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Eighteen months following the advent of the COVID-19 pandemic, signs of a tangible global economic recovery have begun to surface. Looser monetary conditions, fiscal stimulus and vaccination efforts have cemented recovery progress in several major markets, but virus resurgence, lack of vaccine access and/or the absence of fiscal support have restricted significant headway in others. Of the region’s major trading partners, the US and Canada recorded annualised real GDP growth of 6.4% and 5.6%, respectively, in Q1 2021, primarily reflecting greater personal consumption spending, Government transfers and private investment. In contrast, UK real GDP fell 1.5% q/q, as the impact of Government-imposed restrictions on manufacturing output and services overshadowed an expansion in construction activity. Meanwhile, the uptick in global demand, combined with adverse climatic conditions and supply chain disruptions have spawned a surge in prices across the globe, prompting some central banks to weigh the potential impact of raising interest rates – a move that could cloud the course of recovery. Specifically, oil prices soared despite the easing of OPEC+ supply cuts, with the price of WTI crude oil increasing 51.9% year-to-date to US$73/barrel at the end of June 2021, while international food and beverage prices climbed 19.9% year-to-date at the end of the same period, aided by drought in key export markets and rising shipping costs.
However, signs of a Caribbean economic recovery have paled in comparison to the global picture. The reintroduction of travel restrictions in key source markets coupled with virus resurgence in several markets kept economic activity in the region subdued year-to-date 2021. Tourism dependents, in particular, suffered substantial declines as stay-over arrivals to the region plunged 78.1% y/y during Q1 2021, relative to an almost normal Q1 2020 – when the effects of the pandemic had not yet fully set in – while cruise vessel operations remained on pause. Further, rising COVID-19 infections compelled some Governments, including Aruba, Barbados, Bermuda, Curacao, Jamaica and Turks and Caicos Islands to tighten restrictions and reinstate lockdowns, limiting domestic traffic and business activity. The jaded performance of the accommodation sector coupled with limitations on non-essential services continued to hamper growth in wholesale and retail, transportation storage and communication, and other related services’ sectors year-to-date 2021. Although commodity exporters were poised to benefit from the improved demand and more favourable energy prices, virus resurgence in Trinidad and Tobago and Suriname also led to an escalation of restrictive measures to stem the spread, and likely hampered productive activity. However, ramped up oil production continued to boost economic output in Guyana, while preliminary indicators of non-oil activity imply a mixed performance in Q1 2021. Meanwhile, concerted efforts by regional Governments to advance vaccination programmes have gained momentum. However, progress remained uneven with the Caymans Islands administering at least a first dose to over 74% of its population by the end of June, and at other end of the spectrum, Jamaica had not yet reached 10%.
Regional consumer price inflation exhibited modest quickening over the twelve months ended March 2021 likely heralding the climbing of global commodity prices. Regional consumer prices (excluding Suriname) rose 1.2% y/y, accelerating from 0.9% y/y recorded one year earlier, as prices rose in all markets except Aruba, St. Kitts and Nevis and St. Vincent and the Grenadines. Meanwhile, consumer prices in Suriname increased 50.7% y/y during March 2021, up from 17.6% y/y during March 2020, but slowed relative to the 60.7% y/y recorded during December 2020.
The pandemic’s drag on economic activity has cast a dark shadow on the region’s fiscal accounts. Significant borrowing led to a surge in public debt for all markets, except Cayman Islands, St. Kitts and Nevis, and Turks and Caicos Islands, with latest data suggesting that at least six markets, namely Aruba, Barbados, Belize, Dominica, Jamaica and Suriname now post public debt ratios above 100% of GDP. Moreover, the strain on public finances averted fiscal consolidation progress in Aruba, Bahamas, Barbados and Jamaica, while public debt in Barbados and Jamaica in particular, reverted from its downward trajectory. However, the Jamaica Government continued to reiterate its commitment to debt reduction post-recovery. And, the Barbados Government met most of its revised IMF targets for end-March 2021, but has delayed its 60% debt target by two years to FY2034/35. Meanwhile, following its bond deferral agreement and expected resumption of interest payments in May 2021, the Government of Belize also missed this payment and has engaged bondholders to seek yet another restructuring of its 2034 ‘superbond’. Also, the IMF announced a staff-level agreement on a US$690mln three-year Extended Fund Facility for Suriname in support of its homegrown economic reform programme, which is expected to be complemented by a comprehensive debt restructuring. In addition to borrowing to support financing requirements, the Government of Trinidad continued to make withdrawals from its Heritage Stabilization Fund during Q1 2021, which fell to US$5.6bln at March 2021. Conversely, the Government of Guyana continued to receive oil earnings and royalties into its Natural Resource Fund, which rose to US$267.7mln at the end of the same period.
