September 22, 2020

PetroCaribe presents spillover risk to beneficiary countries, says IMF


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PetrojamE20060815RBBy McPherse Thompson, Assistant Editor Jamaica Gleaner

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.

IMAGE: A section of Petrojam’s oil refinery complex in Kingston. Petrojam is Jamaica’s off-taker of PetroCaribe oil. – File

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IMF: Oil plunge reinforces case for T&T’s diversification

By Elie Canetti From T&T Guardian

Following nearly a decade of rapid growth, Latin America and the Caribbean has decelerated over the past three years. The slowdown has intensified further in recent months, as growth in several economies came to an effective standstill in the first half of this year.

In our recent Regional Economic Outlook Update, we revised our growth projections downward, to only 1.3 per cent in 2014 and 2.2 per cent in 2015. Why has growth slowed down so sharply? And what is needed to get the region up to speed again?

Brakes on growth

The brakes that have held back activity in the region appear to be partly external and partly domestic. On the external side, some important trading partners have not been growing as fast as before. In particular, slowing demand from China, along with a rise in global supply, has ended the boom in commodity prices. For the commodity-exporting economies of the region, this has removed an important positive impulse.

Meanwhile, the recovery in the US economy has taken longer than expected to materialize, delaying positive spillovers to Mexico and other economies with close ties to the US, including tourism-dependent Caribbean nations.

Beyond external headwinds, domestic factors have also acted as a brake on growth. Many economies in Latin America reached their productive capacity limits in recent years, and without improvements to productivity and the capital stock, it will be difficult to rekindle strong growth going forward. In the Caribbean, growth in tourism-dependent economies has continued to disappoint.

While the improving conditions in the US and the UK will shore up visitor arrivals, long-standing competitiveness issues and deteriorating policy frameworks in some countries stand in the way of a robust recovery.

Prospects for Caribbean commodity exporters are better, but still disappointing compared to earlier expectations given softening commodity prices and the challenges of boosting growth outside of the commodities sectors. Although fiscal risks in T&T are contained, they have generally grown elsewhere in the Caribbean.

The road ahead: uphill, with risks of slippery conditions

Moreover, increasing external risks are clouding the horizon. If China were to decelerate more than currently projected, demand for the region’s commodity exports would weaken even further. Financial market volatility could also spike and capital outflow pressures emerge if, for example, US interest rates were to rise more abruptly than expected.

Indeed, such a concern was a major motivation cited by the Central Bank of Trinidad and Tobago when it recently raised its key monetary policy instrument, the repo rate, by a 0.25 per cent. Policymakers will need to keep their eyes closely on the road ahead and make sure to be ready for rougher terrain.

Tuning up the engines of growth

What else should countries do? External conditions are what they are. What policymakers can influence is their economies’ preparedness and capacity for sustained future growth via structural reforms. Improving the performance of education systems is one important priority in most countries in the region.

Higher investment in infrastructure—within tight budgetary envelopes in most countries—will also be needed, and our advice for T&T has emphasized the importance of shifting public spending from consumption to investments for the future. Improving the business environment is an important precondition for raising private investment, creating jobs and boosting growth.

In this regard, the Trinidadian government has made a concerted effort to remove impediments to doing business, and this has had some payoff already in a three-notch improvement in the country’s ranking on the World Economic Forum’s Global Competitiveness Index. Although the future of the energy sector in T&T looks promising, recent sharp declines in oil prices further reinforce the case for policies to help wean the economy’s dependence on energy.

The IMF has, in addition to the structural reforms noted above, emphasized the importance of making the public service more efficient and improving the functioning of labour markets and the production of economic statistics.

While the government is pursuing fiscal consolidation to achieve budget balance, the IMF has advocated that the government should move beyond that towards fiscal surpluses, in order to save more of the country’s natural resource endowment for future generations.

Of particular importance would be the gradual elimination of fuel subsidies, which are costly (around TT $6-7 billion a year, similar in magnitude to what the government has spent in recent years on health), disproportionately benefit the wealthy, encourage smuggling, and lead to serious traffic congestion. These sets of reforms could help Trinidad and Tobago to secure a more prosperous future by putting the country on the road to more durable and diversified growth.

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