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Brazil announced a sharp rise in Petrobras investments. (AP Photo)

Brazil began 2009 facing deteriorating economic conditions and rising unemployment. But, through recent actions, the Brazilian government seeks to steer the economy into safer waters by committing billions of dollars to create jobs and propel Petroleo Brasileiro (Petrobras) into the heavyweight category of oil production companies. Furthermore, U.S. President Barack Obama signaled his interest to work with Brazilian counterpart Luiz Inácio Lula da Silva to move forward on biofuels and the Doha round of global trade talks. Lula will visit Washington to meet with Obama in March.

With the goal of jumpstarting the ailing economy, Brazil’s Central Bank reduced its overnight lending rate by a full percentage point to 12.75 percent on January 21. The move intended to stimulate economic activity at a moment when financial markers signaled the danger of recession; private consumption has shrunk, December job losses hit their highest level since 1999, and analysts predict GDP growth may not reach the 2 percent mark in 2009. The Economist Intelligence Unit’s ViewsWire augurs that industrial growth could be close to zero and private consumption may drop to 0.9 percent in 2009—down from 6.2 percent last year. The analysis applauds the cash infusion of more than $42 billion into the Brazilian Development Bank (BNDES), designed to stimulate the creation of new employment. The fund helped create 2.8 million jobs in 2008 alone, according to BNDES data. “The businessmen who used to shop for funds on the international market and are not managing to obtain capital due to the financial crisis will be able to resort to the BNDES,” said Brazilian Finance Minister Guido Mantega last week.

In tune with the government’s actions, Petrobras unveiled a plan on January 23 that promises a 55 percent expenditure increase over the next five years. The package includes investments of more than $174.4 billion, with $28 billion alone to finance exploration of recently discovered pre-salt oil fields. The company also hopes to double its total oil and natural gas output by 2015, counting on the Tupi oil field and three other offshore camps to begin production. The day after the plan’s release, the first fully Brazilian-made natural gas platform, with capacity to generate electricity for 300,000 people, started operations. This also marks a step forward for Brazil’s naval industry, which will build another eight platforms to be deployed by 2013.

Washington’s new administration has signaled interest in working with South America’s largest economy this week in the fields of energy and trade. Following Monday’s phone conversation between the presidents of both countries, a spokesperson from Lula’s office announced that Obama “is interested in continuing discussions to advance the Doha round” of trade negotiations. In his January 26 edition of his radio show, “Café com o Presidente”urged Obama to push Doha forward.

A new report by AS/COA’s Trade Advisory Group entitled Building the Hemispheric Growth Agenda: A New Framework for Policy proposes creation of a hemispheric energy partnership that would include Brazil: “[A]s a starting point to greater regional integration, the United States and other willing partners across the hemisphere, perhaps as an E4 or E5, should join together to formulate a mutually beneficial hemispheric energy agenda roughly analogous to the original European Coal and Steel Community.” The report also suggests that the new U.S. administration should scrap the 54 cent-per-barrel tariff on Brazilian ethanol and consider a pact for a civil nuclear program similar to the one signed with India during the Bush administraion.

A December AS/COA panel analyzed the investment climate for energy in the region, with an emphasis on Brazilian energy and Latin American integration.

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Citgo oil delivery to a low income house in Philadelphia. (AP Images)

Crude oil prices continue to fall, forcing countries such as Venezuela that rely heavily on oil exports to rethink their 2009 spending priorities. Earlier this week, the nonprofit organization Citizens Energy headed by U.S. Congressman Joseph P. Kennedy II (D-MA) announced that Citgo—the U.S.-based subsidiary owned by Venezuela—would curtail its fuel assistance program for low-income Americans. Two days later, Citgo and the government of Venezuelan President Hugo Chávez asserted that the program, which last year provided assistance to some 200,000 households in 23 states, would remain in place.

The reversal raised questions about whether Chávez’s plan to continue the program represents a costly political investment at a time when oil prices hover around the $40 per barrel mark. Venezuela’s Central Bank announced on January 8 that inflation reached 30.9 percent in 2008, the highest in more than 10 years. The Economist Intelligence Unit’s ViewsWire explains that Chávez “has his eyes more on the ballot box than on his purse strings.” The analysis argues that, as he plans to call for a national referendum that would allow him to seek unlimited reelection, he must maintain his support base among the poor through social programs.

