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The global economy has recovered somewhat from the throes it spiraled into in Q2 as many countries gradually reopened following the flattening of the initial wave of COVID-19 infections. Economic activity in the region’s major trading partners bared no exception, although, expectedly, Q3 real output remained considerably below 2019 levels. Specifically, the UK’s real GDP expanded 15.5% q/q in Q3 relative to its 20.4% q/q fall-off in Q2, while Q3 real GDP advanced at annualized rates of 33.1% and 40.5% in the US and Canada, respectively, following annualized contractions of 31.4% and 38.4% in Q2, respectively. However, the situation has deteriorated since then as second waves and the reintroduction of lockdowns across several advanced economies likely destabilized the progress toward a robust global recovery. While the US has resisted second lockdowns despite new record-high daily cases and hospitalizations, the UK and parts of Canada in particular reinstituted lockdowns in November to curb contagion. Meanwhile, with uncertainty lingering, global travel has remained largely suppressed, sustaining the stifling of oil demand – following the partial recovery from the April 2020 collapse, the price of WTI crude oil stabilized at around US$40/barrel. However, recent optimism following announcements on vaccine trials pushed the price of WTI crude to US$45/barrel by the end of November.
Despite the reopening of most borders to commercial air travel, the slump in global travel continued to weigh on the regional tourism recovery. Reduced air capacity, uncertainty regarding travel protocols and general fear of the virus restricted tourist arrivals to a trickle that remained substantially below the usual traffic. Specifically, the exceptionally modest activity in Q3 – at least 80% lower y/y – that followed near zero arrivals in Q2 has generated a larger than 65% y/y decline in visitor arrivals to the region over the first nine months of the year. While the tourism downturn continued to curtail activity in related economic sectors, some markets, including Aruba, The Bahamas and Belize, have been grappling with local virus resurgence, which coerced respective Governments to reintroduce restrictive measures and lockdowns in Q3, and likely led to a further dampening of domestic demand. Moreover, the recent spikes of COVID-19 cases and new lockdowns in major source markets since then undermine the already sluggish tourism recovery in the region. Meanwhile, in addition to protracted virus containment measures, the global contraction of demand also continued to restrain real output for commodity exporters, Suriname and Trinidad and Tobago, although the impact was likely not as severe relative to tourism-dependents. Official labour statistics remained unavailable for most markets, but unemployment rates likely remained elevated despite the restart of activity in some sectors. Jamaica’s unemployment rate, in particular, rose from 7.3% to 12.6% between January and July 2020.
The lower global oil prices have continued to further depress domestic consumer prices in 2020. Despite notable spikes in the price of food, consumer prices declined or inflation rates decelerated markedly in most markets due to declines in the prices of energy-related sub-components, including transport, housing, utilities, gas and other fuels. One notable exception was Suriname, where consumer prices rose 54.2% y/y during October 2020, reflecting a surge in prices that began in February and worsened after a close to 90% devaluation of the Surinamese dollar against the US dollar in September 2020.
Revenues collected by the treasuries of regional Governments have plummeted under the weight of the COVID-19 pandemic. While a few Governments have sought to reduce spending to mitigate the impact, the fiscal accounts of most Governments have deteriorated rapidly, generating substantial financing requirements and higher debt levels. Further, the stress on public finances has very recently led to a second round of credit rating downgrades for some markets. Specifically, large fiscal deficits and escalated borrowing in The Bahamas prompted Standard and Poor’s to lower the sovereign’s credit rating further from ‘BB’ to ‘BB-‘ on November 12, while Moody’s further downgraded Belize’s sovereign rating from ‘Caa1’ to ‘Caa3’ on November 24, following an agreement with bondholders to delay interest payments on its sole external 2034 bond until mid-2021. Standard and Poor’s also reverted the Government of Suriname’s rating to ‘SD’ on November 6 after a missed interest payment in October, which preceded bondholder consent for short-term relief pending a more extensive debt restructuring and a potential IMF-supported macroeconomic reform program. The Government of Barbados did, however, despite its worsening fiscal position, meet its September 2020 fiscal targets under the IMF programme, and the IMF supported a further revision to its primary balance target to a 1% of GDP deficit.
In addition to the emergency funding from international financial institutions provided to most Governments, some Governments, including those in The Bahamas, Bermuda and Trinidad and Tobago, raised financing on the international capital market to support budgetary needs. The Government of Trinidad and Tobago also withdrew US$900mln out of the maximum US$1.5bln allowed from its Heritage Stabilization Fund by the end of its just concluded fiscal year. Against the backdrop of weakened domestic activity and lower oil prices, this external funding continued to generate burgeoning levels of FX reserves in most markets, despite the narrowing of export receipts. Further, the external funding has led to a sharp rise in banks’ excess liquidity in the region, reflected in strong deposit growth, amid largely lacklustre demand for credit. Meanwhile, banks’ loan quality has begun to tilt downward as loan moratoria offered by financial institutions likely started to expire, while banks’ profitability has started to sink amid declining revenue and increased provisions for expected credit losses. Nevertheless, banks’ capital adequacy ratios have generally remained in excess of regulatory minimums.
