VZCZCXYZ0000
PP RUEHWEB

DE RUEHCV #1382/01 2742033
ZNY CCCCC ZZH
P 302033Z SEP 08
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 1901
INFO RUEHBO/AMEMBASSY BOGOTA 7869
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 1094
RUEHQT/AMEMBASSY QUITO 2908
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY

C O N F I D E N T I A L CARACAS 001382 
 
SIPDIS 
 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR MMALLOY 
NSC FOR JSHRIER 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
 
E.O. 12958: DECL: 09/30/2018 
TAGS: ECON PGOV EFIN VE
SUBJECT: AS ELECTION APPROACHES, WHERE'S THE SPENDING? 
 
REF: A. CARACAS 313 
     ¶B. CARACAS 1146 
 
Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) 
and (d). 
 
¶1.  (C) Summary:  An anticipated jump in spending prior to 
the November 23 state and local elections by the Bolivarian 
Republic of Venezuela (BRV) does not appear to have 
materialized.  Local analysts primarily attribute this 
surprising failure to boost spending significantly to 
increasing incompetence, inefficiency, and lack of capacity 
in the BRV.  They caution, however, that it is increasingly 
difficult to measure government spending, as an increasing 
amount of it is done off the books and in foreign currency. 
While we certainly expect the government to increase 
patronage outlays in the coming eight weeks, it is probably 
too late for a spending effort comprehensive enough to 
provide a spurt in economic growth before the elections.  End 
summary. 
 
----------------------- 
The Ghost of December 2 
----------------------- 
 
¶2.  (C) Most local economists expected the BRV to spend 
moderately in the first half of 2008 and then rapidly pick up 
the rate in run-up to state and local elections scheduled for 
November 23.  Datos pollster Joseph Saade (protect) noted to 
Econoffs a strong correlation in Venezuela between government 
popularity and voters' perception of their economic 
situation.  As government spending is currently the most 
powerful driver of economic growth, a well-timed spending 
increase could lead to a temporary spurt in economic growth 
with associated electoral benefits.  In 2007, however, the 
BRV sharply reduced spending growth and implemented a more 
restrictive monetary policy because of concerns over 
inflation.  Some analysts attribute the December 2, 2007 
defeat of the constitutional referendum in part to the BRV's 
failure to pump more money into the economy (e.g., through 
social programs known as "missions"; ref A), heightening 
expectations that the BRV would learn from its mistake and 
increase spending as the 2008 elections drew near. 
 
------------------------------------------- 
Numbers and Impressions Tell the Same Story 
------------------------------------------- 
 
¶3.  (C) Numbers and anecdotal impressions tell the same 
story:  public spending is not picking up as expected. 
According to the Central Bank (BCV), ordinary central 
government expenditures were up 32 percent in nominal terms 
through June 2008 (the latest data available) relative to the 
same period in 2007.  In real terms, however, there was no 
increase, as prices also rose 32 percent from June 2007 to 
June 2008.  Monetary liquidity, sometimes used as an 
indicator of government spending, has risen only 7.8 percent 
on the year, which represents a contraction in real terms. 
Spending did pick up somewhat in the second quarter, with 
ordinary expenditures peaking in April at 16 billion bolivars 
(USD 7.4 billion at the official rate) per the BCV. 
According to economic consultant Tamara Herrera (protect 
throughout), an analysis of the National Treasury Office's 
weekly payments schedule, a more current but less reliable 
indicator of government spending, suggests that expenditures 
have become "erratic" since the second quarter increase.  In 
short, spending patterns do not show a substantial or 
sustained enough increase to cause a significant spurt in 
economic growth.  Of the ten economists and financial sector 
executives Econoffs spoke with over the past two weeks, 
virtually all agreed that public spending was not growing as 
fast as they had expected given the critical nature of the 
November 23 elections. 
 
