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DE RUEHCV #0930/01 1292042
ZNR UUUUU ZZH
R 092042Z MAY 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8668
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 04 CARACAS 000930 
 
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: EFIN VE
SUBJECT: VENEZUELA'S DEBT PICTURE 
 
REF: A. CARACAS 718 
     ¶B. CARACAS 741 
     ¶C. CARACAS 861 
 
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SUMMARY 
------- 
 
¶1. (SBU) Venezuela's debt profile is changing, with the BRV 
financing more domestically and incurring additional debt and 
liabilities through PDVSA and the Central Bank.  External 
debt as a percentage of GDP remains low (16 percent of GDP) 
by historical and regional terms; however, "total debt" 
(external debt, internal debt, Central Bank liabilities, and 
PDVSA debt) has doubled during the past eight years. 
Individuals are also becoming increasingly indebted and bank 
risk profiles are growing -- an unsustainable situation (over 
the longer term) made possible by the trapped liquidity from 
windfall oil revenues and government spending.  The potential 
withdrawal from the World Bank and IMF further complicates 
matters and has increased Venezuela's risk profile by 49 
basis points since April 30, thereby making its debt 
potentially more expensive. 
 
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DEBT LEVELS 
----------- 
 
¶2. (SBU) Since 1998, the BRV has steadily reduced its foreign 
debt as a percentage of GDP, to the point that it is now 
below 16 percent of GDP (calculated at the official exchange 
rate of Bs. 2150/dollar).  At the same time, it has been 
issuing more debt locally, both through bolivar-denominated 
bonds and certificates of deposit.  These instruments have 
the benefit to the government of being based on the currency 
it prints (it can print more and pay off the debt with the 
extra bolivars).  The debt table below shows Venezuela's 
indebtedness since 1998 and over the past five years. 
 
 
               1998 / 2002    2003    2004   2005   2006 
 
Price of Oil*  10.60  22.20   25.76   32.88  46.03  56.45 
GDP Growth     .3     -8.9    -7.7    18.3   10.3   10.3 
 
 
Foreign        23,314 22,517  24,786  27,471 31,202 25,836 
 
Pct. GDP       25.5   24.2    29.7    24.4   21.8   15.4 
 
 
Domestic       2,384  11,553  15,029  15,525 15,682 16,851 
 
Pct. GDP       4.9    12.4    18.0    13.8   10.9   9.5 
 
 
Central Bank   2,863  279     4,720   3,679  14,099 16,162 
 
PDVSA          3,900  6,426   6,265   2,716  2,704  2,476 
 
Total BRV Debt 33,461 40,775  50,800  49,391 63,687 61,325 
 
(The numbers above, with the exception of the price of oil 
and percentages, are in millions of dollars at the official 
exchange rate) 
*Average price for the Venezuelan oil basket in US dollars 
 
SOURCES: Venezuelan Central Bank, Ministry of Finance, 
Santander Investment, Embassy Calculations 
 
¶3. (SBU) Venezuela's foreign debt has grown 11 percent (in 
dollar terms) since 1999, reaching almost USD 26 billion by 
the end of 2006, a marked decrease from 2005.  Much of this 
decrease was the result of Venezuela's prepayment of Brady 
bonds, valued at almost USD 4.4 billion, during the year.  At 
the same time, the stock of domestic debt has also grown, 
from Bs. 2.4 trillion in 1999 (USD 3.7 billion at the then 
exchange rate) to Bs. 36.2 trillion today (USD 16.8 billion). 
 When adjusted for inflation and devaluation, this represents 
a 264 percent increase. 
 
¶4. (SBU) Central Bank (BCV) debt/liabilities, while not 
normally included in calculations of domestic debt, is 
 
CARACAS 00000930  002 OF 004 
 
 
nonetheless alarming.  As of the end of April, the BCV had 
Bs. 34 trillion in outstanding notes (USD 15.8 billion), 22 
times more than it did in 1999 and 58 times more than in 
¶2002.  These CDs and structured notes are issued by the BCV 
to soak up excess liquidity, a relatively recent problem in 
Venezuela associated with the currency control regime in 
place since February 2003 and large increases in government 
expenditures.  PDVSA's debt load had actually decreased 
through the end of 2006, although so far in 2007 PDVSA has 
issued USD 12.5 billion in debt (reftel B). 
 
