Published by Economist Intelligence Unit

Event

Venezuela received a payment of US$1.93bn from the Dominican Republic to settle a US$4bn debt under the PetroCaribe agreement. The payment, made to the state oil company, Petróleos de Venezuela (PDVSA), is a much needed-cash injection for the ailing economy.

Analysis

Under the PetroCaribe agreement, launched in 2005 by former the Venezuelan president, Hugo Chávez (1999?2013), members can buy up to 185,000 barrels/day of crude, of which 60% must be paid for within 90 days. However, the remainder is payable at 1% fixed interest, either over 25 years or through the export to Venezuela of goods or services. This has insulated the 17 signatories from oil price rises over the past decade.

However, Venezuela's economy, which obtains 96% of its foreign currency from oil sales, is struggling as international oil prices plummet. There are reports that oil sales to Cuba have halved in the past two years, although these claims are difficult to verify. Some Caribbean nations have quietly voiced concern about Venezuela's financial troubles, given their dependency on PetroCaribe.

While there was criticism in Venezuela of the more than 50% discount offered to the Dominican Republic, it still left Venezuela with a sizeable amount of cash, which is much-needed as the country struggles to provide hard currency to its citizens and to businesses operating locally. This is manifested in a black market on which the US dollar sells for around 30 times the country's strongest official exchange rate of BsF6.3:US$1.

Venezuela's international reserves grew by US$1.9bn on the day of the announcement. It is likely that the cash will go to funding new exchange mechanisms announced by the president, Nicolás Maduro, last month. Full details of these systems are likely to be confirmed this week.

Impact on the forecast

While this is a much-needed cash injection for Venezuela, it does nothing to address the economy's long-term structural problems and, as such, our forecast remains unchanged.