Caribbean Market Overview

Caribbean Market Overview: An Economic Review for Investors

 

Interested in an economic overview of the Caribbean Market? We provide the latest detailed information for Corporate and Investment clients in our quarterly review.

You can download the latest edition Caribbean Market Overview April 2022.

or read the Caribbean Economic Overview & Caribbean Market Review summaries  for a synopsis.

We encourage you to contact a Relationship Manager if you have any queries on Investment Banking in the Caribbean. Our team of experts is ready to assist.

 

Caribbean Economic Overview

Summary:

The COVID-19 pandemic raged on in 2021. However, after contracting by 3.1% in 2020, the global economy bounced back by 6.1% against the headwinds of the Delta variant and the early stages of Omicron. Economic adjustment to the pandemic, pent-up consumer demand, and the absence of harsh lockdowns, propelled the global recovery amid fiscal stimulus and monetary accommodation in several large economies. In the US, one of the region’s major trading partners and key tourism source markets, real GDP rebounded by 5.7% in 2021, following 2020’s 3.4% fall-out. However, the pandemic-induced supply chain disruptions persisted into 2021, and when blended with the surge in consumer demand, inflation rates across the globe skyrocketed. Oil prices climbed to a multi-year high in October, before the news of the spread the highly infectious Omicron variant softened price pressures at the end of the year. Since then, the war between Russia and Ukraine, related sanctions on Russia, and to a lesser extent, the recent lockdowns in China, has cast a cloud of uncertainty over the global economy, jittering financial markets, intensifying supply chain disruptions, and catapulting energy and other commodity prices – the price of WTI crude oil rose 33.5% since December 2021 to US$100.53/barrel at the end of March 2022, but peaked at US$123.64/barrel during the month. Hence, despite the expected dampening of the recovery, major Central Banks, including the Fed, the Bank of England and the Bank of Canada have started to raise policy interest rates to combat the precipitous inflation, with subsequent rate hikes in tow over the remainder of 2022. 

The rising international commodity prices spawned accelerated inflation in the Caribbean, against mild economic recoveries largely attributed to renewed or delayed removal of restrictions, operational challenges with commodity production and a fractional rebound of tourism services. Regional consumer prices (excluding Suriname) rose 3.9% y/y in December 2021, relative to a 0.3% y/y uptick in December 2020, with the growth in prices quickening in all, but one market, and with most markets posting accelerated inflation rates thus far in 2022. Jamaica’s inflation rate remained in breach of its target range since August 2021, prompting five consecutive increases of the Bank of Jamaica’s policy rate to 4.5% by the end of March 2022. Meanwhile, FX shortages and exchange rate depreciation kept Suriname’s inflation rate elevated at 61.5% y/y in January 2022.

Despite the strong performance of the region’s major source markets, tourism activity remained significantly below pre-pandemic levels, but gained notable momentum during the recently concluded winter season. Stay-over arrivals to region advanced 59.8% in 2021 to approximately 48% of the 2019 level, with visitors from the US leading the expansion. However, cruise passenger arrivals declined relative to 2020, reflecting a modest start to cruise ship operations that recommenced only in the second half of year for most markets. Economic activity in Trinidad and Tobago likely remained lacklustre as natural gas supply issues and downtime at some production facilities hampered energy output, and most restrictions on domestic business activity were only lifted in the latter half of the year.  Real output in Suriname also likely remained muted considering the country’s ongoing economic woes, but the IMF approved the 36-month IMF Extended Fund Facility in December, in support of Suriname’s homegrown economic plan aimed at restoring macroeconomic stability. However, the Guyanese economy continued to expand in 2021, led by a further boost to oil output, and supported by the recovery of non-oil output.

The resumption of tourism services and domestic business activity especially in the second half of the year spawned a recovery of Governments’ revenue collections, while reduced COVID-19-related outlays lowered expenditure bills, generating improved fiscal positions for all, but three markets. However, fiscal deficits largely remained elevated relative to pre-pandemic levels, and public debt-to-GDP ratios of most markets continued to climb, although a few improved due to the partial recovery of economic activity. A rebound in Citizenship by Investment (CBI) inflows came to the rescue of some of the islands Eastern Caribbean, while the Government of Barbados’ revised primary balance target of -1% of GDP for FY2021/22, as in the previous fiscal year, accommodated additional natural disaster-related spending. The Government of Belize finalised and settled the fourth restructuring of its external commercial debt in November 2021, which saw holders of the 2034 US Dollar bond receive 55 cents on the dollar. Meanwhile, the approval of Suriname’s IMF-supported program led to financing assurances from international financial institutions, but negotiations with private and official creditors remain ongoing. However, following the delay of the international bond issue last year by The Bahamas’ Government, and despite an improved fiscal performance, increased financing by the Central Bank to near its legal limit, and a recent repurchase agreement on US Treasuries held by its sinking fund, suggest the country could be facing financing challenges, while bond yields have trended upward sharply over the last six months.

