Oil, dollar volatility and ALBA

Wednesday 10 September 2008 by CEPRID

Toni Solo


At the end of July, Alberto Guevara, Nicaragua’s Treasury Minister, just back from a successful meeting with the IMF in Washington, remarked, "...now, at a time when we really are beginning to have some success in our macroeconomic programmes, we are beginning to be affected by external factors that are leaving our countries without any fiscal capacity. But that’s not the only problem. The problem is the lack of any real coordinated response from the international financial organizations that are working with us to maintain macro-economic stability at any cost."

Guevara was talking in the context of a discussion of the impact of high food and oil prices on Central America and how those prices affect inflation in the region. The volatility of oil, commodities and foreign exchange markets has demonstrated that, for the moment, the strong correlation between the oil price and the US$-Euro price holds. If the US$-Euro price moves a cent up or down then the oil price moves around two or three dollars in the same direction. While the current reversal brings short term relief to vulnerable economies like those in Central America, the continuing volatility of energy prices makes development planning a lottery for those countries’ governments.

Dollar reversal background

Various factors seem to have caused the sharp reversal in the price of the dollar. The signs are that Europe may be as hard hit as the US by the developing recession. Britain’s housing market may end up being proportionately in worse shape than the US with all the dismal implications that carries for consumer spending. In the Euro-zone, Spain and Ireland face a similarly bleak outlook.

Another factor has been China’s determination to keep the value of its currency low in relation to other currencies. Peter Morici has noted, "In 2007, the Chinese government purchased $462 billion in U.S. and other foreign currency and securities, and in 2008 it is on track to purchase about $640 billion in foreign currencies. This comes to about 17 percent of China’s GDP and about 43 percent of its exports of goods and services...In recent weeks, China has begun pushing down the value of the yuan, and if this continues, this will likely have major repercussions for global trade and financial stability in the months ahead." (1)

This ties in to James Turk’s observation that "On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth..... central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets."

A press release on July 30th from the European Central Bank and similar coordinated announcements from the Federal Reserve and the Swiss National Bank may also have played a part in forming market sentiment. To date along with other mechanisms to get banks lending to each other again, the Federal Reserve has loaned over US$900bn via its Term Auction Facilities on terms of 28 days. The press release stated that the Federal Reserve, the European Central Bank and the Swiss National Bank will all be making dollars available in cycles on terms of 84 days.

But the chances are the beneficiary banks are not then lending on that money. Instead they seem to be heading off to their favourite gambling dens in Wall Street, the City of London and the other European stock exchanges and to foreign currency and commodities markets. Now they will have three months to play around with out-of-thin-air funny money before they have to give it back, instead of just one month.

The July 30th ECB press release ended, "It is intended to continue the provision of USD liquidity for as long as the Governing Council considers it to be needed in view of the prevailing market conditions." In plain words, that seems to mean the ECB and the Swiss will prop up the dollar as long as it takes. Not a bad short term reason to buy dollars.

With the dollar so cheap for so long, it was probably heavily bought too by countries and corporations wanting to guarantee oil contracts for the northern winter. Plenty of people may also be betting on a sooner than expected rise in US interest rates coupled with a sooner than expected cut in interest rates in Europe. Perhaps Euro weakness is more important than the health of the dollar. Russia’s currency, the ruble, has been fully convertible since 2006, adding to foreign exchange trading the option of a currency backed up by the Russia’s vast oil and gas reserves.

The Euro could also be weakening relative to the dollar following the latest conflict in the Caucasus, which may end up affecting European energy costs. The variables pile up, making reliable calculations impossible. Still, Orwell was right when he said the truth goes on existing, as it were, behind one’s back. Almost nothing has changed for the US economy. The US budget deficit is worse than ever. While latest figures for the monthly trade deficit show it narrowed by around only 4%. Whatever benefits the weak dollar gave US exports seem to have been offset by higher oil prices.

There is no sign US government policy will make the structural adjustments necessary to to protect the interests of ordinary people in the United States in the short or medium term, regardless of who wins the election in November. The recent Wall Street-welfare rescue by Congress of Fannie Mae and Freddy Mac underlined that. So the latest volatile reversal is unlikely to mark more than a temporary change - maybe weeks, maybe months - in the long term downward trend of the dollar against other currencies and hence the long term upward trend in oil prices.

Central America and the Caribbean

The wider context of rich country recession and market volatility holds little comfort or encouragment for weak economies like those in Central America and the Caribbean, heavily dependent on food and cash-crop exports like coffee, bananas and other fruit, beef and shrimp, on minerals and timber and on tourism. Those countries’ economies suffer doubly. They lose export earnings as rich country consumers’ demand for their goods and services tends to fall. They also lose foreign exchange income from family remittances’ sent home by their nationals working overseas who find it harder and harder to stay in viable employment in North America and Europe.

