The Petrocaribe Trap

A guest post by Alexis Caraballo, who makes her living as a Caribbean regional analyst.

The bit they don’t show the tourists

A failing economy, where everything for sale in the shops is imported, with dwindling foreign reserves and on the brink devaluation.

Sound familiar? It does to folks in Jamaica, a country that breaks records not just in the 100-meter dash (9.58 seconds) but also in debt-to-GDP ratio (139%) – and whose beaches, stunning though they may be, just can’t bring in enough money to keep the island’s economy afloat.

Venezuelans tend to have some vague notion that the government has basically bought up these struggling Caribbean island states through oil subsidies, but seldom do we really stop to understand just how dependent places like Jamaica are on our petro-largesse.

So let’s go there.

Jamaica is currently in austerity-land as it fights to achieve IMF targets. To IMF reform package means the usual mix of higher taxes and lower public spending, in return for USD $345.8MM loan. That’s peanuts compared to its outstanding debt with Petrocaribe, which the Government of Jamaica estimated at USD $2.5B at the end of January.

True, for a bigger country US $2.5 billion is a mere rounding error. But for Jamaica, US $2.5 billion is 2.4 times the country’s international reserves. In fact, international reserves have only surpassed the billion dollar mark in three of the last 12 months.

Jamaica’s total exports are also peanuts next to what it owes to Petrocaribe. The nation’s exports were just $1.4 billion between January and November of last year. And they’re falling fast, with a 7% year-on-year drop during these eleven months.

The country’s access to international credit markets remains extremely precarious: its credit rating was taken out of default category by S&P only 12 months ago, after a successful NDX debt swap that had an impact on domestic bonds worth no less than 64% of GDP.

Into this extremely fragile macro environment comes Moneybags Uncle Ramírez offering to finance up to 95% of their fuel tab for periods of up to 25 years, at a bargain basement 1% interest with a manguangua-del-siglo two-year grace period.

Of course, as the debt under the Petrocaribe mechanism grows, so do the stakes for Jamaica. Never forget, the second-to-last article of the Petrocaribe Agreement explicitly states the deal be changed or terminated by the Bolivarian Republic of Venezuela unilaterally, with just 30 days’ notice after notification through standard diplomatic channels.

In effect, the Venezuelan government has a fiscal gun pointed at Jamaica’s head at all times, with a 30-day trigger.

What happens if that trigger gets pulled? It’s simple, really: if Petrocaribe stops, the lights go out. Literally. Because – did I mention? – Diesel-powered powerplants make up almost 95% of the country’s installed power generation capacity.

This is a country whose political economy just doesn’t work without Petrocaribe. Already the fiscal accounts barely work with the Venezuelan subsidy. Without it, it’d be just fiscal carnage.

Now you start to see why, when Roy Chaderton says “jump” to Jamaica’s ambassador at OAS, the guy barks back “how high”?

Though Nicolás Maduro makes the friendly promise to his Caribbean neighbors that Petrocaribe is here to stay, he was not smiling on March 8 when he said that “any country that intervenes in Venezuelan affairs will go dry, sink, and pay a high price.” It’s…not exactly subtle.

Under the Petrocaribe ‘goods for oil’ arrangement, Jamaica has agreed to supply Venezuela with 100,000 tons of clinker – a key input for cement-making – over the five months to May. With the deal valued at only USD $8.5MM, it will barely make a dent in the USD $2.5B debt. In fact, the cement company involved in the deal, Caribbean Cement Company Limited, could decide to repatriate profits to Trinidad & Tobago anyhow.

Termination of the Petrocaribe agreement or an increase in the interest rate would mean more pressure on the currency, more inflation, and more strain on the private sector. In fact, the Petrocaribe countries are already feeling the pinch, as 2013 shipments were down by 4.6% and Rafael Ramirez stated in December that only 84% of Petrocaribe quotas had been fulfilled last year.

As the OAS Ambassadors sat around a table on March 21 to decide on a motion to have the meeting held behind closed doors (since Venezuela’s opposition would speak from Panama’s seat), it was hard to hear when Jamaica’s representative muttered his vote. In fact, he didn’t even look up to say “closed”.

Personally, I don’t think the Ambassador was avoiding the camera. As his country’s economy hangs in a delicate balance and Nicolás Maduro threatened to sink deserters, it seems to me that he may have been looking around trying to find his own #Salida.