venezuelan oil basket of USD 29/barrel, which is 
considerably less than the average for 2006 (USD 57.33 YTD as 
of November 3) and consensus estimates for 2007 (around USD 
55).  According to Finance Minister Merentes, the budget 
assumes 3.4 million barrels per day (mbpd) in production 
(although the budget as submitted to the AN doesn't include 
this figure).  The production figure was contradicted 
publicly by Central Bank (BCV) governor Zavala on October 14, 
who put actual production at around 2.6 mbpd (which is in 
line with our estimates).  Thus, while continuing to 
underestimate the price of oil, the revenue surplus will not 
be as large as it first appears.  Given that actual 
production is considerably less, the price of the Venezuelan 
oil basket would have to fall below USD 37.92/barrel (rather 
than below USD 29) for government revenues to fall below 
budgetary expectations.  (Note: As part of the announced OPEC 
production cuts, Venezuela is supposed to cut production by 
138,000 bpd.  The BRV appears in some cases to be cutting 
production (rather than simply lowering the numbers on 
paper), so this break even point may be even higher. 
However, the extent of actual production cuts is not clear 
(see reftel B).  The weekly price for the Venezuelan oil 
basket on November 2 was USD 49.38.  End Note.) 
 
¶6. (U) The current exchange rate of 2150 Bolivars to the 
dollar was instituted in March of 2005 and Chavez has 
publicly stated that there will be no devaluation in 2007. 
The parallel rate for Bolivars is currently hovering around 
2900 Bs/USD, indicating the Bolivar is overvalued by between 
30 and 35 percent.  (Comment:  There is much debate as to 
whether or not the Bolivar will be devalued in 2007.  Most 
experts agree that if a devaluation does occur, it will be 
minor (5-8 percent) an would be based more on the 
government's desire to increase its spending power than to 
reduce the spread between official and parallel rates.  In 
addition, foreshadowing a devaluation would have negative 
consequences for the economy, as consumers would splurge 
(exacerbating shortages and increasing inflation) and capital 
flight would increase before the money lost value.  End 
Comment.) 
 
¶7. (U) Official inflation is expected to close the year in 
excess of 15 percent, although official figures are 
misleadingly low (see reftel A).  The 2006 budget presaged an 
unrealistic inflation rate of 10 percent and given increasing 
liquidity and government spending, 2007 inflation will likely 
be near, if not higher than 2006 levels. 
 
¶8. (SBU) Planning Minister Giordanni noted on October 20 that 
GDP would grow from USD 150 billion to USD 200 billion in 
¶2007.  This implies a 33 percent nominal increase.  (Comment: 
It is unlikely that more than 10 percent would come from GDP 
growth, although the remainder of Giordanni's estimate could 
be from inflation.  This neat little trick of a 33 percent 
nominal GDP increase in USD terms is achieved by keeping the 
overvalued exchange rate anchored at 2150 Bs/USD and is not 
without its costs.  End comment.) 
 
¶9. (SBU) Comment: The draft budget for 2007 is just that, a 
draft.  Given the lack of opposition in the AN it seems 
likely that there will be little debate on the budget and it 
will pass with cursory changes, probably in mid to late 
November.  This election year the AN has already increased 
the budget by almost 49 percent through the approval of 
 
CARACAS 00003316  003 OF 003 
 
 
additional credits, and that trend seems likely to continue 
in 2007.  (Note: The BRV's inability to obligate all of its 
authorizations means that actual spending in 2006 is forecast 
to be only 29 percent higher than the original 2006 budget. 
End Note).  In addition, the BRV spends substantial amounts 
of money using "off/parallel-budget" mechanisms including the 
Fund for National Development (FONDEN) and PDVSA which fund 
many social programs and large segments of the BRV missions. 
Off-budget spending for 2006 may reach USD 15 billion, though 
exact numbers are hard to come by.  The BRV currently has 
around USD 40 billion in unspent reserves (in USD and 
Bolivars held in treasury accounts at the BCV, the Bank for 
Economic and Social Development (BANDES), the Treasury Bank 
(which holds FONDEN assets) and private sector banks 
(septel).  (Note: This figure does not include BCV foreign 
exchange reserves, which as of November 2 are USD 34.7 
billion.  End Note.)  Debt stock is relatively low and if 
necessary, the BRV could cover all of its financing needs for 
2007 with these unspent reserves.  The conservative forecasts 
for GDP growth by the Ministry of Finance will allow the BRV 
to take credit when GDP growth exceeds estimates.  The low 
ball price for oil means that the government can continue to 
increase spending throughout the year and avoid additional 
constitutionally mandated payments to state governments or 
the macroeconomic stabilization fund as the "unexpected" 
windfall comes in.  End Comment. 
BROWNFIELD