¶5.  (SBU) If one includes foreign and domestic sovereign debt 
as well as BCV notes and PDVSA's debt, it paints a grimmer 
picture for the BRV.  Under this methodology, the debt stock 
almost doubled since 1998 in dollar terms, during a time in 
which oil prices rose exponentially (from an average of USD 
10.60 for the Venezuelan oil basket to USD 56.45) and 
government revenues similarly surged. 
 
------------------------- 
"CHAO" IMF AND WORLD BANK 
------------------------- 
 
¶6. (SBU) Minister for People's Power of Finance (MPPF) 
Rodrigo Cabezas and President Chavez spent several days 
recently crowing the final payment of Venezuela's World Bank 
debt.  During his April 15 "Alo Presidente" television 
program, Chavez celebrated that, "sooner rather than later 
the world will not need them (IMF and World Bank) because 
they have been the arms of imperialism to dominate the world, 
to indebt the world, and then enslave it through the perverse 
mechanism of eternal debt; we are liberated from these chains 
and these are the steps of the Revolution." 
 
¶7. (SBU) On April 30, Chavez announced that Venezuela would 
withdraw from the World Bank and IMF (reftel C).  This 
action, if taken, would probably increase Venezuela's debt 
burden by raising its country risk profile and t@cAQve U.S. Treasuries) has risen 
by 49 basis points since Chavez' announcement.  Over 70 
percent of Venezuela's external debt goes into technical 
default if the country leaves the IMF.  While most creditors 
would probably be willing to accept the technical default as 
long as Venezuela continues to pay on time, the uncertainty 
and potential profit from arbitrage between trading and book 
value of the debt could lead to an expensive rescheduling. 
 
¶8. (SBU) Venezuela still actively engages with the Andean 
Development Corporation (CAF) and InterAmerican Development 
Bank (BID), with the CAF recently announcing an increase of 
USD 600 million in its project portfolio to fund a 
hydroelectric plant.  Venezuela currently has about USD 1.8 
billion in outstanding loans with the CAF and approximately 
USD 1.1 billion with the BID. 
 
------------------------------- 
OIL PRICES GO UP, DEBT GOES UP? 
------------------------------- 
 
¶9. (SBU) Venezuela has run a budgetary deficit in seven of 
the past eight years, though has been issuing more debt than 
it needs to cover these deficits.  Local economists and 
university professors Miguel Santos and Ricardo Villasmil 
(PROTECT THROUGHOUT) suspect that this is due to Chavez' 
preoccupation with maintaining significant levels of 
contingency, or rainy day funds. (Note: A significant portion 
of BRV spending is off-budget, and there exists little 
transparency in how the BRV utilizes off-budget revenues as 
well.  End Note.)  Post estimates that the BRV has as much as 
USD 34 billion non-Central Bank reserves (reftel A).  This 
money serves as an insurance policy for Chavez against a drop 
in oil prices, potential sanctions, or civil unrest similar 
to the coup and strikes in 2002-2003. 
 
¶10. (SBU) For Santos and Villasmil, the confluence of the 
BRV's political and economic policies is notable in the debt 
service profile.  The majority of Venezuela's foreign debt 
comes due after 2017, and hardly any is due in 2009 or 2012 
(election years in Venezuela).  This appears to be 
intentional in order to provide the BRV with the leeway to 
increase spending during those years to shore up support, as 
it did in 2006 when government spending (not including 
 
CARACAS 00000930  003 OF 004 
 
 
off-budget spending) grew 41 percent (in dollar terms). 
 
Venezuela's Debt Amortization Sechedule (Foreign Debt) 
 
Year       Amount 
 
2007       1,431.81 
2008       2,165.56 
2009       785.28 
2010       2,196.41 
2011       2,276.31 
2012       580.52 
2013       2,037.00 
2014       1,812.89 
2015       1,494.53 
2016       1,628.37 
2017-2045  10,805.07 
 
(millions of USD) 
 
SOURCE: Ministry of Finance as of the end of January 2007. 
 