¶4.  (C) Anecdotal evidence also suggests there has been no 
significant spending increase.  As Carlos Henrique Blohm 
(protect), a businessman who chairs VenAmCham's economic 
committee, put it, "We're waiting for pre-election blip, and 
it hasn't come.  It's too late now."  Another contact, the 
personal friend of the owner of the company contracted by the 
BRV to build a major railroad, said his friend told him the 
BRV had not paid the firm in several months.  Work has 
basically stopped, although the firm, under pressure from the 
BRV, has tried to create the appearance of progress.  On the 
other hand, there are indications that some election-related 
patronage payouts have begun.  Several contacts told us the 
campaign of Jesse Chacon, the Chavista candidate for mayor of 
Sucre municipality (in Caracas), has started handing out 
washing machines and other domestic appliances in the barrios 
(reportedly with the assistance of PDVSA).  We can expect far 
more outlays of this type as the election nears.  While they 
will undoubtedly contribute to an uptick in commercial 
activity, they will not produce the same sensation of 
economic growth as substantial, sustained government spending. 
 
------------------------------------ 
Why? Ineptitude and Lack of Capacity 
------------------------------------ 
 
¶5.  (C) Virtually all of our contacts agreed that the BRV 
wanted to spend more but could not because of lack of 
capacity and, in some cases, sheer ineptitude.  Banking 
Association chief economist Jesus Bianco (protect) called the 
government "paralyzed," noting that the constant changing of 
ministers and their teams had sharply reduced administrative 
capacity to execute projects.  He and others specifically 
pointed to the Ministry of Finance, where Ali Rodriguez is 
the second minister since Rodrigo Cabezas resigned in January 
¶2008.  Banco Mercantil economist Luis Zambrano (protect) 
characterized PDVSA, President Chavez' favorite go-to 
organization, as "collapsing" administratively under an 
increasing variety of demands.  Zambrano also said spending 
through the missions was declining as some were controlled by 
parties now splintering from mainstream Chavismo.  Herrera 
and Zambrano observed the spending that was taking place was 
having a smaller impact on economic growth, thanks to 
inefficiency, corruption, and the displacement of public 
investment by salaries and transfer payments.  Finally, 
several contacts pointed out that recent nationalizations (or 
the negotiations toward them) were stretching the BRV's 
remaining management capacity. 
 
------------------ 
Beware the Numbers 
------------------ 
 
¶6.  (C) Although they virtually all agreed the BRV was 
spending less than expected, and less than it would have 
liked, because of ineptitude and lack of capacity, our 
contacts noted it was becoming increasingly difficult to know 
what the BRV was actually spending for several reasons.  Most 
importantly, a significant percentage of spending is taking 
place outside the central government's budgetary process, 
through PDVSA or various funds the BRV has created for this 
purpose.  This spending is purposefully discretionary and 
non-transparent, making it impossible to know the exact 
magnitude.  Second, an increasing part of this 
extra-budgetary spending - payments to contractors, for 
example - is taking place in dollars.  These payments do not 
impact liquidity in the same way as BRV spending in bolivars. 
 Instead, they are potentially another source of corruption: 
if the initial contract was priced in bolivars and the BRV 
pays in dollars, BRV officials and/or the contractor could 
make an instant profit on the difference between the official 
and parallel foreign exchange rates. 
 
------- 
Comment 
------- 
 
¶7.  (C) Venezuela's economy is faltering, with growth 
slowing, inflation rising, and the feeling of boom times 
fading (ref B).  Given how crucial the November 2008 
elections are to President Chavez' political project, it is 
surprising the BRV has not reverted to the model of 
government spending driving economic growth, which served it 
so well from 2003 through 2006.  We agree with most of our 
contacts that ineptitude, inefficiency, corruption, and lack 
of administrative capacity in the government are the major 
reasons for this failure, problems which could hurt the BRV 
in the November elections and beyond.  Nevertheless, 
President Chavez has essentially eliminated any distinction 
between the state and his United Socialist Party of Venezuela 
(PSUV).  PSUV candidates, by and large, will be able to 
deploy more resources than their opposition competitors.  End 
comment. 
CAULFIELD