Publish in Perspectives - Monday, December 1, 2014
Venezuela -- here represented by Caracas -- will suffer a more than 3 percent of GDP deterioration in its current account balance, the author says. (Photo: George Miquilena)
Declining oil prices on Latin America will add to the woes that the region is already suffering.
BY WALTER T. MOLANO
The recent decline in oil prices is partially the product of rising U.S. output. In August, oil imports from OPEC dropped to a 30-year low. It is also the result of increasing production in Libya and Russia. The latter is in a mad dash to generate alternate sources of hard currency, as the international sanctions take hold. However, the Saudi price cut was the main catalyst that pushed the market lower. Although they deny it, the Saudi move was probably engineered to damage the burgeoning shale sector. Given the recent plunge in prices, producers will no longer assume that the market can only move higher. Nevertheless, the downward trend has had important ramifications for Latin America. Not all of them are bad. Up until the 1980s, Venezuela and Mexico were the only major oil producers in the region. Most of the countries produced some oil, but the sectors were dominated by large and inefficient state-owned companies. During the liberalization reforms of the 1990s, most of the countries increased their output. Today, the region’s daily production is more than 10 million barrels per day. It is an important part of economic activity, trade and government revenues.
TOP PRODUCERS: MEXICO AND VENEZUELA
Mexico and Venezuela are at the top of the list, with daily output of about 2.8 million barrels, each. Brazil is third, with a daily production of 2.2 million of barrels and Colombia is fourth with a daily output of almost a million barrels. Ecuador and Argentina each produce about 600,000 barrels per day. Trinidad and Tobago produces 82,000 and Peru’s daily output is 68,000. Chile brings up the rear with only 7,000 barrels per day. Although the region’s output is high, not all of it is slated for the international market. Brazil, for example, has to import oil to meet its internal needs. Moreover, refining capacity is limited. When we balance oil exports with imports, we arrive a net oil balance. Sadly, the region exports only about a quarter of its total daily production. Not surprisingly, Venezuela is at the top of the league table, with daily net exports of 1.7 million barrels. Mexico is next, sending 850,000 barrels abroad. Colombia is third, with a daily embarkation rate of 650,000 barrels. It is followed by Ecuador, with exports of 256,000 barrels per day and Trinidad which sends out 75,000 barrels per day. All of the other countries are net importers. This means that the decline in oil prices will actually help their balance of payments. Nevertheless, the countries most affected by the recent rout will be Venezuela and Trinidad, which will suffer more than a 3 percent of GDP deterioration in their current account balances. Colombia and Mexico will see an erosion of 1.2 percent and 1.5 percent of GDP, respectively. At the same time, Brazil and Chile will see more than 0.5 percent of GDP improvement in their current account balances. While Peru and Argentina will enjoy a marginal improvement of about 0.15 percent of GDP. Overall, the recent price decline will shave about $30 billion off the region’s current account.
FISCAL IMPACT: WINNERS & LOSERS
The impact on the fiscal side will be more important. Oil royalties represent more than a third of Mexico, Venezuela, and Trinidad governments’ revenues. The latter had a pretty sensible budgeting program that slated excess oil revenues to a stabilization fund, but the other two are much more exposed to current prices. This will force them to impose important spending cuts. Venezuela is already talking about slashing its Petrocaribe budget and raising gasoline prices. At the same time, the Mexican government is increasing its fiscal deficit projection to 3.5 percent of GDP and planning to tap the international capital markets for more than $6 billion next year. Ecuador’s government relies slightly less on oil, but it is still very dependent. The fiscal deficit is expected to soar above 5 percent of GDP in 2015, and it could crest over 7 percent of GDP if the situation worsens. Most governments can meet these shortfalls by printing money, but Ecuador is dollarized. Therefore, it does not have this option. Oil royalties represent 5 percent of Colombia’s budget, but the government is moving fast to increase corporate taxes to offset the projected 1.6 percent of GDP decline in revenues. Interestingly, the impact on inflation will be mixed. Gasoline prices are heavily regulated in the region. Brazil and Chile are raising prices at the pump. Venezuela will most likely do the same. The rest of the countries are moving pump prices lower, but at a slow pace. Therefore, the impact on inflation will not be as dramatic as in other parts of the world. In conclusion, the slump in oil prices will trigger a deterioration of the region’s balance of payments, which should lead to weaker exchange rates. It will also produce difficulties on the fiscal front, which should lead to higher taxes. Therefore, it will add to the woes that the region is already suffering.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.