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The unprecedented coronavirus pandemic has toppled global financial markets, and sent investor and consumer sentiment into a tailspin thus far in 2020. Though the global travel industry has been among the hardest hit, the disruption of supply chains and the implementation of stay-at-home orders, social distancing and other measures to contain the spread of the novel disease have brought productive activity across the world to a halt, signaling an economic downturn unmatched by the Global Financial Crisis. The slump in economic activity, particularly reduced demand from the airline industry, coupled with disagreement among OPEC+ regarding supply cuts has led to a collapse of oil prices, compounding an already dire state for some commodity exporters. The price of WTI crude oil plunged from US$61/barrel at the end of 2019 to less than US$20/barrel at the end of April 2020. While a measured restart of production is under way in China, the epicenter of the outbreak, COVID-19 continues its march across the globe, leaving a deleterious trail of human, social and economic ramifications, including record spikes in unemployment. In response, major Governments have rolled out extensive fiscal support and major central banks have leaned further on monetary easing, aiming to keep economies afloat and prevent exacerbation into a financial crisis. In particular, the US Government has responded with a stimulus package in excess of US$2trn, while, in addition to rate cuts, the Federal Reserve has made similar-sized funding available, including support to small and medium-sized businesses. Broadly patterned across major markets, such measures position the global economy to emerge more quickly from the challenges wrought by the current crisis.
The global pandemic has brought to the fore the Caribbean’s high dependence on the travel industry, and the importance of fiscal and external buffers to provide room to respond to large external shocks. Widespread air travel restrictions, border closures and the eventual termination of commercial flights to the region led to an almost immediate closure of hotels and a cessation of tourism services, while the region’s cruise industry has been sunk. Further, varying degrees of lockdown across most markets have limited productive capacity to essential services, cascading the economic fall-out beyond that implied by the drastic reduction in tourism activity. Meanwhile, the lower price of and demand for oil has tainted the economic prospects for Trinidad and Tobago, Suriname and Guyana, though the Guyanese economy could still likely register an expansion. These developments follow a broadly positive regional GDP performance in 2019, with a few exceptions – Aruba, Barbados, Curaçao and Trinidad and Tobago. Dominica and Sint. Maarten, in particular, were still in recovery mode from the devastation of the 2017 hurricanes, while The Bahamas likely registered mildly positive growth in the aftermath of Hurricane Dorian’s destruction to Grand Bahama and Abaco.
To mitigate the economic fallout, regional Governments have sprung into action by strengthening healthcare systems and infrastructure, providing support to affected sectors and vulnerable segments of society, and boosting social services. Many Governments have also provided tax waivers and other incentives to entities retaining the majority of their staff and have taken steps to establish or enhance credit facilities for small and medium-sized businesses. However, compounding increased spending, the erosion of the tax base given reduced commercial activity has disrupted fiscal consolidation efforts and increased the pressure on the already strained fiscal positions of most markets, with only a few, including the Cayman Islands and Turks and Caicos Islands, accumulating adequate fiscal savings to reasonably respond to the shock.
Caribbean Market Review
The COVID-19 outbreak took the world by surprise in early 2020. Although the initial impact manifested through the disruption of supply chains in China and the decline in commodity prices, subsequent lockdown orders globally accentuated the problem. With the world facing an unprecedented supply and demand shock and most economies heading into a deep and sharp contraction in growth, central banks around the world slashed interest rates to historical lows, while providing extensive liquidity to the market as investors and corporations sought cash to cover short-term obligations. However, the initial lack of liquidity did not bode well for markets and it was not until advanced economies announced substantial fiscal expansion plans that markets stabilized somewhat. Emerging market credits took a large hit as investors took shelter in traditional safe havens, while scrutiny for those countries with the best fiscal position and lowest financing requirements for 2020 punished those with a poor record on the fiscal front.
In this context, the Caribbean and Central American region was severely hit by the COVID-19 outbreak. International travel bans and local mobility restrictions are severely curtailing economic growth prospects and fiscal accounts given the region’s large dependence on tourism. BAHAMA and ELSALV were the credits most affected, with yields increasing 730bps, and 570bps on average, respectively, since our last publication. The Bahamian economy was already fragile on the heels of Hurricane Dorian. Tourism comprises 40% of the Bahamian economy, including indirect contributions. Thus, the closure of major resorts, including Atlantis and Baha Mar, will have a significantly negative impact on the country’s growth prospects and fiscal accounts for this year. El Salvador’s reliance on remittances and the expected decline in exports this year have also caused a sharp reduction in growth prospects, while massive financing needs are expected to increase rollover risks and investor concerns about the Government’s ability to finance its fiscal gap this year. COSTAR is also presenting large financing risks for this year and the market continues to lose confidence in the Government’s ability to implement any fiscal adjustment in the short term and into 2021.
On the other hand, although also losing ground, JAMAN and DOMREP outperformed in the Caribbean. Both countries have more diversified economies than the rest of the region. Moreover, Jamaica’s fiscal adjustment process over the last few years has left the country in a much better position. However, the lack of economic growth remains one of the main drag anchors for the credit. The case of DOMREP is particularly interesting. The credit had been underperforming on the back of a new presidential election cycle and on expectations of fiscal slippage as the prospect of a new administration increase. Having said that, the country will likely continue to enjoy one of the best economic growth stories in the Caribbean post COVID-19, and its fiscal situation, although deteriorating, is not as precarious as those in the rest of the region. Moreover, with most of its initial external financing needs for 2020 already covered, we do not expect to see pressures on DOMREP from the supply side until at least Q4 2020. PANAMA’s status as one of the few investment-grade credits in the region, and growth potential, should continue to provide the credit shelter despite the large increase in fiscal expenditures expected for this year.
As investors scrutinize the region for the best growth and fiscal positions for the remainder of 2020 and 2021, we like steepeners in both JAMAN and DOMREP and we see value in JAMAN 25, DOMREP 28. The more diversified economies of Jamaica and the Dominican Republic, and their lower financing pressures for the rest of the year, should continue to benefit these credits. However, we maintain a pessimistic view on ELSALV and COSTAR, and suggest keeping a safe distance from such credits as uncertainties on financing sources surge. Moreover, despite both Governments’ efforts to assure the market about the availability of resources for this year, we expect rollover risks in their local curves to rise as delays on the approval of multilateral loans for this year continue in congress. ELSALV situation is even more worrisome as the Government has already maxed out the issuance of LETES for this year.