VZCZCXRO1529
RR RUEHDE
DE RUEHCV #0718/01 1011601
ZNR UUUUU ZZH
R 111601Z APR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8325
INFO RUEHHH/OPEC COLLECTIVE
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 08 CARACAS 000718 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EPET EINV ENRG VE
SUBJECT: EVERYTHING YOU EVER WANTED TO KNOW ABOUT THE 
VENEZUELAN ECONOMY, BUT WERE AFRAID TO ASK 
 
CARACAS 00000718  001.2 OF 008 
 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) The BRV is spending more money than ever before on 
the back of historically high oil prices.  Despite these high 
oil prices, PDVSA appears to have cash flow problems stemming 
from its role as the BRV's cash cow.  Official production 
figures exceed most analyst estimates, and PDVSA's ability to 
increase production is limited.  PDVSA's issuance of USD 12 
billion in debt in 2007 demonstrates its need for cash. 
Despite these problems, the BRV probably has financial 
resources of around USD 66 billion in off-budget and foreign 
exchange reserves to draw on should problems mount, and the 
government can always devalue if money gets too tight.  The 
overvalued exchange rate (currently over 60 percent) allows 
the BRV to selectively promote certain imports and discourage 
others.  The parallel exchange rate is augmenting inflation, 
which at 17 percent in 2006 was the highest in the 
hemisphere.  Inflation is driven by government spending that 
has doubled since 1999 and by policies that cause shortages 
and keep interest rates below the rate of inflation.  Despite 
the economic distortions, a banking crisis looks unlikely in 
the near term, so long as BRV spending maintains liquidity 
and regulations do not push banks into a corner.  Government 
handouts and the mission social programs drive Chavez' 
support in the D and E classes, who have seen their incomes 
and living standards rise.  These programs are not cost 
effective, however, and appear to be unsustainable.   The 
weakness of the current system is evident in the labor force, 
where 400,000 people enter the labor market annually to 
compete for fewer than 200,000 jobs.  The government taps 
also run full for military spending, which included over USD 
4.3 billion in arms purchases since 2005.  END SUMMARY. 
 
--------------------------------------------- -------- 
Is Venezuela's fiscal spending becoming unsustainable? 
--------------------------------------------- -------- 
 
¶2. (SBU) In 2006, we estimate the BRV spent approximately USD 
65 billion (USD 54 billion in budgetary spending and another 
USD 11 billion spent by PDVSA, FONDEN, and FONDESPA).  If one 
extrapolates spending increases of 20 percent annually (the 
average increase in dollar terms over the past eight years) 
and assumes that inflation meets the government's target of 
12 percent (which it won't), in 2007 the government will need 
to spend at least USD 87 billion in 2007, USD 117 billion in 
2008, and USD 157 billion in 2009 (assuming no devaluation). 
The average price for the Venezuelan oil basket was USD 
56.44/barrel in 2006 (a 350 percent increase over 1999 and a 
historic high) and production was approximately 2.5 million 
barrels/day (see paragraph 8).  Production is not expected to 
rise and most analysts predict the price of the Venezuelan 
oil basket to range between USD 50 to 60/barrel in 2007. 
This leaves the government with the problem of stagnating 
revenues and increasing costs, to say nothing if the price of 
oil falls. 
 
¶3. (SBU) Much like an individual, a government that begins to 
run out of money has three basic options:  spend less, eat 
into savings, or incur debt.  While it is likely that the BRV 
will augment spending at a slower rate than in recent years, 
it has to keep increasing spending in order to meet the 
rising expectations of its citizens and to cover up 
distortions caused by an increasingly inefficient and corrupt 
system. 
 
¶4. (SBU) The BRV has approximately USD 33 billion in 
off-budget funds and another USD 34 billion in Foreign 
Exchange reserves.  The lack of transparency in government 
accounts requires some amount of estimation in compiling 
these numbers.  In the last quarter of 2006, the off-budget 
reserves fell by almost USD 2 billion, presumably due to the 
increase in spending in advance of the December elections. 
These "rainy day funds" will cushion BRV finances for some 
time.  In fact, Minister for People's Power of Finance (MPPF) 
Rodrigo Cabezas recently claimed that the BRV could survive 
without exporting a drop of oil for 18 months.  Venezuela's 
 
CARACAS 00000718  002.2 OF 008 
 
 
external debt picture is also quite manageable, with an 
external debt/GDP ratio of less than 25 percent and annual 
external debt payments of less than USD 2.5 billion. 
 
