By | São Paulo
The drop in international oil prices could make a difference in the trade balance with Venezuela, the country with which Brazil has its highest surplus among Latin American nations. From January to September, Brazilian exports to Venezuela totaled $3.25 billion, with a $2.36 billion surplus for Brazil. In the same period, the overall foreign trade balance of Brazil went in the opposite direction, showing a $690 million deficit. Last year Brazilian trade with Venezuela generated a $3.67 billion surplus. Brazil’s overall foreign trade balance showed a $2.56 billion surplus.
According to analysts, the price drop should generate less foreign currency for Venezuela, which obtains 96% of its export value from oil. The lower oil prices reduce Venezuela’s ability to import, while foreign-exchange controls already restrict foreign purchases. “This should reduce Brazil’s exports to the country and the surplus with Venezuela, even when taking into account that the majority of shipments involve food,” says José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB).
Currently naphtha, a petroleum product, corresponds to about 60% of Brazilian imports originating in Venezuela. Meats are the dominant product in Brazilian exports to the country of President Nicolás Maduro. Considering only frozen meat, live cattle and poultry, Brazilian exports to Venezuela amounted to $1.41 billion from January to September, which equates to almost 45% of Brazil’s exports to Latin American countries. Despite the concentration in food, Brazilian exports are diversified and include rolled steel, tires, tractors, medicine and toiletries.
“If the low oil prices continue, Brazilian exporters will hurt a lot,” says Mr. Barral, former secretary of Foreign Trade and a partner in Barral M Jorge Consultants. Besides the drop in Venezuelan demand, the situation should increase the risk in Venezuela, while also introducing additional challenges in areas such as hiring export insurance. On account of existing political risk, about 50% of Brazilian shipments to Venezuela are made via the Agreement for Reciprocal Payments and Credits (CCR), a system where compensation payments for trade between the countries in Latin America are guaranteed by local central banks. The rate of use of the CCR with Venezuela is much higher than the 5.4% average rate for Brazilian exports to all countries with which the agreement is used.
Mr. Barral says Venezuela may increase its use of the CCR, but the agreement will not be the solution for everyone. “The use of this instrument makes trade more expensive and many exporters already face slim margins that could not support the increase.” He points out that difficulties to export to Venezuela, because of its risk, intensified about two years ago. The drop in oil prices, however, should accentuate the difficulty.
If major producing countries do not reduce output levels and oil prices remain low in the international market, Brazilian exporters who cannot give up some profitability can only hope the Venezuelans are able to reach a better balance of payments through public-account adjustments, Mr. Barral says. This, however, is a medium-term possibility, he points out.
At the same time, it is unlikely that Brazil will be able to increase the importation of Venezuelan oil. Mr. Barral explains that the type of oil produced in Venezuela is very similar to that of Brazil, restricting Brazilian demand. And even if there were more demand, the former secretary says, there are also supply problems, since Venezuela ships large volumes to other international partners.
Venezuela will be the Latin American economy most negatively affected by the price drop, according to British consultancy Capital Economics. The lower revenue from crude oil increases the chances of Venezuela’s default on government debt.
According to an analysis by emerging markets specialist at Capital Economics, David Rees, oil should remain cheap in the medium term. Revenues from oil exports accounted for 37% of the GDP of Venezuela last year. With the decrease in these receipts, the Maduro government will have to pay higher interest rates on government bonds, putting more pressure on the country’s already battered dollar reserves.
The price drop should also affect the economy of Colombia. The country, according to the report, will also have less room to buy imported products. Last year’s oil exports accounted for 6% of GDP. The British consultancy points out that the Colombian economy was showing a current account deficit before the commodity’s price retreat. Therefore, to balance its external accounts, the government of President Juan Manuel Santos will have to cut imports, against a backdrop of slowing growth in Colombia.
The Colombian scenario, however, should have much less impact on Brazilian exports. Trade with Colombia is less significant than with the Venezuelans. From January to September Brazil exported $1.78 billion to the Colombians, with a surplus of $381.05 million. Fabio Silveira, an economist with GO Associados, estimates that for exporting countries, reduced prices could push back revenue from oil sales by between 10% and 15%. Regarding Brazilian oil imports, however, he stresses that they are expected to decline in the medium and long term, due to an expected increase in domestic production.
