LATIN AMERICA MONITOR PREDICTS RISING OIL PRICES AND WIDER CURRENT ACCOUNT AND FISCAL DEFICITS IN THE ECCU ECONOMIES
26th September, 2017
BASSETERRE, St. Kitts (KYSS) — Rising oil prices and the end of the Petro Caribe programme will result in wider current account and fiscal deficits in the economies of St. Kitts and Nevis and the other member states of the Eastern Caribbean Currency Union (ECCU).
This is according to the British-based Latin America Monitor (LAM), a leading publisher of specialist business information on global emerging and frontier markets.
In its October analysis, released prior to the devastation of Anguilla, Barbuda and Dominica by Hurricanes Irma and Maria, the LAM said while it views it as unlikely, it cannot rule out a balance of payments crisis in the region or a devaluation of the pegged East Caribbean dollar.
In its report, the LAM stated, “The economies of the Eastern Caribbean Currency Union (ECCU) member states will come under pressure from rising fuel prices and the end of the PetroCaribe programme in the years ahead. We expect to see a deterioration of current account and fiscal balances across the union over the next several years due to increasingly expensive fuel imports. This will raise the risk of balance of payments crises by member states and a devaluation of the East Caribbean dollar (XCD), although these are not part of our core view for the region.”
The report continued that in addition to the effects on the ECCU, the end of Petro Caribe poses risks to all members of the alliance. It highlighted Cuba and Nicaragua as other countries that are particularly vulnerable to the programme’s end.
It stated that given their small size and limited natural resource bases, the countries of the Caribbean are heavily reliant on fuel imports, primarily for electricity generation. This is particularly true for the ECCU, which includes some of the smallest economies in the Americas that have virtually no domestic fuel production.
LAM disclosed that between 2010 and 2016, fuel imports accounted for an average of 18.9% of total imports in the ECCU, reaching as high as 29.8% in Montserrat.
“Our Oil & Gas team forecasts the price of Brent to average US$54.0/barrel (/bbl) in 2017 compared to US$45.1/bbl in 2016, before gradually trending higher in subsequent years which will place upside pressure on the import bill in these economies. Moreover, rising oil prices will be compounded by an end to heavily subsidised fuel imports from Venezuela to the majority of the ECCU as part of the PetroCaribe programme. Years of cheap fuel have masked external vulnerabilities in the ECCU (see ‘Region Facing An Uncertain Future With PetroCaribe At Risk’, September 19 2014),” said Latin America Monitor.
The report added that the ongoing political and economic crisis in Venezuela has seen a sharp decline in shipments to the Caribbean and there is little chance that crude exports will recover to previous levels in the foreseeable future.
The spike in energy costs, amid falling support from Venezuela, will challenge ECCU countries’ fiscal and external account positions, potentially pushing the most vulnerable countries towards a crisis point.
According to the LAM, the end of Venezuelan support will also result in wider budget deficits in the ECCU, noting that in addition to subsidised oil, PetroCaribe effectively provides financial assistance to member governments, which is typically put towards various social development programmes.
The LAM has however identified two dynamics that are likely to mitigate the impact of rising fuel import prices moving forward – tourism and renewable energy.
The report states that LAM has a positive outlook on tourism in the Caribbean in the years ahead due to robust growth in the region’s primary source markets as well as fading concerns about the Zika virus. Noting that the revenue gained from foreign arrivals provides roughly one quarter of GDP for ECCU countries, LAM stated that this will offset some of the impact of higher fuel costs on the countries’ external accounts.
Regarding renewable energy, the report states that over the long term, greater reliance on renewable sources of energy, as well as liquefied natural gas (LNG), may potentially reduce the union’s reliance on imported oil to meet domestic energy needs if the ECCU countries further developed these power sources.