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RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0291/01 0402100
ZNR UUUUU ZZH
R 092100Z FEB 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7792
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 CARACAS 000291 
 
SIPDIS 
 
SENSITIVE 
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 VE
SUBJECT: OUT OF THE GATE INFLATION SURGES 
 
REF: A. 06CARACAS 3500 
     ¶B. CARACAS 216 
 
¶1. (SBU) SUMMARY: Inflation grew 2 percent in January 2007, 
the second highest monthly rate in more than a decade. 
Prices for foodstuffs (food and non-alcoholic beverages) grew 
even faster at around 4 percent, and have risen 31.1 percent 
for the 12 months ending in January.  BRV officials announced 
February 6 that the BRV would soon come out with an 
"anti-inflation pact."  Any serious monetary measures or 
fiscal tightening to reduce inflation are unlikely for now, 
because the political costs would be too high.  BRV attempts 
to punish suppliers and merchants for raising prices will 
only exacerbate existing economic distortions, which are 
already forcing many importers to either use the parallel 
exchange rate or stop importing goods.  Shortages are 
becoming common as these economic distortions begin to be 
felt by the general population.  END SUMMARY. 
 
------------------------------- 
INFLATION, WHAT IS IT GOOD FOR? 
------------------------------- 
 
¶2. (U) According to the Venezuelan Central Bank (BCV), the 
consumer price index (IPC) rose 2 percent in January of 2007 
and foodstuffs (food and nonalcoholic beverages) rose 4 
percent.  With January inflation, prices in Venezuela have 
risen 18.4 percent in the last 12 months and the cost of 
foodstuffs has risen 31.1 percent.  January is typically a 
month of low inflation in Venezuela, since consumer spending 
drops following the Christmas season and many businesses 
remain closed for the first couple weeks of the year. The 
sharp increase presages further price increases in 2007. 
 
¶3. (SBU) Venezuela's 2007 Budget assumes an annual inflation 
rate of 12 percent, but given current trends this seems 
wildly optimistic.  Economic contacts are forecasting 
inflation estimates that range from 20-30 percent this year, 
and argue that there is little the government can do to limit 
this growth, given continued high levels of spending and 
below-inflation interest rates. Both the spending and 
interest rates are products of political decisions to 
maintain support for the BRV.  According to the economic 
consultancy EcoAnalitica, the BCV's ability to sterilize 
government spending is also increasingly limited. 
 
¶4. (SBU) The BCV has been issuing CDs to banks to soak up the 
excess liquidity in the economy (note: M2 grew 66 percent in 
2006 and 150 percent during the last two years.  end note). 
There are approximately USD 15.5 billion in outstanding CDs, 
on which the BCV pays 10 percent interest annually.  Payment 
for these CDs comes from income earned on the country's 
foreign exchange reserves, currently invested in gold (which 
pays little to no return), and on U.S. and European 
securities.  As the government continues to diminish the 
country's foreign exchange reserves by transferring them to 
the National Development Fund (FONDEN), the amount of 
interest income decreases, limiting the number of CDs that 
the BCV can issue without losing money, even as the 
government continues to create more money (i.e., through the 
transfer of funds to FONDEN some of which are turned back 
into bolivars).   Based on rough Embassy estimates, when the 
BCV transfers the first tranche of excess reserves this year 
to FONDEN, roughly USD 7-8 billion, its operations will go 
into the red (FX reserves are around USD 36 billion).  In 
Venezuela the BCV can be supplemented by the national budget, 
however it remains to be seen if the BRV is willing to 
subsidize the Central Bank. 
 
--------------------------------------------- --- 
FOOD PRICES SKYROCKET AS SOME PRODUCTS DISAPPEAR 
--------------------------------------------- --- 
 
¶5. (SBU) The rising cost of foodstuffs has alarmed Chavez and 
many BRV officials, whose supporters in the D and E classes 
spend most of their incomes on food.  Chavez took advantage 
of his weekly television program, "Alo Presidente" on January 
28 to lament the country's inability to meet many 
agricultural production goals, including for beans, cotton, 
soy, sunflowers and peanuts.  On February 3, Vice President 
Jorge Rodriguez attended an event sponsored by the 
 
CARACAS 00000291  002 OF 002 
 
 
government-subsidized Mercal food chain, where he listed a 
range of sales figures and exclaimed that there are no 
shortages in Venezuela (septel).  Other BRV ministers 
subsequently contradicted Rodriguez, accurately noting that 
shortages exist and blaming hoarders and speculators for 
causing the shortages.  The Venezuelan tax authority, SENIAT, 
has setup a commission to investigate "over-pricing" and its 
superintendent, Jose Vielma Mora, frequently attacks the 
"speculators" and "hoarders" that are causing inflation and 
shortages (reftel B).  There are on-going shortages of sugar, 
which has a price set by the BRV below the costs of 
production, and recurring shortages of a host of other 
products which disappear and reappear with increasing 
frequency (reftel A).  According to the polling firm 
DataAnalisis, between 30 and 40 percent of the goods sought 
by a consumer are unavailable on any given day. 
 
¶6. (SBU) Other products in short supply are beef and poultry, 
which disappeared from store shelves this week after the BRV 
shuttered the Unicasa supermarket chain (which is also the 
closest store to the Embassy) for selling these goods at 
prices above those set by the government.  Rather than 
lowering their prices and accepting large losses, the chains 
decided to leave their shelves bare by withholding products. 
This led to panic in Caracas and the local "King of Las 
Mercedes" butcher apparently locked his doors and shut off 
his phones after one too many frantic member of the Caracas 
elite called in desperate search of meat.  The government is 
currently negotiating with supermarket representatives and 
plans are to import meat from Bolivia and Argentina and sell 
it to distribution centers at subsidized prices, which would 
then allow these chains to sell at the approved price without 
a loss.  Jose Luis Betancourt, the President of the umbrella 
Chamber Fedecamaras spoke out against the government-caused 
economic distortions on February 8, accusing the BRV of 
precipitating the crisis to provide an excuse to take over 
private sectors of the economy.  He also correctly observed 
that relying on imports "limits the possibility to add value 
and generate employment..." 
 
¶7. (SBU) Well known local economist and commentator Orlando 
Ochoa claims that up to 25 percent of Venezuelan imports are 
purchased using money obtained from the parallel market; 
government officials claim the figure is no more than 5 
percent.  Many firms now price their goods based on the 
parallel rate (currently over 4000Bs./dollar, 86 percent 
above the 2150Bs/USD official rate), or an average of the 
official and parallel rates. 
 
¶8. (SBU) COMMENT: Venezuela had the highest inflation rate in 
the hemisphere in 2006, and inflation shows no signs of 
abating in 2007.  Retrograde government policies continue to 
cause economic distortions, many of which are manifested in 
the inflation rate.  The government's wrong headed attempts 
to "alleviate" this problem through price controls and heavy 
handed tactics only make things worse.  The normally 
pro-Chavez "Daily Journal" noted this week that "people are 
not necessarily anti-social freaks" when they stock up on 
available goods in a climate of shortages.  Inflation and 
shortages have the potential to eat away at support for the 
Bolivarian "Revolution," a fact which Chavez seems keenly 
aware.  What he and his government seem to not understand is 
that they are treating the symptoms rather than the cause, a 
method that has only been possible until now due to massive 
government spending made possible by windfall oil revenues. 
END COMMENT. 
 
BROWNFIELD