Spreading The Hit: Venezuela's Shock And Impact On LatAm Neighbors

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Summary

If Venezuela's imports reach $20 billion this year, highly possible, the 66% contraction between 2012 and 2016, it will be the worse contraction in the Americas.

Brazil has seen the largest contraction in its exports to Venezuela (-2.3 billion between 2012 and 2015).

Bolivian exports to its historical ally, Venezuela, have decreased in almost 90% from its $472 million peak in 2012 to $50 million in 2015.

The humanitarian disaster and the increasing social unrest make hard to believe that Maduro's regime will prove long lasting. But in the meantime, food shortages and starving people are becoming more and more common topics in media articles on cash-strapped Venezuela. The current crisis is not only the product of a liquidity issue caused by lower oil prices, but a deliberate government policy that gives priority to international creditors and certain groups within the country.

The current administration refuses to lift price controls "in favor of the poor". The problem is that such controls have become unsustainable for several companies that have opted to stop production. Coca-Cola (NYSE:KO), Lufthansa (OTCQX:DLAKF) and even local companies such as Polar have announced in recent weeks that they are stopping production for certain products, or that they are leaving Venezuela.

Faced with a shortage of dollar inflows due to the lower oil prices, Chavismo has also prioritized bond payments over imports. Total imports reached $27 billion in 2015, the lowest level since 2005, when the country imported almost $22 billion.

Last year's imports are lower than 2009, when the global financial crisis and low oil prices hit Venezuela. But this crisis is far from over and we should expect even lower import levels, as the country prepares for important debt payments in the coming quarters.

In April, Bank of America (NYSE:BAC) stated that there are only two examples of worse contractions in the Americas, a slide of 65% in Argentina's imports between 1998 and 2002 and one of 62.2% in Aruba between 2006 and 2010.

If Venezuela's imports reach $20 billion this year, highly possible, the 66% contraction between 2012 and 2016 it will be the worse contraction in the Americas.

Maduro's policies will not only produce food shortages in Venezuela; they are likely to have current account and growth consequences for at least a dozen of neighbors.

Who is exposed and by how much to Venezuela's import crunch?

Small neighbor Guyana is the most exposed in terms of GDP. In 2013, exports to Venezuela accounted for 5.5% of GDP and then contracted by almost 70% in value terms. It is hard to say that this is the main reason for Guyana's decreasing economic growth trend, but the magnitude of such a decline helps to explain why its growth rate has gone from 5.2% to 3% in the same period.

Exports from Nicaragua have also contracted significantly. Between 2014 and 2015 they did by $100 million or 25% in value terms, which accounted for 1% of GDP. The difference with respect to Guyana is that Nicaragua has managed to maintain its growth rate at 4.5%. However, the decline in exports has contributed to Nicaragua's current account deficit, which jumped from 7.0% to 8.8% of GDP between 2014 and 2015.

Similar stories come for some of Venezuela's main trade partners such as Uruguay, Colombia, Ecuador, Bolivia, and Peru. Combined, their exports have decreased -13% in value terms or $540 million. Although there are several variables involved in the deterioration of the current accounts of these countries, in some cases, such as Bolivia, it is clear that Venezuela's was one of the factors.

TABLE 2. Current account balances as % of GDP

Trade partner

2013

2014

2015

Bolivia

3.41

0.19

-6.88

Colombia

-3.25

-5.18

-6.49

Ecuador

-1.02

-0.56

-2.85

Peru

-4.27

-3.99

-4.39

Uruguay

-4.91

-4.34

-3.94

Click to enlarge

Source: LATAM PM with IMF data

Bolivian exports to its historical ally, Venezuela, have decreased by almost 90% from its $472 million peak in 2012 to $50 million in 2015. That represented a 4% decline in total Bolivian exports.

LATAM PM's Take: Venezuela's current crisis is extending beyond its borders. A country that used to exchange oil for other goods has found itself trapped between the oil prices decline and economic mismanagement. So far, the current administration clearly prefers to cut imports to the nation's default. Venezuelan main ports, starting by Guaira, once full of containers look currently empty. This political decision has left millions of Venezuelan's without the most basic goods; goods that used to come from Brazil, Bolivia, Colombia, Ecuador, Peru, and other Latin American neighbors. Venezuela stopped importing $31 billion in the last three years and 40% of that flow used to come from Latin American.

Brazil has seen the largest contraction in its exports to Venezuela (-2.3 billion between 2012 and 2015), although as a share of GDP and exports it is not as significant as it is for smaller neighbors. But others have not been that lucky and for countries such as Guyana, Bolivia, Nicaragua, Uruguay and even Colombia, the shock can prove to be more significant.

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