VZCZCXYZ0001
RR RUEHWEB

DE RUEHCV #3434/01 3241530
ZNR UUUUU ZZH
R 201530Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7077
INFO RUEHAC/AMEMBASSY ASUNCION 0727
RUEHBO/AMEMBASSY BOGOTA 7124
RUEHBR/AMEMBASSY BRASILIA 5824
RUEHBU/AMEMBASSY BUENOS AIRES 1519
RUEHLP/AMEMBASSY LA PAZ NOV LIMA 0663
RUEHMN/AMEMBASSY MONTEVIDEO 0884
RUEHQT/AMEMBASSY QUITO 2495
RUEHSG/AMEMBASSY SANTIAGO 3827
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE

UNCLAS CARACAS 003434 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: PARALLEL RATE SPIKES AS DEMAND FOR DOLLARS GROWS 
 
REF: A. CARACAS 3375 
 
     ¶B. CARACAS 1215 
     ¶C. BOWEN/WELLS E-MAILS 11/15 
 
¶1. (U) SUMMARY:  The recently-issued Bonos del Sur (see 
reftel A) were being re-sold in Venezuela at a rate in excess 
of 3400Bs/USD this week as Venezuelans are increasingly 
demanding dollars.  The demand is driven by continued excess 
liquidity, problems with the Commission for the 
Administration of Foreign Exchange (CADIVI), concerns of a 
potential 2007 devaluation, seasonal pressures, and general 
economic and political uncertainty as elections approach. 
END SUMMARY. 
 
¶2. (U) The spike in the parallel exchange rate for 
dollar-denominated bonds follows the USD 1 billion 
bi-national Bonos del Sur issuance earlier this week (reftel 
A).  The issuance was oversubscribed by as much as much as 12 
times.  The Bonos del Sur issuance precipitated the spike in 
the parallel rate as many companies and individuals had been 
postponing foreign currency transactions to wait for the Bono 
del Sur and when their requests for bonds were not fulfilled, 
they had to rush to get dollars by other means.  (Note: 
According to one source, a request for a USD 5 million 
allocation resulted in an actual allocation of USD 27,000. 
End Note.)  The bond issuance also raised trader interest in 
dollars and led to speculation as people bid up the rate, 
hoping to get bonds and then to be able to sell them for a 
higher price. 
 
¶3. (U)  The most-often quoted parallel rate is the cost of 
converting American Depository Shares of the local 
telecommunications monopoly (CANTV) to shares on the New York 
Stock Exchange (see reftel B), which as of November 15 was 
hovering around 3100Bs./USD (or 44 percent above the official 
rate of 2150Bs./USD).  This rate has steadily increased over 
the past few months.  While CADIVI has increased approvals 
for foreign exchange in recent weeks from an average of USD 
90 million/day to USD 112 million/day, it appears that even 
this amount does not meet demand.  (Note:  Consumer demand 
has been at historical highs throughout 2006 and will only 
increase in the run-up to Christmas.  End Note.)  In 
addition, CADIVI does not approve requests for individuals 
(except for USD 4,000 in credit card purchases while 
traveling) or for certain products and types of transactions. 
 Some companies that have experienced delays in receiving 
approvals (for example due to problems with the tax authority 
or with completing their labor certification) also use the 
parallel market as an assured means for obtaining dollars, 
albeit at a much higher Bolivar to dollar rate. 
 
¶4. (SBU) The increase in the parallel rate presages continued 
problems for private industry and the Venezuelan economy. 
The increase in the parallel rate (both the CANTV rate and 
the "permuta" bond rate) increases inflation as some 
importers price their goods based on this rate (rather than 
the official one) and the costs of doing business in 
Venezuela for companies that take advantage of parallel 
mechanisms goes up.  By keeping imports artificially cheap, 
the official fixed, overvalued exchange rate encourages 
conspicuous consumption, further fueling inflation and 
causing shortages.  The artificially cheap imports compete 
with domestically produced goods and undermines local 
production.  (Note:  One contact from Venezuela's industrial 
heartland, Valencia, noted that over 600 factories and 
producers have shut down in the region since Chavez took 
power.  End Note.) 
 
¶5.  (SBU)  While Chavez and other senior BRV officials are 
adamant that there will be no devaluation in 2007, the 
widening gap between official and parallel rates make the 
necessity of a devaluation harder to ignore.  The last 
devaluation occurred in March of 2005, when the parallel rate 
was 40 percent higher than the official rate.  The rate gap 
causes inflationary pressures, about which the BRV seems 
increasingly concerned and costs the BRV financially as they 
implicitly lose money for every dollar to Bolivar transaction 
(receiving 2150 Bs. for a dollar that is really worth 3000 or 
more).  In addition the Central Bank is spending hundreds of 
millions to try and soak up excess liquidity caused by 
government spending and exchange controls.  As spending 
continues to grow, there will be an added incentive to 
devalue in order to make the BRV's dollar revenues (primarily 
from oil) go further in the local economy. 
 
¶6. (SBU) COMMENT:  While the spike to 3400Bs./USD may be 
temporarily related to the Bonos del Sur, the trend line 
clearly shows an increasing overvaluation of the Bolivar. 
Based on the number of public comments by BRV officials 
recently about the parallel rate, it seems that the BRV is 
preoccupied by the increasing numbers, if not the underlying 
causes of liquidity, increasing demand, structural problems 
with CADIVI and fears of the future.  This problem is also 
self-sustaining as the widening gap between the official and 
parallel rate makes people eager to get their money out more 
quickly, which in turn drives demand for dollars and raises 
the parallel rate.  END COMMENT. 
BROWNFIELD