That context also highlights the stunningly blatant hypocrisy of the rich countries about development cooperation and debt. That Federal Reserve Term Auction Facility spewing out almost US$1 trillion dollars of thin-air funny money demonstrates how pathetic and cynical rich country development aid really is. Look at the European Central Bank, lending out US$50bn in their bi-weekly auction operations.

As Ralph Gonsalves, Prime Minister of St. Vincent and the Grenadines said back in May at the Food For Life summit in Managua "I feel no confidence that countries, apart from ourselves and those seated around this table, can deal with this problem completely seriously. I don’t see the Americans helping us, nor do I see the Europeans helping us and in fact, on many occasions when they bring programmes for diversification, for agricultural production and so on, they perpetrate a fraud on people, raising expectations, and there are many, for the small contributions they make."

At the end of July, Nicaraguan Treasury Minister Alberto Guevara said of inflation in Central America, "...that boom in oil prices a very important cause. It is a tragedy for our countries. To give you a figure that I think might help prick the world’s conscience as regards the tragedy we are living through, 70% of our exports go to pay the oil bill. Here practically nothing is left to invest in social programmes or in economic or social development. Oil is eating up our economies."

Guevara added, " I think that if there were a consensus between everyone about what is the reality of oil then oil could not be subject to the volatility of financial bubbles. It could not be subject to future prices. It could not be subject to countries’ individual policies because oil has to do with the very life of the planet." That regional reality and the resulting consensus around thinking like Guevara’s explains why all the traditional allies of the United States in Central America, except still-fighting-the-Cold-War El Salvador, have signed up to the Petrocaribe concessionary energy supply programme coordinated by Venezuela.

ALBA - model for humanity

Seventeen countries including Jamaica, Dominican Republic, Guatemala, Honduras, Nicaragua and Belize are member countries of Petrocaribe. Costa Rica has applied to join and should sign up in September. Honduras and Nicaragua are now both members of ALBA. Should the FMLN candidate Mauricio Funes win the presidential elections in El Salvador in March 2009, El Salvador will certainly join both Petrocaribe and ALBA very shortly afterwards. Since joining ALBA, Nicaragua has enjoyed a modest export boom marginally assisted by the CAFTA free trade agreement with the United States which remains Central America’s single most important market.

As the Office of the US Trade Representative noted in its "CAFTA - AGRICULTURE Overview Fact Sheet" of February 6th 2004, "Over 99% of Central American agricultural exports (on a trade-weighted basis) enter the United States duty free already under MFN tariffs and CBI preferences. The United States imported over $2 billion from Central America in 2002. The vast majority of these imports constitute non-competitive crops, such as coffee and tropical fruits." For an agriculture based economy like Nicaragua, CAFTA benefited the US more than it did Nicaragua.

By contrast, for Nicaragua, membership of Petrocaribe and ALBA has eased cash flow problems caused by the oil bill via concessionary terms that spread payments over 25 years. Nicaragua imports almost 11 million barrels of oil a year. In 2008, almost 7 million of that will be imported via Petrocaribe. At an average price of say US$125 a barrel over the year, the ALBA concessionary oil bill for Nicaragua will be US$875m. 50% of that is invested in social and economic development programmes before eventually being paid back to Venezuela’s PDVSA State oil company. So in 2008, over US$430 million will be freed up to fund social and economic investment.

That is why Central American leaders with ideologies as diverse as Oscar Arias, Manuel Zelaya, Alvaro Colom and Daniel Ortega have decided to join Petrocaribe, which is is the key component of the wider ALBA framework. Like Ralph Gonsalves, they look at US and European Union governments and see them bailing out the greedy super-rich crooks who have wrecked those countries’ economic progress for the next few years.

They see those governments betray their own peoples while rescuing fraudulent banks and financial institutions with hundreds of billions of dollars of taxpayers’ money. What hope is there of genuine development cooperation and debt relief from such gangsters? At the same time those rich country governments are intervening in their free-lunch-if-you’re-rich markets to the tune of hundreds of billions of dollars, they say they can do little to help poorer countries cope with the oil and food price shocks.

The example of Venezuela and Cuba shows what miserable deceivers the rich country leaders really are. Venezuela and Cuba are helping almost 20 countries stabilise and sustain their economic and social development via the Petrocaribe-ALBA framework. But the US government continues to accuse Venezuela of destabilising the region. While the US government itself is funding often violent anti-democratic opposition movements across Latin America.

The ALBA countries offer a humanitarian model of solidarity-based cooperation to help solve their region’s economic, social and environmental problems. By grim contrast, the United States and its allies offer cynical elitist corruption, racist warmongering and sadistic State terrorism, all on a global scale. It is obvious they fear improved living standards for the world’s impoverished majority because then they will have to compete as equals for the world’s remaining finite resources. That is why ALBA is so profoundly revolutionary.

toni solo writes for www.tortillaconsal..com

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