------------------- 
VENEZUELA INDEBTED? 
------------------- 
 
¶11. (SBU) Former head of the Central Bank's Economic Research 
Division, Jose Guerra recently authored a book entitled, 
"Venezuela Endeudeada," or Venezuela Indebted.  The primary 
argument of Guerra and many others is that, in a time of 
historically high oil revenues, it makes no economic sense to 
be increasing the country's debt burden.  While arguments can 
be made for issuing debt at rates of interest below the rate 
of return for an inv!wejzVQQ2i=NQK8y1i_old the proceeds in the 
bank, or to spend the money on handout programs that do 
little to boost future growth.  (Comment: One could argue, 
however, that it makes good political sense, given the 
direction we believe Chavez wants to take the country.  End 
Comment.)  Much of the USD 7.5 billion recently issued by 
PDVSA is expected to go toward current obligations and BRV 
social spending (reftel B). 
 
¶12. (SBU) Local sovereign debt is issued in bolivars, but at 
a set exchange rate to the dollar.  Thus, should the BRV 
choose to devalue, its debt burden would remain the same in 
dollar terms.  The preference for local issuances probably 
stems from the BRV's ability to issue local notes at 
preferential interest rates (below inflation) as currency 
controls and excess liquidity result in a seller's market for 
instruments.  For a government little preoccupied with the 
rule of law or private property rights, local debtors would 
also be easier to deal with in the event of default or 
restructuring.  Issuing local bonds also allows the 
government to soak up excess liquidity, one of the primary 
factors driving Venezuela's double digit inflation and a 
major preoccupation of Chavez and Minister for People's Power 
of Planning and Development Giordanni. 
 
¶13. (SBU) The Venezuelan government is not the only 
institution in Venezuela addicted to debt.  Financial 
institutions have heavily promoted consumer loans and credit 
cards in recent years, offering interest rates below the rate 
of inflation and many incentives.  The banking system's loan 
portfolio has grown by 332 percent in dollar terms since 
2002, due mostly to the surge in liquidity.  Credit cards 
loans, for example, have grown almost 260 percent.  Banks in 
Venezuela make soi of the highest profits in the hemisphere, 
with a number of analysts estimating an average above 30 
percent (septel).  One major bank offers up to six months 
advance on one's salary and just about any bank will offer a 
car loan or mortgage with little investigation.  While 
default rates remain low, a cycle of indebtedness is 
emerging, with borrowers moving from one bank to another, 
paying off the first credit card with the latter.  When 
liquidity diminishes, this Ponzi scheme will come falling 
down. 
 
¶14. (SBU) The increasing indebtedness of state institutions, 
such as the Central Bank and PDVSA is a cause of concern, 
tempered, however, by the high oil revenues and the ability 
of the BCV to increase the money supply if its resources 
 
CARACAS 00000930  004 OF 004 
 
 
become crimped (however, this would carry an inflationary 
cost).  As a percentage of GDP, Venezuela's foreign debt 
profile remains very manageable, and some international money 
managers (to justify their purchases of Venezuelan paper), 
note that Venezuela has never defaulted.  The BRV's foreign 
debt, as a percentage of GDP compares favorably with other 
countries in the region, including Argentina (28 percent), 
Colombia (17), Ecuador (24), and Peru (23).  The drop in debt 
as a percentage of GDP for Venezuela is due mostly to its 
increase in GDP in recent years, as the total amount in 
dollar terms has risen slightly since 1999. 
 
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COMMENT 
------- 
 
¶15. (SBU)  While the run up in debt during years of windfall 
oil revenues does not make much economic sense, for Chavez' 
revolutionary ambitions it may make perfect sense and be 
worth the gamble.  Recreating a new political, economic and 
cultural order doesn't come cheap.  It is worth remembering 
that Venezuelan GDP growth is highly dependent on the price 
of oil and the debt picture only remains manageable so long 
as oil prices remain high and production doesn't crash.  In 
2003, when GDP fell 8 percent, Venezuela's foreign debt 
burden as a percentage of GDP shot up from 37 percent to 48 
percent. 
 
WHITAKER