Crude production has grown by only 0.5 per cent year on year over the last five years, which is one third of the pace of the rest of the world. Having made specific reference to the area’s largest known oil reserves outside the Middle East, the rating agency confirmed that immediate demands for transfers from oil companies to state coffers have left the oil firms with little retained earnings to invest for development. Such actions have been reflected in the slow pace of credit improvement relative to other oil-exporting countries.
Venezuela and Ecuador are cases in point as their socialist leaders have advocated spending programmes and anti-capitalist views, which have been popular with the masses but have potentially disastrous economic consequences.
Venezuela’s president Hugo Chavez has spent with little concern to inflation or building reserves for the eventual turning of the cycle. He has criticised the Bush administration and has attempted to reduce his country’s reliance on its neighbour by rerouting some of the traditionally US-bound oil to the likes of China.
In Ecuador, the somewhat fiscally responsible Lucio Gutiérrez was ousted in a coup by his populist vice president Alfredo Palacio, who in turn promised sweeping reform and increased social spending. This despite his predecessors’ agreement to abide by austerity measures with the World Bank, where the majority of the country’s additional windfalls would be used to buy back debt, build reserves and reduce its dependency on foreign loans. In a country that has seen four presidents since its constitution was rewritten in 1998, political manoeuvrability is difficult. Dr Palacio seems to be heading the same way, having already spent much of his political capital by angering some of his supporters for failing to live up to earlier promises. Congress has turned him down for a referendum on political change and, with little authoritative leadership, it will be difficult to embark on any meaningful reforms.
Long-term stability in these countries will require a number of short-term sacrifices. With the majority of the population facing daily economic challenges – few are concerned with oil stabilisation funds, debt to GDP ratios or fiscal measures. Looking ahead, the situation will remain precarious as South Americans continue to be swayed by politicians that exhaust their petrodollars.
John Cleary is chief investment officer of Standard Asset Management.