¶5. (SBU) While one can argue the merits of using rainy day 
funds and issuing debt when oil prices are at historic highs, 
it does nonetheless appear that the BRV can maintain these 
spending levels for a few years before the chickens come home 
to roost.  A fourth option available to governments is to 
print more money.  A devaluation, while painful to ordinary 
Venezuelans (by decreasing the value of their savings and 
generating higher inflation in a country that already has the 
highest inflation rate in the region), would also allow the 
BRV to prolong the situation by providing more bolivars for 
every dollar of oil revenue -- albeit at a significant cost. 
 
--------------------------------------------- ----- 
What price of oil is Venezuela's break even point? 
--------------------------------------------- ----- 
(see 06 CARACAS 1291 for more information) 
 
¶6. (SBU) It is difficult to set a magic number on the price 
for the Venezuelan oil basket which the BRV needs to sustain 
its fiscal policy.  It depends on the production levels of 
the various types of crude that make up the Venezuelan 
basket, as well as factors such as inflation, government 
spending, debt issuance, and the amount of "rainy day funds" 
the BRV has stored up for just such an eventuality. 
Conventional wisdom is that Venezuela loses USD 1 billion in 
revenues for each dollar drop in the price of oil.  To define 
the break even point as the point at which BRV expenditures 
exceed revenues would not be illuminating, as many countries 
have long-term policies of deficit spending.  Rather, it is 
important to estimate the point at which the BRV's fiscal 
deficit becomes so large as to force it to burn through its 
cash reserves and begin serious deficit spending (say in 
excess of 10 percent) within a one to two year time frame. 
The traditional number has been assumed to be around USD 
40/barrel for the Venezuelan basket, though Econ contacts and 
local analysts provide ranges from USD 25/barrel to USD 
55/barrel. 
 
¶7. (SBU) Demands by Chavez and Minister Ramirez for emergency 
OPEC meetings and production cuts as the Venezuelan basket 
price fell below USD 45/barrel (or roughly USD 55/barrel WTI) 
in early 2007 imply that they see this number as a red line. 
On March 15, Ramirez commented that an OPEC basket price of 
USD 54/barrel (or roughly USD 50/barrel for the Venezuelan 
basket) was reasonable. 
 
------------------------------------------- 
How much oil does Venezuela really produce? 
------------------------------------------- 
(06 CARACAS 905, 1238, 1400, 2297, CARACAS 512) 
 
¶8. (SBU) According to the Ministry of People's Power for 
Energy and Petroleum (MPPEP), Venezuela produces 
approximately 3.4 million barrels per day (mbd) of petroleum 
and petroleum derivatives, divided between PDVSA production 
(2.287mbd), the former Operating Service Agreements (OSAs) 
(343,000bd), PDVSA Gas (29,000bd), the Strategic Associations 
(SAs) in the Faja (563,000bd), and Liquefied Natural Gas 
(173,000bd).  These numbers are optimistic; most independent 
analysts think that Venezuela actually produces between 2.4 
and 2.6mbd.  Embassy estimates, based on data from service 
companies and shipping firms, are that PDVSA produces around 
1.6mbd, the former OSAs produce another 350,000bd (PDVSA owns 
on average 60 percent) and the four SAs in the Faja were 
producing around 520,000bd (of which PDVSA controls 
approximately 40 percent of production) before the 2007 OPEC 
cuts.  This gives Venezuela a total production of around 
2.45mbd, of which about 2mbd are exported. 
 