Governments’ external borrowing and/or the IMF Allocation of Special Drawing Rights (SDRs) in August boosted the FX reserves of all markets in 2021, though the Central Bank’s interventions in the FX market led to a decline in Trinidad and Tobago. The upswing of tourism receipts also supported reserve growth during the year but was mitigated by rising energy and other commodity prices. Meanwhile, Governments’ use of external borrowing proceeds replicated in a surge of deposits in the banking systems of most markets, while credit extension generally remained lacklustre, generating a further build-up in excess liquidity positions. Falling lending rates continued to compress interest rate margins, but banks’ profitability improved mostly due to reduced provisioning expenses relative to 2020, while asset quality worsened only marginally, and in some cases started to improve by the end of the year.

Following the strong recovery in 2021, global economic growth is set to moderate in 2022 as the impact of tensions between Russia and Ukraine reverberates across the globe and deepening price pressures prompt further interest rate hikes by major Central Banks generating tighter monetary conditions. In its April 2022 World Economic Outlook, the IMF projects that global real GDP growth will decelerate to 3.6% in 2022 but acknowledges considerable uncertainty associated with the present economic climate, including the persisting pandemic and the unknown course of current geopolitical tensions. In addition to sharp contractions projected for Russia and Ukraine, the IMF has revised downward its 2022 growth forecast for most advanced and emerging market and developing economies. Notwithstanding, following relatively shy recoveries in 2021, real economic activity in the Caribbean is still expected to ramp up in 2022, led by the continued recovery of accommodation services and supported by a full-year absence of domestic COVID-19-related business restrictions. However, the shadow of global events also creates uncertainty for the region, as intensified supply chain disruptions and the surge in international commodity prices could stifle expected recoveries, with most regional Governments possessing little to no fiscal space to cushion adverse consequences. In addition to spiralling domestic inflation, higher fuel prices will likely exert upward pressure on travel costs which could dampen the tourism rebound, while higher food prices and supply chain challenges have sparked anxiety concerning the potential threat to the region’s food security.  

 

Caribbean Market Review

Summary:

Despite the promising start to 2022, new global shocks are threatening to put the brakes on the global recovery that has followed the COVID-19 pandemic. The Ukraine/Russia conflict has pushed commodity prices significantly higher, escalating inflation concerns around the world. Moreover, tighter financial conditions – the prevalent risk before the news from Europe – have exacerbated concerns of a global stagflationary scenario. Needless to say, emerging markets (EM) credits have not responded well to such a combination. The constant repricing of inflation, a more hawkish Fed and the need to frontload the tightening cycle in the world’s largest economy have caused hard currency credit spreads to widen sharply in 2022, while at the same time, fears of a sharp deceleration in growth are increasing. This is a difficult situation for most EM countries, as their debt metrics drastically deteriorated during the pandemic and some had already initiated a cycle of both fiscal and monetary policy tightening, posing a significant risk for growth in the short term.

Caribbean and Central American (CAC) economies have not been indifferent to this trend. Downward revisions to growth outlooks are already making headlines. Moreover, note that contrary to most South American economies, Caribbean and Central American countries are (with a few exceptions) not benefiting from the increase in commodity prices. In contrast, the region, which depends greatly on tourism, is set to be hit by the rising costs of fuel, the start of local monetary tightening cycles, and the need to implement fiscal reforms/adjustments following the pandemic. This situation highlights the fragility of the recovery in CAC credits, and the need to look more carefully at the intrinsic issues in the region as inflation rates across the world rise, and more persistently than initially estimated.

A look at the performance of CAC credits already shows evidence of these dynamics. Unsurprisingly, ELSALV continued to underperform, with yields across the curve moving 740 bps, on average, since our last publication (December 15, 2021). The credit’s poor performance has stemmed from continued delays on an agreement with the IMF, the lack of a concrete fiscal adjustment plan, and the government’s antagonistic comments towards the US. BAHAMA (+191 bps, on average, across the curve) has also performed poorly as the recent increase in Central Bank financing and the repurchase agreement using sinking funds suggest that financing challenges could lie ahead in the absence of greater participation from the domestic market or additional external funding.

On a more positive note, approval of the public employment bill and completion of the IMF’s first and second reviews under the Extended Fund Facility were the main drivers behind COSTAR’s outperformance (+19 bps, on average) in the region. Although the improvement in fiscal numbers over the last year supports the credit in the short term, it’s worth noting that a fragmented congress and the new government’s intention to negotiate some aspects of the deal with the IMF remain risks into the start of President Rodrigo Chaves’ mandate in May.