Yet, to strengthen its balance sheet, Caracas may find that it must cut back social programs that extend beyond its border, such as fuel assistance programs. A Stratfor podcast explains that “it is practically impossible” for the Chávez government to avoid cutting social programs, with cheap oil programs facing the greater risk. The report also suggests that, before reducing popular subsidies on medicines and gasoline, Venezuela may increase sales taxes, default on government contractor’s compensation, or even halt payments on previous nationalization deals. An analysis by RGE’s EconoMonitor reports that even if average oil prices float around $50 per barrel in 2009 and spending levels mirror those of 2008, Venezuela’s fiscal budget may fall from a surplus of 0.7 percent last year to a 5.5 percent deficit in 2009. For now, they may rely on cash reserves that stand at roughly $38 billion, but risk a ratings downgrade if those reserves are depleted. “Venezuela’s government is stuck. It needs to maintain spending to ensure political support, but it may find it harder to access needed funds,” write RGE Analysts Italo Lombardi and Rachel Ziemba.

Left-leaning Upside Down World recognizes that “Venezuela has reportedly not been keeping up with current [Petrocaribe] quotas” and other initiatives like the Bolivarian Alternative of the Americas Banco del Sur, Petroamerica, and Petroandina have stalled. Through the Petrocaribe cooperation agreement, Venezuela has provided cheap oil with preferential payment terms to 16 Caribbean countries since 2005. (Although Cuba is not part of the pact, Caracas also supplies Havana with 100,000 barrels per day plus contracts to boost Cuban refining capacity.) To ease worries over Venezuela’s ability to continue supplying affordable oil, Dominican Republic President Leonel Fernández in December offered a reassurance that Petrocaribe provides elasticity on purchases and payments to the countries receiving fuel shipments and emphasized Chávez’s commitment to keep the agreement afloat. In an op-ed for the Jamaican newspaper Gleaner, University of the West Indies Lecturer Robert Buddan underlines the importance of the pact for Jamaica, saying “Petrocaribe stands out as the best example of the benefits of regional cooperation.” Former Attorney General of Grenada Lloyd Noel, writing for Caribbean Net News, recognizes how critical energy cooperation remains but concedes that “Now that the gas and oil bonanza is down to its lowest value for years, Venezuela in particular is no longer as influential in the negotiations as when it was selling crude oil at $140 per barrel as opposed to $40.”

Read a previous AS/COA analysis on how falling oil prices have taken a toll on Venezuela’s economy.

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View a slideshow of the most compelling events in the hemisphere. Also, read an article by AS/COA Online Managing Editor Carin Zissis on the most riveting events affecting the Americas in 2008.

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A raft in Belem, Brazil loaded with illegally cut logs. (AP Images)

With Amazonian deforestation on the rise, Brazil’s environmental ministry on Monday announced an ambitious plan to curb rainforest destruction. As a UN-led climate change conference got underway in Poland, Brazilian Environment Minister Carlos Minc unveiled the initiative, which would seek to cut deforestation rates by 72 percent by 2017. The plan also offers proposals to increase biofuel production without using more arable land while decreasing carbon dioxide emissions by 4.8 billion tons in the same 9-year period.

During his remarks, Minc emphasized that this voluntary effort puts Brazil in the vanguard on climate change issues, marking a shift from past policies that placed responsibility for curbing global warming on the shoulders of industrialized nations. But the efforts come as the Brazilian government finds itself pressured on one side by conservationists ringing alarm bells with deforestation figures and on the other side by cattle ranchers and soy growers who cashed in on the recent commodity boom.

At the UN’s 2007 General Assembly, Brazilian President Luiz Inácio Lula da Silva called for more actions from industrialized countries to curb carbon emissions, praising Brazil’s decreasing levels of deforestation over the course of the three previous years. Then the government’s environmental record suffered a setback when Brazil’s National Institute of Space Research revealed an increase in deforestation rates during the first five months of 2007.

In response, Lula’s government stepped up policing in the affected areas through an operation called “Arc of Fire,” initiated in February. The program allowed issuing of fines, arresting deforestation suspects, and impounding illegal cargo. Yet the program’s launch was followed with controversy over the resignation of former Environment Minister Marina Silva, a respected conservationist thought to have struggled with the perceived lack of political will to halt environmental destruction. She was replaced by Minc, who helped found the country’s Green Party.