¶9. (SBU) Our estimate tracks with other reliable observers. 
The Department of Energy's Energy Information Administration 
(EIA) estimates that Venezuela was producing 2.49mbd as of 
the end of December 2006, and independent local energy 
analysts estimate current production at 2.5mbd.  This 
 
CARACAS 00000718  003.2 OF 008 
 
 
contrasts sharply with the data published by the MPPEP as 
part of its annual report to the National Assembly in 
February 2007, which claimed that Venezuela was exporting 
2.9mbd, of which 2.4mbd was wholly owned by PDVSA.  Post and 
most analysts expect Venezuela's production to decline in the 
near to medium term due to increasing inefficiencies, 
underinvestment, and a reduction in private sector 
participation.  This is in spite of PDVSA's USD 70 billion 
investment plan to raise production to 5.8mbd by 2012.  PDVSA 
recently announced that its investment budget for 2007 would 
exceed USD 10 billion, or nearly double what it spent in 
2006, which may be recognition of mounting production 
difficulties. 
 
---------------------------------- 
Is PDVSA Unable to Pay Its Bills? 
---------------------------------- 
(06 CARACAS 2227, 3311, 3558, CARACAS 183) 
 
¶10. (SBU) PDVSA's finances are a black box; transparency and 
accountability are sorely lacking.  Nonetheless, all signs 
indicate that PDVSA has cash flow problems.  PDVSA has had 
trouble paying its joint venture partners, services 
companies, and (reportedly) even its income tax bill.  The 
press has reported that PDVSA is offering oil instead of cash 
to pay for the lost equity in the conversion process for the 
Strategic Associations in the Faja.  PDVSA's bottom line is 
being strained by BRV demands for more and more cash, 
especially for social programs, having contributed at least 
USD 13 billion to BRV budgetary and off-budgetary coffers in 
¶2006.  PDVSA's role as the BRV,s cash cow, coupled with 
rising costs and increasing inefficiency, is evident in its 
increasing costs and decreasing profits, even as revenues 
continue to grow on the back of high oil prices.  Given 
PDVSA's USD 100 billion in worldwide revenues during 2006, 
PDVSA looks more like a company lacking financial controls, 
rather than one threatened with bankruptcy.  Were PDVSA ever 
to get into real trouble, it could in theory decrease these 
transfers or take steps to increase production. 
 
¶11. (SBU) Political pressures, however, make the likelihood 
that PDVSA would decrease social spending unlikely. In fact, 
it will probably go up in 2007.  PDVSA's plans to increase 
production frequently fail to be implemented in a timely 
manner.  The normal time lag in increasing oil production 
coupled with high global demand for oil machinery and 
services make the ability to quickly increase production 
remote in the short to medium term.  There is very little 
spare production capacity in Venezuela currently. 
 
¶12. (SBU) PDVSA only had about USD 4 billion in debt in 2006, 
and investment bankers have indicated to econoffs that 
increasing its debt profile would not be difficult given 
global liquidity glut chasing returns in emerging market 
debt.  Already in 2007, PDVSA has secured USD 4.5 billion in 
lines of credit and on April 12 it will issue a further USD 
7.5 billion in debt, which will be the largest debt issuance 
in emerging market history.  After this issuance, PDVSA 
should have between USD 15 and 16 billion in debt. 
 
---------------------------------------- 
How much does the BRV have stashed away? 
---------------------------------------- 
(06 CARACAS 3411) 
 
¶13. (SBU)  While the BRV's finances are intentionally opaque, 
current Embassy estimates are that the BRV had around USD 
33.4 billion in available funds (as of the end of February 
2007), not counting USD 34 billion in Central Bank (BCV) 
reserves.  Much of the money in off-budget funds is already 
allocated, but could presumably be reallocated in a crisis. 
The off-budget funds are divided between treasury funds held 
in the BCV (USD 1.8 billion), BRV deposits in private sector 
banks (USD 8.7 billion in bolivars), The Bank for Social and 
Economic Development (BANDES) (USD 9.9 billion), The Treasury 
Bank (USD 5.7 billion in bolivars plus FONDEN's assets in 
dollars), the Fund for National Development (FONDEN) (USD 6.2 
billion, held by the Treasury Bank) and the Fund for Social 
 
CARACAS 00000718  004.2 OF 008 
 
 
and Economic Development (FONDESPA) (USD 1 billion).  FONDEN 
has since received USD 3.7 billion in transfers from the BCV. 
 (Note: These numbers are gleaned from BCV reports and public 
comments by BRV officials.  There is considerable doubt as to 
the accuracy of BRV financial accounting and many reports are 
significantly late.  End Note.)  In addition to the rainy day 
funds and official reserves, PDVSA has tens of millions of 
dollars in escrow accounts tied to the Faja strategic 
associations.  PDVSA can only draw on the accounts by 
presenting audited financial statements.  It is very possible 
that PDVSA has additional funds held in off-shore accounts, 
but we have no way of verifying their existence. 
 
