Editorial: Northern Andean economies groan as oil revenues dry up

There’s nothing quite like a fall in oil prices to expose the cracks in the economies and politics of countries highly dependent on oil exports. And such is the case with South America’s largest oil exporters — Venezuela, Colombia and Ecuador — all three of which have suffered through three years of recession, and have chronically underperforming mining sectors that can’t pick up much of the slack.

Venezuela has taken a particular turn for the worse in recent weeks. There are shortages of just about every basic necessity, from toiletries and food staples to medicines and electricity — despite the deeply unpopular Venezuelan President Nicolas Maduro asking women in the country to stop using hairdryers to save electricity, as droughts hamper hydroelectric power generation.

Most companies still active in country have halted or curtailed production, with even Coca-Cola having stopped producing its iconic drink owing to sugar shortages caused in part by the government’s inability to pay for fertilizer imports.

As a symptom of the lousy business environment Venezuela offers these days, two of the world’s top airlines — Latam Airlines (Latin America’s biggest carrier) and Germany’s Lufthansa — are cancelling or indefinitely suspending flights to the country. Two months ago, American Airlines (the top North American airline serving Latin America) scrapped its New York–Caracas route only three months after reinstating it.

And it’s not just because of the dwindling volume of passengers. Reuters reports that Lufthansa has had difficulty repatriating profits from Venezuela due to onerous currency-exchange controls, and is owed at least US$100 million by the Venezuelan government, and that the International Air Transport Association has been lobbying the Venezuelan government to free all trapped airline revenue, which likely amounts to billions of U.S. dollars.

Even with the recent rise in oil prices back to the US$50-per-barrel range, the International Monetary Fund (IMF) estimates Venezuela’s economy will contract by 8% in 2016, after having already contracted 5.7% in 2015, with an inflation rate expected to surge to almost 500% this year.

Despite its enormous mineral endowment — especially gold in the southeast — the Venezuelan government decisively turned its back on foreign miners’ investment in 2008, when president Hugo Chavez, who died in 2013, started talking about nationalizing gold and cement assets in the country, and strengthened ties with China, Iran and Russia. Top miners such as Hecla Mining and Gold Fields quietly packed up and left the country for good, and potential gold mega-projects such as Las Cristinas and Brisas have floundered due to domestic politics, more than the projects’ technical deficiencies.

With its more mixed and free-market economy, Colombia is faring better. The IMF sees the country’s growth easing to 2.5% in 2016 from 3.1% in 2015 due to low oil prices, as well as tightening macroeconomic policies and financial conditions.

Colombia’s export numbers from the minerals sector has benefitted from years of output from large coal and nickel mines, complemented by smaller-scale gold and emerald output, even if new gold-mine development in the country is hampered by bureaucratic, political, security and social-licence issues.

The IMF describes Ecuador’s outlook as “highly uncertain,” and says it depends on the availability of external financing. Under the IMF’s baseline scenario, Ecuador’s economy is expected to contract this year by 4.5%, due to “lower oil prices, a loss of competitiveness on the back of an appreciating dollar, fiscal consolidation and tight financing conditions.”

Ecuador is not a traditional mining nation and has had chaotic experiences in decades past with artisanal miners, such as at Nambija in the south.

But nonetheless the Ecuadorian government has renewed efforts over the past couple of years to woo foreign miners back to the country — with real progress seen such as the restart of development of the spectacular Fruta del Norte gold deposit, now under the direction of Lundin Gold.