Executive Briefings

Will Latin America, U.S. Manufacturers Doing Business There Suffer if Oil Prices Continue to Be Depressed?

The consensus among analysts is that cheaper oil should be broadly neutral for Latin American countries in general, with clear winners and losers. Their expectation is that net oil exporters will suffer from lower oil prices and net oil importers will benefit. Although we can agree with that general short-term diagnosis, it is predicted that a sustained period of lower oil prices will have a net negative impact on Latin America and on the prospects of U.S. manufacturing companies doing business in the region.

Will Latin America, U.S. Manufacturers Doing Business There Suffer if Oil Prices Continue to Be Depressed?

Countries in which the oil industry represents a large share of total economic activity and those whose fiscal revenues are heavily dependent on oil will take the largest hit. And that negative effect on growth is immediate, not only because lower fiscal revenues are already slowing down public spending, but also because of balance of payments–related issues. Oil exports are for many countries in the region a source of hard currency that allows imports of intermediate and final goods that make up the backbone of numerous economic activities. A lack of oil-generated hard currency inflows to pay for imports will surely negatively influence short-term economic growth.

Take the Venezuela case, where the oil industry represents almost a third of GDP and more than 90 percent of export revenues. The ongoing shortage of a broad range of goods will worsen if the price of oil remains depressed. No doubt analysts would rank Venezuela as the economy taking the biggest hit from lower oil prices. Two other economies suffering from cheap oil are Ecuador and Colombia, where net exports represent 8 percent and 6 percent of GDP, respectively. Authorities in Ecuador have already raised import tariffs in an attempt to shield the economy from foreign goods and avoid a balance of payments crisis.

The smaller economies in Central America and the Caribbean gain from lower oil prices. With the exception of Trinidad and Tobago, most of these countries are net oil importers; a cheaper import bill will free up resources that will stimulate economic activity.

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Countries in which the oil industry represents a large share of total economic activity and those whose fiscal revenues are heavily dependent on oil will take the largest hit. And that negative effect on growth is immediate, not only because lower fiscal revenues are already slowing down public spending, but also because of balance of payments–related issues. Oil exports are for many countries in the region a source of hard currency that allows imports of intermediate and final goods that make up the backbone of numerous economic activities. A lack of oil-generated hard currency inflows to pay for imports will surely negatively influence short-term economic growth.

Take the Venezuela case, where the oil industry represents almost a third of GDP and more than 90 percent of export revenues. The ongoing shortage of a broad range of goods will worsen if the price of oil remains depressed. No doubt analysts would rank Venezuela as the economy taking the biggest hit from lower oil prices. Two other economies suffering from cheap oil are Ecuador and Colombia, where net exports represent 8 percent and 6 percent of GDP, respectively. Authorities in Ecuador have already raised import tariffs in an attempt to shield the economy from foreign goods and avoid a balance of payments crisis.

The smaller economies in Central America and the Caribbean gain from lower oil prices. With the exception of Trinidad and Tobago, most of these countries are net oil importers; a cheaper import bill will free up resources that will stimulate economic activity.

Read Full Article

Will Latin America, U.S. Manufacturers Doing Business There Suffer if Oil Prices Continue to Be Depressed?