------------------------------- 
What is the true exchange rate? 
------------------------------- 
(06 CARACAS 1215, 3434, CARACAS 216, 493, 574) 
 
¶14. (SBU) Virtually everyone agrees that the official 
exchange rate of 2150 Venezuelan Bolivars (Bs.) to the dollar 
is overvalued.  A parallel market exists to convert bolivars 
to dollars using securities transactions.  This so-called 
parallel rate is currently around Bs. 3550 to the dollar 
(after spiking to nearly Bs. 4500/dollar earlier in the 
year).  It reflects a high demand for dollars driven by 
request denials by the Commission for the Administration of 
Foreign Exchange (CADIVI) (requiring firms to obtain parallel 
dollars to import goods or repatriate profits), excess 
liquidity, high internal demand from GDP growth, and capital 
flight.  More than a quarter of the currency exchange market 
in Venezuela goes through the parallel market. 
 
¶15. (SBU) Another means of evaluating the value of the 
bolivar is to divide the money supply (M2) by Venezuela's 
foreign exchange reserves, which yields an implicit rate of 
Bs. 3472 to the dollar as of March 30.  By just about any 
measure Venezuela's currency is significantly overvalued, 
making imports cheaper and hurting domestic production. 
 
--------------------------------------------- ----------- 
Why does Venezuela maintain an overvalued exchange rate? 
--------------------------------------------- ----------- 
 
¶16. (SBU) A "strong bolivar" serves as an anchor against 
inflation by keeping imports relatively cheap and increasing 
the purchasing power of the average Venezuelan.  For example, 
Venezuela imports from 60 to 70 percent of its food, and by 
keeping the bolivar overvalued, foodstuffs are kept cheap in 
bolivar terms for Venezuelan consumers (although given that 
inflation for foodstuffs was over 26 percent in 2006, this 
clearly is not solving the BRV's problems). 
 
¶17. (SBU) The currency controls that maintain the exchange 
rate also serve as a mechanism to control the importation of 
goods to Venezuela.  Through CADIVI, the BRV can promote 
certain imports (by approving dollar requests at Bs. 
2150/dollar) and discourage other goods (by refusing requests 
and forcing importers to pay Bs. 3550 for every dollar of 
imports).  This form of Import Substitution Industrialization 
(ISI) also requires certificates of no production or 
insufficient production in order to import goods.  By forcing 
someone to prove that the good s/he is trying to import is 
not produced locally, the BRV in effect protects certain 
local markets competition.  At the same time, the overvalued 
official exchange rate paradoxically hurts those domestic 
producers by requiring them to compete with artificially 
cheap imports.  Many firms in Venezuela have commoditized 
their businesses, shutting down the factory and becoming 
importers instead.  (Comment: The arbitrariness of the 
exchange rate mechanism also allows the BRV to selectively 
deny individuals' or firms' foreign exchange requests and 
provides a wide avenue for corruption.  End Comment.) 
 
----------------------------------- 
Will Venezuela devalue the Bolivar? 
----------------------------------- 
(CARACAS 568) 
 
 
CARACAS 00000718  005.2 OF 008 
 
 
¶18. (SBU) Economists disagree as to whether the BRV will 
devalue the currency.  A devaluation would bring the official 
and parallel markets more into line, improve the 
competitiveness of Venezuela's few exporting firms, and 
multiply the domestic spending power of the government (as 
most of its revenues are from oil sales in dollars). 
However, a devaluation would also contribute substantially to 
inflation (which was 17 percent in 2006) and fighting 
inflation is, at the moment, Chavez' prime economic concern. 
 
