Three weeks ago there was an almost tangible sense of fear in Europe. Then families and individuals realised for the first time in their lives that their savings and pensions could disappear if market confidence fell further and shares in banks plummeted to levels at which their viability became questionable.
The trigger had been the drying up of credit between banks as it became apparent that a significant part of the traded paper that they held was backed by mortgages and a range of financial derivates of uncertain value. To make matters worse this ‘paper’ that had been given investment grade status by powerful but unregulated US credit ratings agencies had been sold on globally. The effect was for banks everywhere to not know which other institutions to trust as they could not determine whether the assets they held were or were not quite literally backed by instruments worth less than the paper they were printed on.
Only then did governments in Europe led by the United Kingdom, recognise that they could no longer consult quietly and consider measured options. They realised that if they did not act immediately to restore order and stem public fear there would be an unsustainable run on their banking systems. This led them to the previously unthinkable: the partial nationalisation of some of the biggest banks, an approach with important variations subsequently adopted by the US and many other developed nations across the world.
Since then other dramatic changes have occurred in world markets. Oil prices have collapsed from a high of US$147 per barrel to a figure around US$65 per barrel; commodity prices have plunged; and foreign exchange markets have become hugely volatile as the relationship between the US dollar, the euro, sterling and other currencies have adjusted to take account of the relative economic strength of each.
At the same time concern has begun to spread. Nations as diverse as Australia, Russia, Iceland, Brazil and even oil producing nations have been plunged into economic turmoil as the realisation has dawned that no one is immune from the coming global economic slowdown and its probable next phase: the collapse of large companies that have over borrowed, a slow-down in demand, unemployment and recession.
Despite this, travelling through the Caribbean in these last weeks I sensed little government or private sector awareness of the implications for the region or the dramatic impact that all of this will undoubtedly have both directly and indirectly on individual Caribbean economies or the region overall.
Although it is hard to tell as yet how long or how deep the recession will be, it is possible to see the emerging negative implications for the region. These range from a decline in remittances, problems with bank liquidity, a rapid fall in tourist arrivals, growing unemployment and a greater difficulty in servicing public debt. They also include more fundamental longer term concerns relating to oil prices and foreign exchange.
Of these the greatest and least predictable problem that many but not all Cariforum nations could face results from the steep fall in global oil prices.
For the last few years much of the region has been protected from oil price rises by the PetroCaribe arrangements with Venezuela and the associated programmes that it has developed. These provide on very soft terms, budgetary support, development assistance and loans. Other newer oil and ALBA programmes are intended to provide funds for the purchase of fertiliser, food and financing for large infrastructural energy projects.
Estimates of the sums committed to the Caribbean by Venezuela under all these programmes range upwards of US$80 billion, making Venezuela the region’s most important development partner by far and paradoxically in the US, Canada and Europe’s unspoken interest for President’s Chavez’s hemispheric development policies to continue if regional economic instability was to be avoided.
Worryingly however, a recent study by Deutsche Bank indicates that when oil prices fall below US$97 a barrel, Venezuela may have difficulty funding its own social programmes, to say nothing of the wide range of economic support it has committed itself to in the Caribbean region and further afield. Venezuela itself suggests that it needs US$60 dollars a barrel to deliver its domestic and presumably its external budgetary commitments. However, it is far from clear whether OPEC – which is meeting as this is being written – will agree to cut production in order to strengthen its members’ prices or whether Venezuela can achieve higher levels of production as an alternate way to increase its revenues.
A recent edition of Caribbean Insight noted that close reading of a financial report released in September by Venezuela’s state oil company, PDVSA, Venezuela’s main revenue generator, would appear to confirm that the company is experiencing cash flow problems and had mounting liabilities despite oil prices being at record highs. While it suggested that this may have occurred because of PDVSA’s diversification into non-oil sectors it has worrying implications for the region.
If this report is correct it suggests that President Chavez may have to take some difficult decisions on how best to distribute his diminishing oil income. In the Caribbean this could result in cuts in Caracas’ newer oil revenue-funded regional programmes while the basic PetroCaribe arrangements continue. Alternatively it may involve prioritising external relationships and taking a strategic decision on maintaining all existing levels of support for the region while seeing levels of Venezuelan support diminishing elsewhere in the world.
For its part Caracas insists that its programmes continue as before.
But one clear indicator of any change could come in the need for an early decision on the operation of the ALBA Caribbean Fund formed in July.
Created to boost regional food production and combat food shortages, Venezuela pledged to set aside US$0.50 from every barrel of oil exported outside PetroCaribe at a price above US$100 a barrel. The fund was expected to accumulate just under US$500M in the first 12 months. But current oil prices suggest that no Venezuelan oil money is flowing into the fund. If this is to function and provide support either oil prices have to remain above US$100 per barrel or it has to be restructured so the region can obtain some value from it when oil is at a lower price.
Previous columns can be found at www.caribbean-council.org