Following a build-up for most markets in 2020 associated with a high reliance on external borrowing, FX reserves remained largely elevated thus far in 2021. However, as borrowing slowed and import outflows likely nudged upward in light of rising oil prices and a pick-up in domestic activity following initial lockdowns, FX reserves started to trend downward for some markets, including Bahamas and Barbados. Meanwhile, rising deposits and either falling credit balances or slower growth coincided with greater excess liquidity of most regional commercial banking systems. However, latest available data suggest a modest rise in non-performing loans, while banks’ profitability slipped amid lower interest income and higher loan provisioning.
The IMF latest projections suggest global real GDP growth of 6.0% in 2021 founded on the additional fiscal stimulus in some major economies and the impetus of vaccine progress over the second half of year. However, uncertainty surrounding the course of the pandemic, including the birth of new variants, continue to pose a downside risk to expected outcomes. Meanwhile, the sluggish tourism rebound, intermitted by sporadic lockdowns, and staggered vaccine progress suggest a long road to recovery for the Caribbean region. Most markets are not expected to return to pre-crisis output levels for a few years, even in the absence of additional external shocks, e.g., the increased likelihood of a severe hurricane, given the expected above average season for 2021. Further, the recently proposed implementation of a 15% global minimum corporate income tax rate intended to ensure multinational companies pay their fair share of tax, could have negative implications for Caribbean international financial centres over the medium-term.
Caribbean Market Review
The euphoria of the first half of the year, characterised by upward revisions to growth and the dissipation of pandemic concerns, appears to have given way to a much grimmer narrative over the last few weeks. The recent narrative points to the deterioration of the growth/inflation relationship – a scenario where growth is near or has already peaked in the short term while inflation expectations keep rising. The latter plays an important role in the dynamics of US Yields as the curve flattens out, creating a classic flight-to-safety correction across assets. Contributing to the situation are a less accommodative global monetary policy, the slowdown of China’s credit push, the risk of a rebound in COVID-19 cases due to new variants, and already stretched Government finances around the world. Remember that following the arithmetic rebound expected post pandemic, most countries will have to tighten their belts as the cost of financing large deficits increases at an accelerated pace in local markets and in hard currency. Hence, as we have mentioned in previous notes, we expect investors to start paying closer attention to intrinsic issues as countries decide whether to support growth or implement fiscal adjustment measures to prevent further credit rating downgrades in the short term.
In the Caribbean and Central American (CAC) economies, we note that although the region responded positively to the vaccination distribution news in advanced economies at the start of Q2, this scenario did not necessarily replicate regionally, with some islands and Central American economies moving in and out of quarantines or, in some cases, easing then reinstating aggressive mobility restrictions as COVID-19 cases rebounded. Having said that, and despite the recent upward revisions to growth estimates by international agencies, the disconnect between the fundamental picture and the performance of regional credits remained in place, a situation we expect to prove difficult to change as countries battle the political implications of aggressively reducing fiscal and monetary stimulus. And, all of this is occurring in an environment of higher-than-anticipated inflationary pressures and credit rating concerns in the short term.
A look at the performance of CAC credits since our last publication shows that BAHAMA gained the most ground, with average yield declines of 94bps across its curve. COSTAR also posted a solid positive performance during the same period with yields dropping 73bps The country’s agreement with the IMF and some early signs of fiscal austerity in 2021 were the main reasons behind these rebounds. However, positive performance has stalled, in line with recent volatility driven by COVID-19 fears, higher inflation expectations, and the medium-term global growth picture. We don’t expect Costa Rica to post much of an improvement from current levels as the market focuses on the difficult tax revenue discussion in congress. Meanwhile, the Dominican Republic lost its opportunity to give the credit a solid boost when the Government announced it will no longer pursue fiscal adjustment discussions this year – not exactly a catalyst for a significant reversal, given the above-average growth, but a warning sign into the medium term.
PANAMA and ELSALV were the regional underperformers, with average yields across their curves moving -20bps and +246bps, respectively. The lack of an immediate fiscal adjustment plan in Panama and the sharp GDP growth declines early this year remain the main reasons behind that country’s performance. However, despite its recent credit rating downgrade, PANAMA issued US$2bln in June – almost entirely covering its expected financing needs for this year. ELSALV’s credit underperformance is driven by the Bukele administration’s confrontational attitude since the start of May, delaying and jeopardising a potential deal with the IMF.
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