¶19. (SBU) Plans are underway to create a new currency, the 
"Bolivar Fuerte," which would remove three zeroes from the 
old Bolivar, but according to MPPF Cabezas, leave its value 
vis a vis the dollar intact.  Former Central Bank Director 
Maza Zavala recently argued that the conditions do not exist 
for Venezuela to gain from devaluation.  According to Zavala, 
Venezuela's lack of a productive capacity which would allow 
for local production to replace imports or an export capacity 
to allow Venezuelan firms to take advantage of the cheaper 
currency means that devaluation would only hurt Venezuelan 
industry and increase the already high inflation rate. 
Should the BRV devalue, estimates are that the devaluation 
would be between 10-30 percent from the current official 
rate.  Falling oil prices could hasten the need to devalue, 
as government expenditures become crimped.  Post does not 
discount the possibility that devaluation could be hidden in 
the monetary conversion scheduled for January 2008. 
 
-------------------------------------- 
What is causing all of this inflation? 
-------------------------------------- 
(06 CARACAS 2244, 2831, 3500, CARACAS 291) 
 
¶20. (SBU) Official inflation was 17 percent in 2006 and an 
accumulated 3.5 percent for January and February 2007 
(typically months of low inflation).  Certain categories are 
growing faster, though, and the prices of foodstuffs and 
non-alcoholic beverages has increased over 30 percent in the 
past 12 months.  Inflation in Venezuela is driven mostly by 
government spending, which rose 62 percent in dollar terms 
from 2005 to 2006, and excess liquidity.  Foreign exchange 
controls keep people from moving their money overseas, as 
Venezuelans have traditionally done, and this bottleneck led 
to an almost 70 percent increase in liquidity (M2) in 2006 
alone.  As a percentage of GDP, government spending has 
nearly doubled since Chavez took office, going from 19.8 
percent of GDP in 1999 to almost 38 percent in 2006 (when 
estimated off-budget spending is included). 
 
¶21. (SBU) The increase in money on the street has not led to 
a commensurate increase in goods available for sale, due to 
inefficiencies in the economy and BRV-initiated distortions, 
which include price controls, fixed interest rates, and an 
increase in the state's role in the private sector through 
expropriations, nationalizations, and new regulations. 
Interest rates are fixed by the BRV below the rate of 
inflation.  In maintaining political support through cheap 
credit, the BRV is impeded from raising rates to encourage 
saving and fight inflation.  Inflation is predicted to 
continue to rise, ending 2007 somewhere between 20 and 30 
percent, as more money continues to chase a limited supply of 
goods. 
 
------------------------------------------- 
Is Venezuela in danger of a banking crisis? 
------------------------------------------- 
(06 CARACAS 2622, CARACAS 686) 
 
¶22. (SBU) The financial sector in Venezuela had one of its 
best years ever in 2006, with record revenues and profits. 
At the same time, banks are under constant rhetorical attack 
by the BRV for their "excessive profits."  The BRV is not 
afraid to regulate to achieve its political ends: directed 
lending now makes up 31.5 percent of a bank's portfolio and 
interest rates are currently fixed, with banks having to pay 
depositors 6.5 percent on savings accounts, 10 percent on 
timed deposits, and the maximum loan rate capped at 28 
percent.  This spread is shrinking as the BRV continues to 
 
CARACAS 00000718  006.2 OF 008 
 
 
lower the maximum interest rate, which is already near the 
rate of inflation (18.5 percent for the 12 months ending 
March 2007).  At the same time, reserve requirements are 
increasing, with the statutory minimum up from 15 percent of 
deposits at the beginning of 2006 to 30 percent of new 
deposits today.  These restrictions will help cushion any 
crisis by providing reserves to cover shortfalls, but are 
also forcing the banks into riskier behavior, including 
increasing car and home loans and credit card issuances, in 
order to make money.  According to Banking Superintendent 
Diaz, only two percent of banks' portfolios are currently 
non-performing.  High GDP growth and increasing salaries mean 
that their customers, for now, can pay their loans.  Should 
government spending dry up and the economy slow down, many 
banks may see large increases in outperforming loans, which 
could potentially cause some of the banks to close. 
 
