Tuesday, August 30, 2011

ALBA & Petrocaribe...a Timebomb?

There's this sword of Damocles hanging over the economies of the countries that are profiting from Venezuela's ALBA/PetroCaribe program. The Bolivarian Alliance for the Peoples of Our America (ALBA) was established on December 14, 2004 by Hugo Chávez and Fidel Castro. Venezuela and Cuba sought to create a regional alliance committed to social, political, and economic cooperation and equality. ALBA says it offers an alternative to free trade accords (FTAA), on the basis of three principles: (1) opposition to free–market economic reforms; (2) not limiting the regulatory action of the State in favor of economic liberalization; (3) harmonizing relations between the State and the market.
PetroCaribe Oil price conditions
 Source PetroCaribe brochure
PetroCaribe is set up to act like a conduit for ALBA. From PetroCaribe's brochure: "Petrocaribe proposes a funding level between 5% and 50% of the oil bill, by reference to the price of oil. Also extends the grace period for the financing of one to two years and provides for an extension of the payment period from 17 to 25 years, lowering the interest rate to 1% if the oil price exceeds $ 40 a barrel. The short-term payment of 60% of the bill extends from 30 to 90 days." From PDVSA's 2010 financial report: "The Government of the Bolivarian Republic of Venezuela signed with governments of other countries, mainly in Latin America and the Caribbean, the Energy Cooperation Agreement of Caracas (ACEC), the Integral Cooperation (CIC) and the PETROCARIBE Energy Cooperation Agreement (PETROCARIBE ). These agreements, among other things, the supply of crude oil and petroleum products by PDVSA state oil companies of these countries for a total of approximately 455 thousand barrels per day (MBD), MBD 484 MBD and 514 for the years ended December 31, 2010, 2009 and 2008, respectively." Presently Petrocaribe is made up of 19 countries: Antigua and Barbuda, Bahamas, Belize, Costa Rica (formal request), Cuba, Dominica, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Nicaragua, Dominican Republic, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Surinam and Venezuela.

The efforts of ALBA have manifested themselves in two strategies:
The first is the continental station Telesur, today made up of seven countries Argentina, Bolivia, Cuba, Ecuador, Nicaragua, Uruguay and Venezuela. This multi-state enterprise is considered as the instrument to aid the Latin American integration process, even though its messages always have a clear ideological tone.
The second strategy is oriented to the use of oil as an instrument of foreign policy. The signing of the Energy Agreement of Caracas in 2001, the creation of Petrocaribe in 2005 and the project of creating a South American Energetic Cone.

While the main intentions of ALBA/Petrocaribe are well meant, the long-term effects could turn out quite negative. Not only for most profiting members, but for Venezuela as well. Let's take a closer look at Nicaragua for instance:

  • Nicaragua joined ALBA/PetroCaribe in 2007. According to the 2010 IMF report of the Banco Central de Nicaragua, Venezuela supported Nicaragua with the following monies (millions of US dollars):

                                   2007  2008  2009  2010   Total
       Oil Supply PetroCaribe      69.3   293   236   337   935.3
       Bilateral Aid               69.1    37    60   163   329.1
       Foreign Direct Investments  46.4   131   147    11   335.4
       Total                      184.8   461   443   511 1,599.8

  • The amounts mentioned above for bilateral aid and oil supplies are credit lines, the foreign direct investments are not. The total ALBA/PetroCaribe debt for Nicaragua therefore adds up to US$ 1,264.4 million. These debts are not included/published in the balance books of the Banco Central de Nicaragua (BCN). According to BCN's 2010 annual report Nicaragua's public external debt increased US$ 215.5 million, that is the public external debt excluding the ALBA/PetroCaribe debt. The total public debt according to BCN reached US$ 5,140.4 million at December 31, 2010. The Grand Total of public debt (BCN totals + ALBA/PetroCaribe totals) for Nicaragua 2010 adds up to US$ 6,404.8 million. You can add another $700 million voor 2011. Therefore the Public Debt/GDP ratio as calculated by BCN shouldn't be 78% but 97% for the year 2010. While this is still a more or less acceptable figure (equal to Belgium), the ratio is increasing very fast since 2008 and will be unhealthy within a few years.

Banco Central de Nicaragua
Total public debt balances 2005 - 2010 

  • Another concern is that all PetroCaribe oil is refined and sold on the Nicaragua market by enterprises run and owned by the Nicaraguan/Venezuelan governments (Petronic, ALBAnisa, ALBAcaruna). Profits that are made are spent to social and development projects. However there are no published records of turnover, profits and costs. It's all kept secret. So it's obvious that a lot of monies go into pockets where they don't belong and to some covert projects. Nicaragua scores already high on Transparency International's corruption perception index but government corruption increases even more in this way and it further encourages the downward spiral of public faith in government.

  • Another concern is the fact that FSLN/Ortega obviously is hoping for (partial) remission of the ALBA/Petrocaribe debts in the future. By strongly supporting Chávez' foreign policies Ortega plays the temptation card. By adopting Chávez' foreign policy, Nicaragua becomes equally isolated as Venezuela in the long run. A small example is Nicaragua's strong support of the Gaddafi regime in Libya.

  • As explained above Nicaragua becomes more dependent of ALBA/PetroCaribe monies every year. It's not unthinkable that the Venezuelan money flow suddenly stops. If Chávez looses the 2012 election, the opposition could stop the ALBA/PetroCaribe program instantly. More and more Venezuelans object to the expensive program already, while the Venezuelan economy is spiraling down already (GDP 2010: -2.8%, Inflation 2010: 30%). The effect of a drained money flow from Venezuela could be devastating for Nicaragua.

  • ALBA monies have also been used for FSLN propaganda and activities in the past. Therefore it threatens democracy, because other political parties in Nicaragua have no access to ALBA monies.

For each PetroCaribe member the financial situation is more or less similar to Nicaragua's, depending on the length of the membership. For Cuba the situation is even more precarious, because of the greater dependency and its present isolation. But why could the ALBA/Petrocaribe program turn out to be negative for Venezuela as well?

  • First of al the program is continuously extending. Today already 19 members. Therefore it's costing more every year too. While there is plenty of oil production capacity, Venezuela's state-owned oil industry (PDVSA), seems unable to produce enough oil for the country's national budget needs. The Venezuelan economy is slowing down. Because Venezuela is an oil-economy it's very vulnarable to booms and busts as has happened in the seventies and eighties. Primero Justicia Venezuela, stated in 2010 that President Chávez has given more than 62 billion dollars to other nations in the last five years, while in Venezuela the poor are becoming poorer and the rich ever more rich. By the Venezuelan government’s own public reports, preferential oil deals alone have cost as much as $20 billion over the years 2005-2009, Primero Justicica has put these oil gifts above US$ 30 billion. As a reference: the total USAID 2010 budget adds up to only US$ 34.5 billion. More and more Venezuelans object to the expensive ALBA program.

  • The ALBA program allows members to barter oil for agricultural goods. This affects the domestic Venezuelan food production and markets. The bartered agricultural goods are often sold through state shops below market prices. The importance of agriculture declined rapidly since oil production started in 1940, but did recover since the Hugo Chávez' administration. Until recently Venezuela was presently self-supporting in corn, rice and pork. Never the less production quotas and prices had been set in 2009 for cooking oil, white rice, sugar, coffee, flour, margarine, pasta, cheeses and tomato sauce to combat inflation. This made it even harder for producers to sell their products and make a profit. These restrictions have forced Venezuela to become increasingly reliant on imports of these products as local farmers will not supply the selected food staples at government prices anymore.

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