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UNCLAS SECTION 01 OF 02 CARACAS 001270 
 
SENSITIVE 
SIPDIS 
 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR MKACZMAREK 
NSC FOR DRESTREPO AND LROSSELLO 
USDOC FOR 4332 MAC/ITA/WH/JLAO 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA'S DEBT: MANAGEABLE FOR NOW 
 
REF: A. CARACAS 1209 
     ¶B. CARACAS 304 
     ¶C. CARACAS 368 
     ¶D. CARACAS 494 
 
¶1.  (SBU) Summary:  As of June 30, Venezuela's sovereign 
external debt officially stood at USD 30 billion and its 
internal debt at 44 billion bolivars (USD 20 billion at the 
official exchange rate).  These levels appear quite 
manageable given the size of Venezuela's economy.  However 
several factors make Venezuela's debt situation somewhat more 
problematic than the numbers above indicate. There has been a 
significant increase in internal debt over the course of the 
year, which could lead to higher inflation if the trend 
continues.  On the external side, the official numbers do not 
take into account what are presumably large sovereign 
obligations to China (for the China-Venezuela joint fund) and 
potentially to Russia (for arms purchases).  Venezuelan debt 
is considered one of riskiest of the major Latin American 
economies, making further external issuances more expensive. 
Finally, PDVSA, the state-owned oil company, has increased 
its debt substantially in recent years with little to show 
for it.  End summary. 
 
-------------- 
By the Numbers 
-------------- 
 
¶2.  (U) According to the Ministry of Economy and Finance 
(MEF), on June 30, 2009, Venezuela's external debt stood at 
USD 29.9 billion and its internal debt at USD 20.5 billion 
(when converting bolivars (Bs) to USD at the official rate). 
According to PDVSA's 2008 audited financial Qatement, as of 
December 31, 2008, PDVSA's debt stood at USD 13.5 billion 
(all denominated in hard currencies).  The table below shows 
the amortization profiles of government and PDVSA debt, with 
the addition of USD 3 billion in zero coupon debt PDVSA 
issued in July 2009 that matures in 2011.  (Note:  This table 
does not include the USD 3 billion in sovereign external debt 
whose issuance is currently being processed.  We will report 
on this issuance septel.  End note.) 
 
 
Year           GBRV          PDVSA 
        External  Internal 
2009      0.7       2.0        0 
2010      2.2       1.5       0.9 
2011      2.3       1.9       3.6 
2012      0.7       3.1       1.2 
2013      2.1       2.4       0.9 
Beyond   21.9       9.2       9.8 
 
Total    29.9      20.1      16.5 
 
¶3.  (U)  By conventional standards, this debt level is quite 
moderate.  Venezuela's external debt as of June 30, 2009, 
represented only 10 percent of its 2008 GDP (as expressed in 
dollars at the official exchange rate) and 32 percent of its 
2008 exports.  In contrast, Colombia's external debt at the 
end of the first quarter of 2009 represented about 13 percent 
of its 2008 GDP and 67 percent of its 2008 exports.  PDVSA's 
USD 16.5 billion in debt is about 13 percent of its stated 
2008 revenues. 
 
----------------------------- 
What the Numbers Don't Reveal 
----------------------------- 
 
¶4.  (SBU) The numbers presented above do not take into 
account a number of factors, which, when taken together, make 
Venezuela's debt situation appear somewhat less rosy, though 
still quite manageable.  First, the MEF's external debt 
statistics do not take into account several key obligations 
of the Government of the Bolivarian Republic of Venezuela 
(GBRV).  These include the China-Venezuela joint fund, for 
which many observers believe China (through the China 
Development Bank) has loaned the GBRV USD 8 billion, and 
credit possibly extended by the Russian government to finance 
GBRV arms purchases (ref A).  As these and similar deals lack 
transparency, there is no way of knowing how much the GBRV 
owes to whom and at what interest and maturity.  There are 
also a number of pending international arbitration cases over 
GBRV expropriations that may result in significant GBRV 
 
CARACAS 00001270  002 OF 002 
 
 
obligations. 
 
¶5.  (U) Second, any comparison of Venezuela's external debt 
to GDP begs the question of what exchange rate to use when 
converting Venezuela's GDP to dollars.  Using the official 
exchange rate (2.15 Bs/USD), which is clearly overvalued and 
becoming increasingly less relevant to Venezuela's economy 
(ref B), makes Venezuela's GDP appear artificially high and 
the debt to GDP ratio artificially low.  In contrast, the 
parallel exchange rate is currently 5.6 Bs/USD.  Using a more 
realistic exchange rate and including an estimate for the 
GBRV's other external obligations, Venezuela's external debt 
to GDP ratio could easily be above 20 percent - still 
manageable, but not as good as a cursory analysis would 
suggest. 
 
¶6.  (SBU) Third, looking at debt levels hides two problematic 
trends related to flows.  The GBRV has chosen to finance its 
2009 deficit by issuing large amounts of internal debt.  The 
National Assembly in March approved issuance of up to Bs 34 
billion (USD 15.8 billion at the official exchange rate) in 
internal debt in 2009 (ref C), and the GBRV issued Bs 11.5 
billion of internal debt in the second quarter.  If the GBRV 
continues to issue internal debt at this pace, internal debt 
will approximately double over the course of 2009 (from 
roughly USD 15 to 30 billion at the official exchange rate). 
While this trend may lead to greater inflationary pressures 
in the future, it does not involve any dollar constraints and 
is less problematic than a similar increase in external debt 
would be.  The second problematic trend is the increase in 
PDVSA's debt without a corresponding increase in crude oil 
production (or, to all appearances, investment).  PDVSA's 
debt has grown from just over USD 2 billion at year-end 2006 
to USD 16.5 billion today.  Again, the level is manageable 
given PDVSA's recent revenue stream and the current price of 
oil.  However, the money raised has not been used for new 
investment and PDVSA's output has been falling, trends which 
raise serious questions about PDVSA's management. 
 
¶7.  (SBU) Finally, it is costly for the GBRV or PDVSA to 
issue new external debt.  Venezuela generally beats out 
Argentina for the dubious honor of having the highest 
sovereign risk of a major Latin American economy, and most of 
its bonds are currently yielding in the 11-13 percent range. 
PDVSA bonds are considered even riskier and have a slightly 
higher yield.  Our conversations with analysts indicate 
Venezuela's risk is high - despite Venezuela having an 
excellent repayment record - because of President Chavez's 
unpredictability, concerns about Venezuela's economic model, 
and the GBRV's lack of transparency.  (Note:  It is not 
costly at the moment for the GBRV to issue new internal debt. 
 The real interest rate is negative (a byproduct of currency 
controls and monetary policy), and the Central Bank has 
ensured the necessary liquidity for banks to buy the debt 
(ref D).  End note.) 
 
------- 
Comment 
------- 
 
¶8.  (SBU) As with most economic matters in Venezuela, the 
parts of the GBRV's debt strategy that make little economic 
sense have a political explanation.  For example, 
conventional economics would suggest the GBRV ought to close 
its 2009 deficit, at least partially, by devaluing rather 
than doubling its internal debt.  For Chavez, however, to 
devalue would be to admit defeat (ref B).  Similarly, it is 
hard to believe Chavez would ever voluntarily take the 
necessary steps to bring down the yield on sovereign external 
debt.  These steps would almost certainly benefit Venezuela's 
economy, but they would reduce Chavez's control and 
discretionary power.  As Venezuela's debt levels are 
manageable, he will probably not be forced to take such steps 
in the near future.  End comment. 
DUDDY