¶23. (SBU) In addition, approximately USD 8.7 billion of 
Venezuelan government funds are currently deposited in the 
banking sector.  Banks use these deposits to fund loans, even 
though in theory at some point the government will need this 
money to pay its expenses.  The Treasury Bank that was 
created in 2006 was designed in theory to hold all of the 
government's funds until they were spent.  (Note: In many 
cases this money appears "parked" with these banks, which are 
rumored to pay hefty bribes to BRV officials and 
intermediaries for the deposits.  End Note.)  The Treasury 
Bank's assets have increased from around USD 8 billion to USD 
13 billion as of December 2006 as the government has begun 
storing its money there.  This amount is broken into the USD 
9 billion the bank holds for FONDEN (in dollar and euro 
denominated assets abroad) and USD 4 billion or so in 
bolivars of budgetary money.  As of yet there has not been 
any large scale transfer of funds out of the private banking 
sector;  however, such a transfer could also trigger a crisis 
as banks would have to suddenly call in loans to avoid 
becoming insolvent. 
 
---------------------------------- 
Has poverty declined under Chavez? 
---------------------------------- 
(05 CARACAS 3830, septel) 
 
¶24. (SBU) Reliable poverty statistics are hard to come by in 
Venezuela since the National Statistics Institute (INE) 
changed its methodology under political pressure from Chavez 
in late 2004.  Unsurprisingly, since then, it has shown a 
steady decrease in the number of people living in "poverty 
and "extreme poverty" and is used to justify the claim that, 
under Chavez, poverty in Venezuela has fallen 10 percentage 
points, from 44 percent of the population at the end of 1998 
to 34 percent of the population as of the first half of 2006 
(the last date for which INE has published statistics). 
Households that cannot afford INE's basic basket of goods and 
services (USD 919 a month at the official exchange rate) are 
defined as "poor" and those that cannot afford the basic food 
basket (USD 232) are "extremely poor."  The average 
Venezuelan household has 4.3 members.  Both baskets are made 
up of many price controlled items, which keep the cost of the 
basket down, but many such items also are often sold above 
the legal rate or are unavailable due to recurring shortages. 
 The comparison between 1999 and today is, of course, 
misleading because INE is comparing apples and oranges -- two 
different poverty calculations. 
 
¶25. (SBU) Datanalisis, the largest polling and market survey 
firm in Venezuela, has a different method that calculates 
socio-economic status (SES).  Their research divides 
Venezuela into five SES groups: A, B, C, D, and E, with A 
being the most well off.  These groups are defined by income, 
education, type of housing, and geographic residency, with 
members of classes A and B (3 percent of the population) 
earning at least USD 4,000 a month, C (16 percent) earning an 
average of USD 900 a month, D (38 percent) averaging USD 415 
a month, and E (43 percent) averaging USD 238 a month (all at 
the official exchange rate).  Groups A, B, and C have seen 
real declines in their incomes of 23 percent since 1999. 
Group D makes about as much in real terms as it did at the 
 
CARACAS 00000718  007.2 OF 008 
 
 
start of Chavez's presidency, and group E has seen its income 
rise by 14 percent in real terms during this period.  The 
increase in earnings is coupled with the advent of the BRV 
"missions" that provide subsidized food, health care, and 
other services to these lower-income groups.  Thus, at the 
same time that the salaries of Venezuela's poor have 
increased, the cost of certain goods and services has almost 
certainly decreased.  The support of these "missions" and of 
Chavez is linked to the perception by members of the D and E 
SES groups that they are better off and that things in 
Venezuela are improving.  This strategy of poverty 
alleviation via transfer payments is clearly unsustainable in 
the medium to long term. 
 
------------------------------ 
Do most Venezuelans have jobs? 
------------------------------ 
septel 
 
¶26. (SBU) According to INE, the unemployment rate in 
Venezuela fell from 15.3 percent in 1999 to 9.5 percent at 
the end of 2006.  INE defines anyone working at least four 
hours a week as well as the participants of many of the 
missions as "employed."  Economic researchers at the local 
economic consulting firm EconAnalitica estimate that over 
750,000 unemployed people are considered employed due to 
their participation in a mission, and an additional 500,000 
"employed" Venezuelans are working less than 15 hours a week 
and therefore would not be considered employed by 
international bodies like the UN. 
 
