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PetroCaribe presents spillover risk to beneficiary countries, says IMF

Published:Sunday | October 19, 2014 | 12:00 AM
A section of Petrojam's oil refinery complex in Kingston. Petrojam is Jamaica's off-taker of PetroCaribe oil. - File

McPherse Thompson, Assistant Editor - Business

The International Monetary Fund (IMF) has advised Jamaica and other 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.

Director of the IMF Western Hemisphere Department, Alejandro Werner, said the Fund has been documenting the exposures faced by different countries and discussing with the authorities how to deal with the situation if those phenomena appear.

"We advise countries to build up buffers, and, where possible, not to spend all of the PetroCaribe resources," added deputy director of the department, Adrienne Cheasty. "Some of them have responded quite well, but all of them are still vulnerable," he told the press in Washington during the annual meetings of the IMF and World Bank.

Under the PetroCaribe agreement, Jamaica pays Venezuela for 60 per cent of the cost of the oil it receives, and the remainder is set aside as a loan, payable over 20 years at an interest rate of one per cent.

Budget adjustments

Earlier this year, consultant and former Caribbean diplomat Sir Ronald Saunders suggested that it would be prudent for those Caribbean governments to start adjusting their budgets to take account of the loss of benefits from the oil arrangement, given, for example, the state of the Venezuelan economy.

The IMF, in its 2014 Spillover Report on global risks, said the financing element of the PetroCaribe energy cooperation agreements alongside other oil accords were equivalent to about five per cent of Venezuela's export revenue or US$4.9 billion, while the accumulated claims on countries receiving oil benefits were valued at about US$10 billion in 2012.

"Beneficiary countries receive financing from Venezuela equivalent to 1.5 per cent of GDP per year on average, but in some cases, as much as 3 to 7 per cent," said the report released at the end of July. "Consequently, some Caribbean countries have debt to Venezuela of about 10 per cent of GDP (15 per cent and 19 per cent 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."

The October 2014 update of the IMF regional economic outlook for the western hemisphere also noted that lower assistance from Venezuela for the payment of oil imports through PetroCaribe could put pressure on the fiscal and external positions of some countries.

It said that although a few countries - including Jamaica and St Kitts-Nevis which implemented reform programmes supported by the IMF - have recently made progress toward reducing vulnerabilities, fiscal risks have generally risen further.

The tourism-based economies face average public debt levels in excess of 90 per cent of gross domestic product, along with increasing financing needs, said the economic outlook, noting that governments' market access has deteriorated and budgetary buffers have narrowed in most countries.

External imbalances have also mounted, prompting reserve losses in some countries, it said.

"Dependence on PetroCaribe presents a further risk. This bleak backdrop calls for stepped-up efforts to strengthen fiscal positions, including by reducing costly and poorly targeted energy subsidies," the report said.

Notable recent progress in Jamaica provides an encouraging example, said the IMF report. "Specifically, the country's fiscal and external current-account deficits have declined sharply since 2012, enabling Jamaica to regain market access, with the issuance of an external bond in July," it noted.

Jamaica's PetroCaribe debt to Venezuela is projected to reach $350 billion by March 2015.

Launching the economic outlook update, Werner said economic activity in the Caribbean, particularly in tourism-based economies, remained weak due to long-lasting competitiveness issues and high microeconomic financial vulnerabilities.

The report said that for this group of countries - The Bahamas, Barbados, Jamaica and the countries of the Eastern Caribbean Currency Union - output is projected to expand by only 1.1 per cent in 2014 and 1.7 per cent in 2015.

Visitor arrivals

It said improving conditions in the United States and United Kingdom economies have shored up visitor arrivals in some countries, but long-standing competitiveness issues and deteriorating policy frameworks stand in the way of a robust recovery.

Prospects for the commodity exporters - Belize, Guyana, Suriname, and Trinidad and Tobago - are typically somewhat more favourable, with growth projected to rise from 2.7 per cent in 2014 to three per cent in 2015, the report said.

However, those projections are also lower than previously envisaged, reflecting softer commodity prices and lasting growth challenges in the non-commodity sector. Inflation has been muted in most countries, amid pegged exchange rates and negative output gaps.

Financial-sector risks also remain high in a number of Caribbean economies, underscoring the urgency of decisive reform efforts, notably through regional initiatives that lessen systemic risks, it said.

"The clean-up of banks' balance sheets and resolution of failing institutions, battered by low growth and high non-performing loans, is essential to maintain financial stability and support a sustainable recovery," it added.