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The global economic recovery progressed in the first half of 2021, despite the unrelenting pandemic. In its October 2021 World Economic Outlook, the IMF suggested that economic activity’s adjustment to the COVID-19 environment alongside vaccines’ efficacy in preventing severe illness, buttressed the revival of productive output. However, unequal vaccine access, vaccine reluctance and the higher transmissibility of the Delta variant continued to fuel the pandemic’s engines. Advanced markets in particular, benefitted from greater vaccine access, relative to several other large economies where inoculation rates remained quite low. In the US, real GDP expanded at an annualized rate of 6.7% in Q2 following 6.3% growth in Q1, while UK real GDP increased 4.8% q/q in Q2 following the lifting of restrictive measures. However, after advancing 5.5% in Q2, real GDP in Canada dipped at an annualized rate of 1.1% in Q2 as supply chain disruptions curtailed exports. Meanwhile, the broken links in supply chains, coupled with the take-off of global demand that left supply to play catch-up, generated a surge in inflation across the globe, complicating policymaking. Despite soaring prices, major central banks have held strain on increasing interest rates, as the recovery remains nascent in most markets, and is yet to take root in others. Oil prices in particular climbed to a multi-year high, with the price of WTI crude oil increasing 73.9% year-to-date to US$84/barrel at the end of October 2021. However, the announcement of the Omicron variant in November and the immediate implementation of travel restrictions in some markets, rattled financial markets and disrupted the rally of oil markets since then, with the price of WTI crude oil falling to US$66/barrel by the end of the month.
Despite the recovery progress of the region’s major trading partners, renewed restrictions amid surging infections, relatively slower vaccine rollout and a measured tourism rebound stifled the Caribbean’s recovery year-to-date. The more contagious Delta variant proved to be a significant challenge for the region with almost all markets battling an alarming rise in infections – largely in Q3 – that surpassed previous peaks and led to a tightening of restrictions on domestic traffic. Further, with nine of 18 markets having less than 40% of the population fully vaccinated by the end of October 2021, some regional healthcare systems have come under pressure due to the increased level of hospitalisations, while productive output also likely took a hit due to associated quarantining. Tourism dependent markets registered a marked improvement in arrivals in Q2 relative to Q2 2020 when borders were initially closed, but the weak Q1 performance kept stay-over arrivals to the region 21% below the 2020 level over the first half of the year. Since then, stay-over arrival growth has begun to turn the corner with most markets posting year-to-date expansions by the end of Q3, but remaining significantly below pre-pandemic levels. Cruise tourism remained largely subdued as most markets only reopened to vessels in June, while others are yet to reopen. Meanwhile, mounting infections likely also led to a subdued performance year-to-date for commodity exporters, Trinidad and Tobago and Suriname, despite soaring energy prices and improved demand. However, Guyana’s economy continued to expand in H1 2021, as oil production powered on, and non-oil real GDP recovered partially, supported by the lifting of COVID restrictions.
The rise in international commodity prices and shipping costs, alongside higher domestic food prices in some markets, spawned an acceleration of inflation in the region. Regional consumer prices (excluding Suriname) climbed 2.0% y/y at June 2021, relative to 0.2% y/y recorded one year earlier, with prices rising more quickly in all, but two markets. Notably, Jamaica’s inflation rate surpassed its target range since August, prompting the Bank of Jamaica to increase its policy rate. Meanwhile, Suriname’s inflation rate increased to 69.5% y/y during September 2021, up from 45.1% y/y during September 2020 coinciding with the switch from a controlled-floating to a flexible exchange rate arrangement.
The lingering pandemic kept public finances of the region’s markets under pressure thus far in 2021. A handful of markets proved to be the exception, most of which had relatively strong or improving fiscal positions pre-pandemic. Specifically, Cayman Islands, Turks and Caicos Islands, Grenada, St. Kitts and Nevis, and Jamaica have begun to see a turnaround in Government receipts that has generated a marked improvement in their fiscal accounts since the initial disruption. However, most markets continued to grapple with revenue shortfalls amid greater spending to shore up healthcare systems and to support affected individuals and sectors. Despite a partial recovery of revenue collections, greater spending worsened the Government of Barbados’ fiscal deficit, though the country still met its end-September IMF program targets. However, deteriorating market sentiment that coincided with its latest credit rating downgrades prompted the newly elected Government of The Bahamas to abandon plans for an external bond issue that was slated for Q4, and redirect its attention toward domestic financing. Meanwhile, the Government of Suriname has made progress in implementing its homegrown plan, including the unification of its exchange rate and the ceasing monetary financing of Government spending. However, financing assurances between Suriname and its official and private creditors remain critical for approval of envisaged IMF-supported program. Finally, the Government of Belize announced majority bondholder consent for the buy-back offered on its ‘superbond’ in September, which was funded by a Blue Bond loan agreement and settled in November.
