Venezuela Turmoil Signals End of Oil-for-Jeans Giveaway

For a decade, countries from Guyana to Nicaragua have gained from a program that allowed them to trade for Venezuelan oil using everything from the jeans they produced to the pasta they made.

Now, the $8 billion Petrocaribe subsidy, which also allows countries to finance part of their oil purchases at 1 percent for 25 years, is looking less secure as Venezuela faces inflation that’s risen to 63 percent and the world’s widest budget deficit.

In response, at least four countries are taking steps to reduce their reliance on Venezuela’s subsidy as crude prices plunge, according to the International Monetary Fund. It’s a move other countries should follow, said David Voght, managing director of energy consultancy IPD Latin America.

“The scale of the oil price decline should trigger some adjustments,” Voght said by telephone from Miami. He urged countries to “react quickly to the fact that in its current form, this agreement presents a huge financial burden for a struggling Venezuela.”

The four countries are Guyana, Haiti, Belize and Jamaica. Cutbacks in the subsidy, created by former President Hugo Chavez, would ripple across the Caribbean and Central America, said Franco Uccelli, an emerging markets analyst at JPMorgan Chase & Co. in Miami.

Those financing terms are “almost free money,” Uccelli said in a telephone interview. “If somebody were to pull the plug on those flows, it would be difficult to replace with well-priced funds from a different source.”

OPEC Meeting

As one of OPEC’s least profitable members, Venezuela is pushing the cartel to reduce output to boost prices when it meets this week in Vienna. An unfavorable outcome will threaten the economy, including its ability to maintain Petrocaribe. Brent has lost 28 percent this year to $80.05 a barrel amid the fastest rate of U.S. production in more than three decades.

Venezuela’s cheap financing has softened the blow of oil prices that have averaged $100 a barrel since the program was created in 2005. The Caribbean region spent 13 percent of its gross domestic product on oil imports, the World Bank said in a 2012 report, and Petrocaribe members have defaulted on debt obligations at least nine times since 2003.

Under Petrocaribe, Venezuela finances as much as 60 percent of the cost of oil shipments. The Bank of Nova Scotia said the program is more “noose” than lifeline for the region, the most indebted in the world.

Inflation, Recession

Venezuela is Latin America’s biggest oil producer, and gets 97 percent of its export income from selling crude and its derivatives. That generated $89.2 billion last year, the fourth-lowest among OPEC’s 12 members, according to the cartel’s annual bulletin. It also has the world’s highest inflation and the worst recession in the region, the IMF says. While officials say there are no plans to change the aid program, recipients aren’t as confident.

Jamaica, one of Petrocaribe’s 19 members, is seeking to “build a resilience in the economy, restore the buffers and reserves, diversify from fuel oil, increase renewables and do something on conservation,” central bank Governor Brian Wynter said in a Nov. 18 interview. The goal is “that our dependency is less” on Petrocaribe.

Jamaica is boosting international reserves to hedge against a potential reduction in aid from Venezuela, the IMF said in a July report on regional financial risk.

Fiscal Policies

Belize is using Petrocaribe financing to strengthen external buffers and Guyana is using the program to reduce debt and increase savings, the IMF said. Haiti, which owes Venezuela the equivalent of 15 percent of its gross domestic product, is strengthening fiscal policies to boost government deposits.

Since forming the program, Venezuela has disbursed $28 billion in oil, more than it has in central bank reserves, Foreign Minister Rafael Ramirez said at a Nov. 20 meeting with ministers from member states. He said there are no plans to change the agreement, and Oil Minister Asdrubal Chavez said countries are paying their debts.

To date, $16 billion has been repaid, including $3 billion in goods such as clothing and food, instead of cash, according to Ramirez and reports from the state-run oil company Petroleos de Venezuela SA.

Petrocaribe deliveries to Central America and the Caribbean averaged 100,000 barrels a day this year, unchanged from last year, Chavez said Nov. 20. That figure doesn’t include about 100,000 barrels a day sent to Cuba, which pays Venezuela with medical care provided by about 30,000 medical and sports personnel sent to the country.

Falling Popularity

Belize, which defaulted on $500 million of bonds twice since 2006, has tapped about $100 million in financing from Petrocaribe in the past two years, according to John Mencias, the head of the country’s Petrocaribe fund.

Jamaica, which in 2013 restructured $9 billion of local bonds for the second time in three years, is swapping high-interest debt for a line of credit funded by the Petrocaribe agreement, according to the Petrocaribe Development Fund’s CEO.

While the subsidy program helped Venezuela build alliances, it comes at a cost for President Nicolas Maduro’s government. Maduro has struggled to reverse falling popularity ratings amid worsening shortages of basic goods, surging inflation and crime.

Oil Exports

Venezuela lost 30 percent of its foreign currency earnings due to the drop in crude prices last month, Maduro said in a national address on Nov. 13. The country’s average price for oil exports reached a four-year low of $69 a barrel last week, below the level it needs to keep making debt payments, according to Jefferies Group LLC.

That’s increasing pressure to boost sales, said Luisa Palacios, managing director at oil consultancy Medley Global Advisors.

“If you are having difficulty increasing oil production, and oil prices are falling, your only option is to increase the share of exports fetching international prices,” she said by phone from New York.

Eliminating the program may generate about $1.1 billion in annual revenue for Venezuela, Credit Suisse Group AG said in a Nov. 19 report.

“The huge drop in oil prices makes it so much more difficult for Venezuela to sustain this,” Lisa Viscidi, director of the energy program at the Inter-American Dialogue, a public-policy research group in Washington, said by telephone Nov. 13. “I don’t see the whole thing ending tomorrow, but more and more the terms will get less favorable and shipments smaller.”

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