LatinFinance - November/December 2014 - 2

NOVEMBER/
DECEMBER
2014
FRONT NOTES

EDITOR-IN-CHIEF Katie Llanos-Small
FEATURES EDITOR Dominic O'Neill
SENIOR REPORTER Eduardo García
REPORTERS Patrick Ferguson, Andre Puglie
CONTRIBUTORS Lucy Conger, Raul Gallegos,
David Wigan, William Chislett
ART DIRECTOR Rosa Matamoros-Sense
COVER ILLUSTRATION Fredrik Broden
CARTOON ILLUSTRATION Christopher Weyant

Decline and fall
Oil prices' dramatic slump is rattling Latin America. The commodity fell to its lowest value since 2010
in mid-October, depressed by disappointing data on global growth, rising shale production, and confidence over Middle East supply.
This is good news for some. Chile, which had an external energy deficit of $14.4 billion last year, will
improve its trade balance by 0.5% of GDP with a 10% drop in oil costs, according to Bank of AmericaMerrill Lynch. Weaker energy inflation will also help the central bank maintain much-needed monetary
stimulus.
But for most of the region, the abrupt tumble spells trouble.
External accounts of Argentina, Brazil and Peru could benefit by around 0.1% of GDP, but lower
oil prices could have a negative impact on these economies if it discourages investment in domestic
energy. This effect is tough to measure, but is particularly worrisome in Argentina's case.
In Mexico the effect is more clear-cut. At current production, a 10% fall in the oil price hurts Mexico's
trade balance only by 0.1% of GDP. But boosting or sustaining production is vital for Mexico's future
government revenues. Although its untapped oil fields are relatively cheap to develop, the price drop
puts a dampener on the opening of its oil sector, with the first round of energy tenders coming early
next year.
Colombia will see a much bigger drag. A 10% oil-price drop costs its external balance 0.6% of GDP.
The country is already struggling to attract energy investment, partly due to rebel attacks on energy
facilities. To keep the deficit in check, imports may need to contract as prices fall, according to Capital
Economics - potentially bringing an end the country's economic outperformance regionally.
But the cost of lower oil prices is on an altogether different scale in Venezuela. With elections for
the National Assembly due next year, the prospect of an all-out political crisis is much closer. So is the
potential for a sovereign default. The cost on its external balance as a proportion of GDP, at 2%, is more
than three times as high as in Colombia.
Even before oil prices started their October drop, foreign exchange was being rationed in Venezuela, as the government continued
tweaking its currency regime.
While production is falling, oil
accounts for almost all its export
earnings, and the country is reliant
on imports for even basic goods.
The sovereign met $5.3 billion
of debt payments in October. But if
oil prices remain low, Venezuela's
government will face tough choices
as more debt comes due. Whether
it is cutting infrastructure spending, or reducing energy subsidiaries, all options are likely to have
a big cost on an economy already
in deep recession. If it cuts energy
subsidies to friendly neighbors,
such as Nicaragua, there could be a
regional fallout too. LF

2 L ATINFINA NCE.COM - November/December 2014

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LatinFinance - November/December 2014

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