Both the International Monetary Fund (IMF) and Scotiabank’s International Economics Group (IEG) have raised serious concerns about the PetroCaribe initiative in recent days, with one agency calling the arrangement “more noose than lifeline” and the other warning Caribbean member states of the facility that a high level of dependence on financing leaves them open to unexpected changes in how much they pay for Venezuelan oil. Scotiabank’s IEG suggested last month that the trend of both political and fundamental factors affecting the longevity of PetroCaribe is towards the eventual dissolution of the scheme, and warns of an “outsized impact of [a collapse of PetroCaribe]”. The PetroCaribe energy accord was created in June 2005 to provide preferentially financed Venezuelan petroleum to Central American and Caribbean member states. Under PetroCaribe, Venezuela sells oil to member states at market prices, but gives generous financing conditions to beneficiary countries, including long-term loans at low interest rates, and sometimes the possibility to repay in kind. The volume of oil sold to the region under various agreements including PetroCaribe has stabilized at around 250,000 barrels per day after 2009, with values rising to about US$10 billion in 2012. While The Bahamas signed the PetroCaribe agreement in 2005, the Cabinet did not ratify the arrangement, and as a result, The Bahamas does not participate in the scheme. The IEG posited that almost a decade after its creation, PetroCaribe has “fostered a fiscal dependence on Venezuela amongst members and perpetuated petroleum consumption patterns that are unsustainable in the current era of high oil prices.” “Should the agreement collapse, unsubsidized market prices would amplify public sector and current account deficits in member countries. Meanwhile, rapidly reducing the consumption of petroleum-based fuels would adversely impact the fragile economies of participating states,” Scotiabank’s IEG said. The IMF points out in its 2014 Spillover Report that the heavy dependence of some Caribbean nations on the favorable financing conditions in the various energy cooperation agreements under PetroCaribe leave those countries exposed to shocks originating in Venezuela that could lead to the cancellation or tightening of the conditions of these agreements. What the IMF identifies as a concern is that while these arrangements represent a relatively small share of the Venezuelan oil sector, authorities in that country could decide to reduce this support if the country’s external liquidity constraints become binding. The financing element of these agreements accounts for only about 5 percent of Venezuela’s export revenue (US$4.9 billion) and its accumulated claims on beneficiary countries stood at only about 2.7 percent of Venezuelan GDP (US$10 billion) at the end of 2012. Nonetheless, given external liquidity constraints, including a continued reduction in international reserves, the Venezuelan authorities could choose to reduce or eliminate these schemes or switch to less generous financing conditions. The authorities publicly avow to continue these agreements, but eight countries have already reported some reductions in PetroCaribe financing in 2013. The IMF notes in the report that some Caribbean states are “highly dependent” on financing from these arrangements. Beneficiary countries receive financing from Venezuela equivalent to 1.5 percent of GDP per year on average, but in some cases, as much as 3 to 7 percent of GDP. “Consequently, some Caribbean countries have debt to Venezuela of about 10 percent of GDP (15 percent and 19 percent of GDP for Haiti and Nicaragua, respectively). In the event of an interruption of the agreements or an abrupt change in their conditions, a number of countries could face significant balance of payments gaps and macroeconomic difficulties. These countries would face a difficult choice between adjusting and finding alternative sources of external financing, including from the IMF. Countries with a large balance of payments gap and no access to international markets would likely seek concessional financing,” the IMF said. The fund noted that some beneficiary countries have been making contingency plans, citing initiatives in Guyana, Jamaica, Belize and Haiti aimed at limiting exposure, and advised Caribbean member countries of the PetroCaribe oil facility that they remain vulnerable to changes in the financial terms of the accord and should consider building up buffers.
Posted on: Wed, 12 Nov 2014 17:08:43 +0000
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