FX reserves rose in all markets bolstered the IMF’s 2021 General Allocation of Special Drawing Rights (SDRs) to member countries in August and/or by additional external borrowing, while drawdowns from its Heritage Stabilization Fund also supported growth in Trinidad and Tobago. However, underlying trends in the FX reserves of most markets suggest a downward drift in line with recovering imports to support the resumption of productive output, and higher commodity prices. Meanwhile, excess liquidity of the region’s banking systems climbed further, reflected in robust expansion of deposit balances, with very little or no increase in credit. Consequently, lending and deposit rates continued to trend downward in most markets. Meanwhile, latest available data largely suggest a modest rise in non-performing loans, but an uptick in profitability likely due to lower provisioning expenses relative to the early stages of the pandemic.
Even though the pandemic has displayed no sign of letting up, the IMF’s latest projections continue to suggest a strong rebound in global economic activity to 5.9% in 2021, before more moderate but still robust 4.9% growth in 2022. Real GDP in the US is expected to advance by 6.0%, while output in Canada and the UK is projected to expand by 5.7% and 6.8%, respectively. Further, the IMF suggests that the upward push on prices should subside in 2022, but acknowledges that prospects are plagued with considerable uncertainty due to the unpredictable path of the pandemic and the unknown duration of supply chain disruptions. Notably, the magnitude of the threat of the Omicron variant, which remains under assessment, is still not clear. Meanwhile, following the mild gains expected in 2021, the bulk of the Caribbean’s economic recovery will likely be concentrated in 2022, powered by increased vaccine rollout and rebound in commercial travel. However, the road to full recovery remains long, with output in most markets not expected to return to pre-pandemic levels for a few years.
Caribbean Market Review
Concerns about the emerging markets debt outlook remained present in H2 2021. The market is gearing for a lift in financial rates across the developed world as inflationary pressures have remained in place for longer than expected and there are already concerns of a slowdown following the rebound from the sharp declines in growth in 2020. The rapid global spread of COVID-19 variants makes a strong argument in favour of a new wave of outflows to safe havens, especially as economies enter monetary tightening cycles. Note that most countries’ debt metrics have drastically deteriorated and although a positive external backdrop should prompt a quick tactical rebound in emerging market assets, we do not expect such a situation to be sustained for a prolonged period as governments deal with a deceleration in growth and already high fiscal deficits.
Caribbean and Central American (CAC) economies have not been indifferent to this trend. Credits across the region, with the exception of ELSALV and PANAMA, posted significant gains during the first half of 2021, explained, of course, by the re-opening of the tourism sector and larger-than-expected growth. Having said that, beyond the positive economic growth surprises and higher fiscal revenues in 2021, we are yet to see substantial progress towards fiscal reforms. 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 move higher and more persistently than initially estimated.
A look at the performance of CAC credits since our last publication shows the market already moving in this direction. JAMAN and DOMREP are outperforming in the region, with yields across the curve moving +12 bps and +28 bps, on average, respectively. Unsurprisingly, ELSALV was the most negative story in the region, with yield increasing 887 bps, on average. We maintain a positive view on DOMREP with its spectacular growth and lower debt/GDP levels in comparison to the rest of the region, and, despite attractive yields, we caution against long positions in ELSALV as the government seeks creative financing sources with the IMF deal in apparent limbo.
COSTAR warrants a stand-alone mention. The performance of the curve has not been the most impressive, but in recent weeks we have seen an uptick in interest in the credit as substantial GDP growth forecast revisions, together with higher‑than-expected fiscal revenues, reignited impetus. Nevertheless, we do not expect this sentiment to endure as we approach the start of 2022. First, Costa Rica’s assembly is yet to finalize approval of the Public Employment reform. The bill has suffered multiple delays, the latest being its return to the constitutional court for further review, a situation that could take up to 30 days to be resolved. Second, and not completely unrelated to our first point, the electoral cycle is likely to continue to create a high level of uncertainty around the approval and discussion of the reforms within the IMF agreement into 2022. Third, the significant economic rebound and revenue increases in 2021 should be taken with a grain of salt. The recovery so far in 2021 has been explained by strong economic activity in the free trade zone, exacerbating risks should higher transportation costs and commodity prices persist. Further, some of the one-off boost to revenues this year (extended period of tax payments, and remaining increase in VAT from the 2018 reform) will no longer be present in 2022. Hence, we do not see risks around the feasibility of the approval of reforms next year being accurately reflected in the price and could see rapid backlash to the trend seen over the last two weeks as the electoral headlines intensify.
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