The market is pricing that Venezuela will default in the coming months. With almost $2 billion in debt due in October, $3 billion in November and almost $4 billion in April 2017; default is only a matter of time. Venezuela’s economic decline will have a regional impact. We have talked about some for South America; but Central America and the Caribbean will experience consequences of greater proportions.
Since 2005, Venezuela has been sending oil at favorable terms through its program PetroCaribe to Antigua and Barbuda, Bahamas, Belize, Cuba, Dominica, Dominican Republic, Grenada, Guyana, Jamaica, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Haiti, Nicaragua, Honduras and El Salvador (Guatemala left the program in 2013). From the Caribbean, only the oil producers Trinidad and Tobago and Barbados refused Venezuela’s offer.
Despite the size of these Centro American and Caribbean nations that benefit from the program, we are not talking about peanuts. Venezuela has sent to PetroCaribe an amount that surpasses $50 billion in oil. On average, it sent around 250 thousand barrels per day (Kbpd), of which 65 kbpd was sent to Cuba, between 2006 and 2014.
Under this scheme, the importers can receive oil and pay an amount as low as 20% of the price while sending the rest of the cost to a 25-year loan (plus a two-year period) with a 1% interest. If the oil barrel falls below $40/b, as it currently is, they can finance up to 30% in a 17-year loan (plus the 2-year grace period) at a 2% interest. In addition, Venezuela accepts debt payments in kind. For the last 10 years, it has received payments in bananas, rice, jeans, medical assistance and “intelligence” services (from Cuba).
For many countries, this assistance surpasses de aid received by U.S. and international organizations. According to Franco Uccelli, an EM analyst at JPMorgan, financing terms are “almost free money [and] if somebody were to pull the plug on those flows, it would be difficult to replace”. Despite Venezuela’s reiterated commitment to continue the program, its economic implosion is already decreasing the oil exported to the region. According to Barclays, PDVSA has reduced its exports to PetroCaribe members as much as 50% since 2012.
The recent victory of the opposition in the National Assembly last December increases the probability that the program will be terminated soon. The opposition criticizes PetroCaribe arguing that it has been costly for Venezuela. From the $50 billion sent to PetroCaribe; only about $20 billion have been repaid (of which $3 billion were goods and services), $3.8 billion have been forgiven and the rest, around $26 billion, is still owed. Cuba alone owes Venezuela $14 billion. The total amount still owed is around 40% of Venezuela’s current total foreign-denominated bonds.
Venezuela’s desperate need of cash has resulted beneficial for some PetroCaribe countries. In January 2015, the Dominican Republic purchased $4.1 billion of its debt for almost $2 billion, which meant a 52% write off. The purchase reduced 3.3% of the country’s debt-to-GDP ratio. Dominican Republic now owes about $100 million to Venezuela. Later in July, Jamaica did the same by raising $2 billion in bonds to pay $1.5 billion to Venezuela in exchange of $3.2 billion of its debt—a 54% write off. The country managed to reduce 12% of its debt-to-GDP ratio in that operation. Both countries still import under the PetroCaribe program.
The impact of the sudden stop on the oil flow will differ across the board, but for most the countries, the impact is going to be significant. According to the World Bank, the island region spends around 15% of its GDP in oil imports. Several islands have a strong dependency on Venezuela’s cheap oil, especially when they are still struggling after the financial crisis, Sandy and the current low committee prices.
Countries without access to other sources of financing will have a hard time in this environment where liquidity is tightening. For countries like Belize, public debt could rise significantly in the short term due to the changes in the PetroCaribe program, according to the IMF. For others, the risks are in their energy security.
In most of the region, Venezuelan oil has eliminated the incentives to invest in its energy sector and has allowed them to postpone though fiscal choices. Jamaica relies on oil for more than 90% of its energy needs and it could require $600 million a year to replace Venezuela’s supply. Several other islands depend on oil to produce more than 90% of their electricity. This becomes extremely risky considering that PetroCaribe agreements can be terminated with a 30-day notice.
Overiew: As with Venezuela’s default, the existence of PetroCaribe is a matter of time and this will bring economic instability to Central America and the Caribbean. The region will find itself with financing problems, and debt is likely to increase. Although the recent bond issuances of the Dominican Republic and Jamaica helped them to reduce their debt, the increasing fiscal pressures could compromise repayments. To overcome the challenge, the region will require more assistance of international organizations and the U.S. In fact, the U.S. has showed willingness to replace Venezuela’s influence in the region. Obama’s trip to Jamaica last year was the first of an US president since 1982. The country has also pledged assistance to develop renewable energy sources in the region. According to the activist Yoani Sanchez, the death of Hugo Chavez and the possible reduction of Venezuelan subsidies is one variable accelerating U.S.-Cuba relations. More changes could come soon.
Policy and Markets in Latin America |