Commodity Prices and the Coming Military and Political Crisis in Latin America

Companies with any supply interests -- or potential supply interests -- in Central or South America would do well to take the information in this post, along with the articles referenced, to heart. As anyone who has been following the major political and economic happenings in countries such as Venezuela, Chile and Peru in recent years knows, the red tide sweeping across the region has created significant new forms of supply risk. From the nationalization of key industries to more frequent strikes, it appeared that there had never been a more risky time to consider doing business in the region. Until now.

Falling commodity prices combined with socialist machismo could be a recipe for significant political, military and economic unrest throughout the Central and South American markets in the coming years. According to this this article in the San Francisco Gate, the fall of oil is "a blow to Chavez's free-spending administration, which depends on oil for 50 percent of government revenue and 95 percent of its export earnings. Other oil-producing countries, which like Venezuela ramped up spending as the price of oil rose to historic highs in recent years, also face serious economic problems … Robert Bottome, editor of Veneconomia, a Caracas business newsletter, said that if the price continues to fall, Chavez's populist government will face economic turmoil."

One expert source quoted in the article notes that, "oil must be at least $94 a barrel to ensure Venezuela's macroeconomic stability this year and generate enough money to pay for imports. Although Chavez frequently touts his country's independence from Washington, Venezuela is more reliant than ever on the food, auto parts, medicine, construction materials and other products it imports from the United States and Colombia, a close U.S. ally." But what will happen if Chavez needs to cut back on these imports -- or if he scales back the wealth redistribution efforts he's already embarked upon? A recent Reuters dispatch provides some evidence of what we should expect in the future.

According the wire story, "Venezuelan President Hugo Chavez threatened on Saturday to imprison his main political rival, intensifying a campaign against a man he calls a crime boss just a month before he faces tough regional elections … Chavez provided no specific evidence for the charges against the main leader of a fragmented opposition." As times get tougher for Chavez and his fellow cronies in other countries throughout the region, look for moves that signal increasing desperation. And most important, make sure your supply interests in the region are protected.

- Jason Busch

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