Under Minc’s leadership, the ministry launched Amazônia Sustentável—the Amazon Fund—in August. The program involves the international community, drawing hefty donations from countries such as Norway, which pledged roughly $1 billion over the next seven years for sustainable development. Monday’s announcement of setting targets aimed at lowering deforestation served as another step in building support for protecting the Brazilian rainforest.

But Monday’s announcement of setting targets to limit Amazon destruction coincided with new data about rising deforestation rates, which have increased by 3.8 percent compared to last year. The BBC reports on the setback and says high commodity prices for staples like soy and beef served as an engine for deforestation. But the report also points out that estimates forecasted an even higher increase, which could signify that governmental policies have made progress. An analysis by mongabay.com’s Rhett Butler tracks deforestation rates in the Amazon using statistics available since 1988 until the present.

With the new plan to be presented at the UN’s climate change conference, environmentalists evaluated it by offering mixed praise, ranging from “better than never” to “a modest proposal.” NPR offers an analysis of expectations ahead of the conference in Poland.

The UN summit comes on the heels of last week’s environmental conference in Mexico, which brought together 70 legislators from across the Americas in a push to regulate land use. Tierramérica reports that the summit helped create a favorable climate for building a common strategy but warns that the new commission faces a long road in terms of hammering out results.

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Lower oil prices threaten spending in Venezuela. (AP Images)

Falling commodity prices worldwide have sounded financial alarms in Latin America given the region’s heavy reliance on exports. In particular, oil’s spectacular price drop from $145 per barrel in July to less than $64 per barrel on October 24 raises concerns among analysts about Venezuela’s financial panorama, given that its economy revolves around oil revenue for approximately 50 percent of government earnings and 95 percent of its total export gains.

A broad range of financial experts forecast that Venezuela will see growth slow in 2009 but disagree on which oil price should be the bottom line before President Hugo Chávez’s government runs short on cash. The Economist Intelligence Unit says that Caracas’ 2009 budget is calculated based on a conservative estimate of $60 per barrel but foresees a public spending increase of 23 percent. It also notes Chávez’ determination to stimulate domestic growth using spending but warns that such a move will fuel the already volatile inflation rate, which surpassed 35 percent this year. El Universal reports Deutsche Bank analysis forecasting that Venezuela’s economy requires an average oil price at around $95 per barrel for the country to maintain a balanced budget. Others suggest the price must be even higher.

The New York Times emphasizes that some of Chávez’s signature policy initiatives—such as heavy domestic subsidies, modernization of the Venezuelan military through $3 billion in arms purchases from Russia; and selling cheap oil to Latin American allies—could face cuts. As an example, a well-trumpeted oil refinery announced by Chávez and his Nicaraguan counterpart Daniel Ortega more than a year ago remains at the drawing board. “Chávez’s days as the ultimate benefactor could be coming to a close,” the Christian Science Monitor explains.

Chávez has dismissed such omens, saying, “Venezuela has conditions to withstand any oil price fluctuations.” In a recent speech, he said that large international reserves stand at approximately $80 billion, represented half in cash and the other half in joint investment funds with China, Russia, and Iran. As a member of the Organization of Petroleum Exporting Countries (OPEC) and in sync with other members such as Libya and Algeria, Venezuela proposed to curb oil production by at least one million barrels per day. On October 24, OPEC members announced plans to cut oil production by at least 1.5 million barrels a day starting November 1 arguing that “oil prices have witnessed a dramatic collapse—unprecedented in speed and magnitude. Still, oil futures fell to $63 per barrel, the lowest price in 17 months.

Like oil, copper has suffered a steep price drop, declining 57 percent since July of this year. Such loss has prompted Chile to reduce its copper output by 2 percent over last year. Still, while U.S. demand has declined, China’s remain solid; current low prices may be a good opportunity to supply Chinese stockpiles.

The International Monetary Fund Regional Economic Outlook report underlines Latin America’s resilience facing the current financial slowdown. The analysis sees relief for commodity importer countries from Central America but advises caution for net exporters who might feel a pinch.

Read an AS/COA exclusive interview with the Global Head of Emerging Markets and Credit Research at JPMorgan Chase Joyce Chang on Latin America’s economic growth prospects.

Read the article as originally published at the AS/COA website.

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