Home' Trinidad and Tobago Guardian : June 19th 2014 Contents JUNE 2014 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
ENERGY | BG9
American Airlines announced
Tuesday it will be reducing its
flights between Venezuela and
the US. El Salvador, however,
only 14 days earlier announced
it wanted to be part of Venezuela s Petrocaribe
facility. Not everyone sees what is happening in
Venezuela as turmoil, but Moody s Investor Serv-
ices definitely counts itself among the latter.
Venezuela s ongoing turmoil poses risks to
the credit quality of Petrocaribe countries,
Moody s Investor Services said in an April 2014
document released specifically to provide
"Answers to Frequently Asked Questions about
Risks to Credit Quality of Petrocaribe Countries
Due to Venezuela s Ongoing Turmoil."
In December 2013, Moody s said it downgraded
Venezuela s rating to Caa1 (seven notches into
junk) with a negative outlook. "The key drivers
of the downgrade were increasingly unsustainable
macroeconomic imbalances and materially higher
risk of an economic and financial collapse,"
Moody s said. "If these risks materialise, some
of Venezuela s trading partners will be negatively
affected, for example, through the Petrocaribe
oil trade relationship."
In the document, Moody s analysed the credit
implications of reduced or eliminated Petrocaribe
support for member countries that are rated by
"Our expectation is not that Petrocaribe sup-
port will disappear abruptly. In fact, should the
terms change at all, it is far more likely that they
will change for some countries and not for others,
and that this will be a gradual process. Never-
theless, the goal of this report is to highlight
which countries would be most negatively
impacted in the event that Petrocaribe support
were sharply reduced or eliminated," Moody s
What is Petrocaribe and how does it work?
Technically speaking, Petrocaribe is an oil
trade agreement between Venezuela and
Caribbean/Central American countries signed
on June 29, 2005, and revised in 2008, Moody s
The treaty allows participating countries to
help finance oil purchases from Venezuela with
long-term concessional loans. Participating
countries pay in full for the oil purchased, but
shortly thereafter receive a loan for a certain
percentage of the value.
In addition to Petrocaribe, Venezuela has sim-
ilar agreements with other countries. These
agreements are known as the Energy Co-oper-
ation Agreement of Caracas and the Compre-
hensive Co-operation Agreement. All three
agreements are similar in that they permit the
participating countries to finance a portion of
oil purchases from Venezuela on concessional
For the purposes of the report, Moody s
referred to all these agreements with the name
In total, 22 countries benefit from some form
of oil co-operation agreement with Venezuela,
Moody s said.
There are 17 countries that benefit specifically
from the 2008 agreement: Antigua and Barbuda,
Bahamas, Belize, Cuba, Dominica, Grenada,
Guatemala, Guyana, Haiti, Honduras, Jamaica,
Nicaragua, Dominican Republic, St Kitts and
Nevis, St Vincent and the Grenadines, St Lucia,
El Salvador is in the process of integrating
itself into Petrocaribe and, as such, already
receives oil on Petrocaribe terms. Three other
countries -- Bolivia, Paraguay, and Uruguay --
have signed the Energy Co-operation Agreement
of Caracas. And finally, just two countries --
Argentina and Cuba -- are part of the Compre-
hensive Co-operation Agreement.
Moody s, in its report, focused only on the
member countries that it rates, and for which
it had sufficient data to complete the analysis.
These countries were: Argentina, Bahamas,
Bolivia, Cuba, Dominican Republic, El Salvador,
Guatemala, Honduras, Jamaica, Nicaragua,
Paraguay, and Uruguay.
Most terms of the original 2005 agreement
have not changed. Long-term financing is deter-
mined according to oil prices, with a 17-year
repayment period (including a two-year grace
period) and two per cent interest rate if oil is
below US$40 per barrel and a 25-year repay-
ment period (including two-year grace period)
and one per cent interest rate if oil is above
US$40 per barrel.
"In 2008, Venezuela revised the Petrocaribe
agreement, but the only significant change was
that it provided more financing for periods
during which oil prices went above US$50/bar-
rel," Moody s said.
Petrocaribe does not represent a large burden
for Venezuela in terms of its total oil production,
since the oil provided through the three agree-
ments (267,000 barrels per day) accounted for
just under ten per cent of Venezuela s total oil
production in 2012 (2.7 million barrels per day),
Moody s said.
However, if the full quota had been sent to
each country that year, it would have amounted
to nearly 14 per cent of Venezuela s oil pro-
duction, Moody s said.
Given that President Nicolas Maduro appears
to support the Petrocaribe arrangement,
Moody s believes the administration s willingness
to continue these agreements is strong. However,
Moody s said, Venezuela s "ability to continue
supporting participating countries on the same
terms indefinitely is weakening, due to
Venezuela s ongoing economic and political
How has Petrocaribe been supporting the
credit quality of member countries?
Moody s said member countries credit quality
has benefited to varying degrees from Petro-
caribe. The three main channels through which
they have benefited are: (i) balance of payments
support, (ii) fiscal support, and (iii) higher levels
of social spending.
Balance of payments support: Most Petro-
caribe members have current account deficits
stemming in large part from significant oil
The favourable terms (that is, concessional
loans) received through Petrocaribe and similar
agreements provide important financing for
these current account deficits.
Venezuela's ongoing turmoil poses risks
to credit quality of Petrocaribe countries
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