Oil cartel OPEC decided not to cut output in a meeting on November 28, despite repeated pleas by members Ecuador and Venezuela to do so. Two weeks after the meeting, the Brent benchmark price had fallen to $62.07 per barrel, its lowest in five years. Until last summer, the price hovered around $100 per barrel. With the OPEC decision and a continued glut in the market, oil prices are unlikely to rise significantly again for a while.
The government budgets of Mexico, Venezuela, Ecuador, and – to a lesser extent – Colombia, rely heavily on oil taxes, royalties and sales. Although the fall in the oil price will negatively impact all of them, some are better prepared than others. Moreover, the political consequences of the oil-price drop will differ strongly with current political stability in the countries.
Venezuela is the region’s fiscal problem child. It is dependent on oil for some 40 percent of its fiscal receipts, while over 90 percent of its foreign exchange comes from oil exports. Together with a public debt of around 50 percent of GDP, a stumbling economy and a budget deficit of 16 percent, this puts it in a very vulnerable position.
Moreover, the government of Nicolás Maduro is fast losing support, with his approval rating dropping to 24.5 percent in November. This spells economic and political instability in 2015, with the probability of a default and a major political crisis increasing by the day.
Ecuador is also in fiscally dire straits, but the risk of political instability is pronouncedly lower. Its fiscal break-even price, the oil price needed to sustain its current spending, has been estimated to be $122 per barrel. As a result, Ecuadorian president Rafael Correa will have to find other ways to pay for his budget, or cut spending. With a budget deficit of around 5 percent this year, however, there is not much leeway.
That said, the government has listed a number of options available to finance its expenditures. And beyond that, Correa’s political position is much more solid than Maduro’s, with high approval ratings and a strong economy. While the fall in oil prices may undercut his political standing, his government is still better placed to weather this downturn.
Although Mexico’s fiscal situation is stronger than Venezuela’s, it is undergoing a wave of protests and discontent that could easily develop into widespread turmoil. The country has been forced to adjust its budget for 2015 to account for new price assumptions, although the old price assumption of $82 per barrel was very conservative by regional standards.
Decreased spending in 2015, however, together with public outrage over the killing of 43 students and a scandal involving the president and his first lady, could together spark further protests and possibly political instability. Although democratic order itself is not under threat, the government’s capacity to bring about reforms and maintain order will be severely impaired in the coming year.
While Brazil has managed to ramp up oil production from 1.8 million barrels per day in 2004 to 2.7 million in 2013, it is only a minor exporter of crude because of internal consumption. As a result, the effect of the falling oil price on Brazil is mixed. With fuel prices already subsidized by state oil firm Petrobras, consumers are unlikely to feel much of the drop.
But paradoxically, Petrobras will partially benefit from the price shock. As it has spent an increasing amount of its profits on the subsidies, the lower oil price will now allow it to spend less on subsidies and more on production. However, it will at the same time also fetch fewer dollars for the oil it produces. The gist of the story is that Brazil’s political landscape is unlikely to be affected much by the fall in prices.
Latin America’s oil importers, including Argentina, Bolivia, Chile and Peru, will benefit from the drop. They will see their industrial production costs decrease and dispensable consumer income go up. This is likely to favour incumbent presidents and parties and increase short-term political stability.
The benefits for Argentina, however, will be limited, as it is also a relatively large oil producer and does not import much. And its ambitious plans to develop the Vaca Muerta shale field are now at risk, as the break-even price of producing there is above the current oil price.
The oil-price bonanza is over for Latin America, and its oil-producing nations will soon feel the squeeze. Political stability in this region, heavily dependent on the export of commodities, will suffer from these price swings. Yet there is a marked difference in how well prepared the different oil exporters are and how much fiscal problems will translate into political problems for governments. Moreover, governments in the oil-importing countries will be quite happy with the price drop. As always, one man’s meat is another man’s poison.
By Sjoerd ten Wolde
Source - http://globalriskinsights.com
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