Opinion: The future of Petrocaribe, another default?

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Today it’s not only the international financial community that’s reacting to the risk of default by Venezuela (as brilliantly analyzed by Harvard Professor Ricardo Haussmann in a recent article that infuriated a Nicolas Maduro), which hasn’t happened only because a commercial default which affects all Venezuelans has been implemented instead — as an alternative to paying public debt.

The alarm bells are also ringing for Petrocaribe and some sectors are getting ready to face the consequences of Venezuela being forced to seriously re-examine the aid program, which commits it to sending 300,000 barrels of oil a day to Cuba, the bulk of the island states of the Caribbean, Surinam and some Central American countries too.

In spite of paying a discounted price for their oil, and only having to pay between 40 and 50 dollars up front with the rest being payable as a loan ... all the [Petrocaribe] participating countries, with the exception of Suriname, are running balance of payments deficits.

— Leopoldo Martinez

Given the difficulties they are experiencing, Venezuelans cannot possibly be expected to understand how their country is subsidizing the economies of the Petrocaribe nations to the tune of seven billion dollars annually. As well as being inexplicable, it’s plainly unacceptable that this provision of aid brings no benefits whatsoever to the economy of Venezuela, unlike what happened in the context of the San José pact, when Venezuela exported non-petroleum goods and services to markets which saved foreign currency through financing and discounts on their payments for Venezuelan oil.

But now we are facing a different problem. Venezuelan oil production has fallen due to a lack of investment and the economic pressures on the country are growing daily. Furthermore, the number of shipments of oil being sent to China to pay off the loans it has made to the government is increasing and this is reducing the country’s ability to comply with its Petrocaribe commitments.

As a result, there is already a great deal of open concern in the nations that make up the group about the impact of the unsustainable nature of the assistance they have been receiving and the negative consequences for their economies of it being cut off or reduced. Our Center for Democracy and Development in the Americas has been examining this issue in depth over recent years and the conclusions it has reached are alarming for the Caribbean nations.

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The cost of petroleum imports financed by Petrocaribe represents between 7 percent and 12 percent of  the GDPs of the participating countries. In spite of this huge subsidy, these economies have not shown robust growth — the average for 2014 was just 2.3 percent and a similar figure is predicted for 2015.

And these numbers come on the back of very low growth levels since 2011 (averaging just 1 percent) and, prior to that, a shrinkage in GDP of 3.5 percent in 2009 and 0.5 percent in 2010. Thus, economic growth in the Caribbean nations is very fragile and heavily dependent on the oil subsidy from Venezuela.

In the same way, the balances of payments of the Caribbean economies are heavily dependent on Petrocaribe subsidies. In spite of paying a discounted price for their oil, and only having to pay between 40 and 50 dollars up front with the rest being payable as a loan (some countries have even had the privilege of making payments in kind with their own products), all the participating countries, with the exception of Suriname, are running balance of payments deficits. And worst of all, the level of indebtedness owed to Venezuela by the participating countries is increasing to such a degree that it may become impossible to service, particularly if the aid system itself collapses, something which indeed seems to be happening.

The Dominican Republic owes Venezuela more than 12 billion dollars, Jamaica another 6 billion and the Bahamas a little more than 3 billion. These are the three big debtors but the list is long and the total debt adds up to some 25 billion dollars which, at the rate things are going, won’t be recovered by Venezuela for decades.

The situation is similar in Central America where the country which receives the most benefits is Nicaragua. Indeed it was President Daniel Ortega who recently expressed his worries about this matter to President Obama and concluded that it was necessary to find other forms of energy cooperation given the unsustainability of Venezuelan aid and the resulting vulnerability of the economies of Central America and the Caribbean.

All of this is occurring in the context of important changes in the patterns of energy production in the hemisphere. For the first time in its history the United States has become self-sufficient in energy and indeed has become an energy exporter. Mexico is carrying out reforms that will lead to increased production and similar developments are occurring in Canada.

In a nutshell, the three NAFTA states, led by the United States, today have the capacity to play a major role in the Caribbean and Central American regions by promoting alliances and cooperation models based on new sources of energy which will have a greater economic impact and are truly sustainable. Sources in Washington confirm that this is indeed the direction the White House is working towards.

During the past decade China’s imports have fueled a Latin American “commodities-exports-driven” growth which providing resilience to the world economic crisis. However, the Caribbean and Central America are a different story, as these economies have been much less resilient to the world economic slowdown, and highly vulnerable to the high cost of energy. Indeed, the uncertainties in Europe and other Western economies, has impacted among other things the flow of tourism to the Caribbean.

Politically speaking, within the OAS, analysts have clearly identified the Petrocaribe countries as the key factor to the diminishing hemispheric influence of the United States in the Americas, and indeed, together with the ALBA countries (Nicaragua, Bolivia and Ecuador), a protective shield to any initiative to enforce democratic values in the case of Venezuela under the Inter-American Democratic Charter.

To this extent, Venezuela’s intervention in this region has not only a political impact, but it has created a significant economic distortion and vulnerability to a region that is critical for United States foreign policy.

As the future of the economies in the Caribbean, which depend on Petrocaribe’s assistance becomes ever more uncertain, their only hope is to look for alternatives to the north. Indeed, an economic collapse in the Caribbean and Central America could feed, among other consequences, the growth of organized crime operatives which are linked to illicit trades, drug trafficking and other unwanted and unwelcomed consequences for the United States and the Caribbean, and the CAFTA-DR market.

Times are changing and with them will change, beyond any doubt, the “political solidarity” of many with the “Venezuelan revolution.” This trend, in which the decline of Petrocaribe is converging with the energy independence achieve by the United States lends perfectly for the United States to reach bipartisan consensus to foster and launch a renewed partnership with the Caribbean and Central America to promote development, in which, energy comes the key element of the strategy.

The time for bold leadership from the United States in the Caribbean and Central America has come.