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Get ready for possible PetroCaribe fallout, says Hughes

Published:Friday | November 7, 2014 | 12:00 AM
Chief executive officer of the PetroCaribe Development Fund, Dr Wesley Hughes, is flanked by managing director of Sterling Asset Management Limited, Charles Ross (left), and managing director for Fixed Income Research at Raymond James Financial Inc, Ellis Phifer, at Sterling's 'Wine & Conversation' event, where Dr Hughes was the guest presenter. The event was held at the Terra Nova All Suite Hotel in Kingston on Wednesday, November 5. Rudolph Brown/Photographer

Asserting confidence in Venezuela's commitment to "international solidarity", Dr Wesley Hughes is nonetheless urging Jamaica to start building up additional foreign reserves as a buffer against any fallout from the PetroCaribe oil agreement.

Hughes, the chief executive officer of the PetroCaribe Development Fund (PCDF), says Jamaica must prepare for the possibility of increased expenditure for oil and needs to build up the net international reserves (NIR) to "protect the exchange rate from extreme volatility".

Jamaica imported just over US$2 billion of oil in 2013. The NIR, at the end of September, was estimated at US$2.2 billion by the Bank of Jamaica, enough to purchase 27 weeks of goods imports.

Jamaica buys PetroCaribe oil on concessionary terms, paying 40 per cent of cash up front for shipments, while the rest is converted to a 25-year loan at one per cent with a two-year moratorium on payments. The retained funds are managed by PCDF.

Hughes, who was the featured presenter at a Sterling Asset Management event in Kingston on November 5, was speaking in the context of recent warnings by the International Monetary Fund that the PetroCaribe arrangement might be unsustainable.

Venezuela supplies oil to 18 markets under the facility.

In October, Alejandro Werner, the director of the Fund's Western Hemisphere Department, warned that Venezuela's oil exports could decline by US$15 billion to US$20 billion annually and lead to policy adjustments which could impact PetroCaribe. He advised regional economies to make contingency plans.

Jamaica currently imports 75 per cent of its crude oil and refined petroleum product needs from the South American country.

The principal debt owed to Venezuela is now US$2.9 billion, Hughes said, noting that the PCDF has received inflows of US$3.09 billion to date and has made investments of J$133.1 billion. Payments on principal to date total US$170 million.

Hughes, who has been CEO of the PetoCaribe Fund for the last two years, said were the oil facility to end - which he noted was an "extreme" scenario - it would cause new obligations in repayment and impact the stock of debt.

"The Government would have to find the resources to pay," he said.

Were Jamaica's quota of oil shipments to be cut, it would impact the balance of payments and the exchange rate.

He also pointed to the possibility of the status quo being maintained, where Jamaica continues to receive its quota of 23,500 barrels per day.

But: "Prudence demands that the Government of Jamaica plan and prepare for the future. The only thing that is constant in the universe is change itself and it must be planned for."

Planning for the future, he said, involves continued reform of the energy mix away from fossil fuels and building up the NIR "to prepare for future oil imports when the agreement ends".

He did not state a specific reserve target.

Otherwise, Hughes urged local businesses to make use of the trade compensation mechanism under PetroCaribe, which allows Jamaica to supply commodities to Venezuela in repayment of the oil loan.

Hughes notes that PCDF pays US$110 million to US$115 million to Venezuela annually, funds that companies could be earning were they able to supply goods to the South American country.

The only company to tap into the arrangement so far is Caribbean Cement, which is supplying Venezuela with clinker under agreements valued at US$29 million.