¶27. (SBU) Estimates are that up to half of the labor force is 
employed in the informal sector.  With around 400,000 new 
entrants into the job market annually, and job creation last 
year of only 190,000, the deficit of jobs continues to grow. 
In addition, the number of people considered disabled or 
unable to work has grown considerably since 1999.  During the 
past seven years, the labor force grew by 21 percent and the 
number of disabled people almost doubled to over 1 million 
(or 5.5 percent of the labor force), implying the perverse 
incentive (hardly limited to Venezuela) for people to collect 
disability payments instead of seeking gainful employment. 
The employment situation is also marked by an increase in 
public sector jobs and a decrease in private sector jobs, as 
government spending increases and private firms reduce 
hiring.  Thus, while it would appear that the percentage of 
people technically unemployed has fallen, the number of 
people with actual jobs seems to not have grown in tandem 
with the economy. 
 
----------------------------------------- 
Do the Missions really make a difference? 
----------------------------------------- 
(06 CARACAS 3505) 
 
¶28. (SBU) By Post's count, there are currently 25 missions in 
Venezuela.  They range from providing subsidized food 
(Mercal) to free health care from mostly Cuban health 
practitioners (Barrio Adentro), to literacy and education 
instruction (Robinson, Ribas, Simoncito, and others) to 
energy-efficient fluorescent light bulbs (Energetica), and 
are costing the government somewhere between USD 6-10 billion 
dollars a year, when funding from the national budget, 
FONDEN, and PDVSA is added together.  The missions receive 
high marks in public opinion surveys, with Mercal and Barrio 
Adentro being the most used and most popular.  While Mercal's 
star has faded recently due to shortages, nonetheless, 63 
percent of respondents in a recent poll were positive about 
the program. 
 
¶29. (SBU) A discussion of the BRV's missions requires an 
explanation of opportunity cost.  While most all would agree 
that these programs do help Venezuela's lower classes, the 
money could arguably be spent in such a way to help many more 
people in an even more significant manner.  The BRV's 
literacy programs, for example, cost USD 583 per student at 
the official rate and have had very little effect on reducing 
illiteracy.  According to the Economic Commission for Latin 
 
CARACAS 00000718  008.2 OF 008 
 
 
America and the Caribbean (CEPAL), illiteracy in Venezuela 
fell from 7.5 percent at the start of Chavez' term to 6 
percent at the end of 2005, despite this massive spending. 
Most statisticians agree that most of this decline is due to 
population changes and not educational programs.  By paying 
both teachers and students to participate, however, they 
provide a benefit to these individuals in the form of 
supplemental income.  (Note: According to UNESCO, the average 
cost of a literacy program in Latin America was USD 61 per 
pupil in 2005 -- about one-tenth of BRV spending.  End Note). 
 
--------------------------------------------- -------------- 
How much money is Venezuela spending on military purchases? 
--------------------------------------------- -------------- 
 
¶30. (SBU) Since 2005, Venezuela has agreed to purchase over 
USD 4.3 billion in military hardware and equipment.  Many of 
these purchases are funded by FONDEN or through other 
off-budget means that reduce the transparency of the 
purchases and make tracking their actual cost and completion 
difficult to ascertain.  Over USD 3 billion of this amount 
constitutes deals with Russia, which include the purchase of 
100,000 AK-103 assault rifles, 24 Su-30Mk2 fighter aircraft, 
Spanish patrol boats, helicopters, and surface to air missile 
batteries.  These purchases mark significant increases in 
military spending, which, not including these extra-budgetary 
purchases, only amounted to USD 3.2 billion in 2005 and USD 
3.1 billion in 2006.  The arms buildup has caused concern 
amongst Venezuela's neighbors and shows no signs of abating. 
In 2007, the BRV has announced that it plans to purchase 
additional helicopters, trainer aircraft, and submarines for 
at least another USD 3 billion. 
 
BROWNFIELD