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Venezuela: Oil subsidy risks in the Caribbean

International debt markets have turned their attentions to the parlous state of Venezuela’s public finances, following the 5 September publication of an article by former planning minister Ricardo Hausmann stating the case for a sovereign default. As far as other Latin American nations are concerned, the current risk of financial contagion is minimal, as reflected in the fact that bond yields decoupled from the rest of the region many years ago. However, a political and/or economic crisis in Venezuela could have significant repercussions via the trade channel. This is particularly true for member nations of Petrocaribe – an economic assistance programme which allows 17 Caribbean countries to import subsidised Venezuelan oil.

The values on the attached map correspond to the maximum daily shipment sizes per country. Under terms of the Petrocaribe agreement, member countries can import Venezuelan oil on a long-term deferred payment basis, with interest charged at just 1%. Shipments reached 240,000 barrels per day in 2012, but have since declined due to fiscal problems and dwindling domestic oil production. In the event of a sudden stop in subsidised oil, Cuba and Nicaragua are likely to be most at risk given the existence of current account and fiscal deficits in these countries.

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