In its October 2020 World Economic Outlook, the IMF revised downward its projection for the global economic contraction in 2020 to 4.4%, premised on sooner-than-expected improvements following initial lockdowns. While the second wave of infections rippling across much of the US and Europe has coated 2020 economic projections with additional layers of uncertainty, the recent promising developments on potential vaccines have boosted optimism for the 2021 recovery. Nevertheless, the region’s economies will undoubtedly suffer a major economic fall-out in 2020, and while a partial recovery is expected in 2021, economic activity will likely not return to pre-pandemic levels until at least 2022. Despite likely pent-up demand for travel and vacationing, this key to the Caribbean’s recovery will likely experience a protracted rebound as public confidence in international transport gradually regains momentum. Even with a full recovery of economic activity, however, the focus of regional Governments will require a sharp shift toward addressing fiscal and debt repercussions in the aftermath of the pandemic.
Caribbean Market Review
The COVID-19 pandemic dominated fiscal and monetary policy actions across the world in 2020. The initial increase in volatility was somewhat tamed by the aggressive fiscal expansion measures and enormous amounts of liquidity provided by advanced economies. Moreover, although not to the same extent, emerging market economies followed this trend, initially prompting a flight to safe havens as the market assessed each government’s ability to weather increasing financing needs. Nevertheless, H2 provided a positive environment for a quick rebound as the market benefited from excess liquidity and investors restarted their search for yield in an expected low-rates-for-longer scenario. This, together with quick access to multilateral financing, provided most emerging market economies with enough room to meet their short-term liabilities and increase fiscal spending this year. However, we expect investors to start paying closer attention to financing needs and fiscal strength into 2021 and the medium term as the initial multilateral assistance provided to deal with the pandemic transforms into fiscal adjustment measures, constraining growth in the years to come.
In line with this trend, most Caribbean and Central American economies benefited from quick access to multilaterals and the large appetite for high yield issuance. Further, recent positive vaccine development news and subsequent optimism about the recovery of the severely impacted tourism sector added to this sentiment in recent weeks. Having said that, and as we mentioned in our previous publication, the disconnect between the deterioration of the fundamental picture and the performance of regional credits has been more than evident. We highlight the surge of financing needs in Costa Rica and El Salvador, with their debt-to-GDP expected to climb above 80% and 100%, respectively, within the next year and the lack of consensus on a significant fiscal adjustment process.
Looking at the performance of CAC credits since our last publication, BAHAMA, DOMREP, and TRITOB gained the most ground, with average yield declines of 125bps, 107bps, and 122bps, respectively, across their curves. The recovery in BAHAMA and TRITOB can be attributed to positive COVID-19 vaccine news, the rebound of oil prices, and attractive technical levels following the sell-off in Q2 2020. The case of DOMREP is, however, much different. The dissipation of local electoral uncertainties in early H1 2020, signs of a fiscal adjustment in the near future, a much lower debt-to-GDP ratio, and a more diversified economy contributed to DOMREP’s rally.
On the other hand, ELSALV, PANAMA and COSTAR were the regional underperformers, with average yields across their curves moving, +68bps, +16bps, and -52bps, respectively. The lack of a credible fiscal adjustment plan and the rapid increase of financing needs were the main reasons behind their underperformance. In El Salvador, expectations of an improvement in governability following the scheduled February mid-term election, overly optimistic budget assumptions and surging financing needs (10% to 16% of GDP) are likely to keep pressure on the credit without a concrete adjustment plan.
In COSTAR, the lack of consensus in congress on a potential IMF proposal should push the government’s finances to the limit as political parties assess their strategies ahead of the 2022 general election. On this note, the Minister of Finance sent a letter to congress with a framework to start negotiations with the IMF. These measures included a 3.0% of GDP adjustment, 1.5 % of GDP from expenditure cuts (administrative reform/fiscal rule), 0.8% of GDP from new taxes (0.6% of GDP still to be discussed and 0.2% of GDP coming from income and lottery taxes), 0.5% of GDP from eliminating some tax exemptions, and 0.2% of GDP from public sectors firms (no details). Moreover, most of these measures were already under discussion in congress, while around 0.5% of GDP adjustment is likely to come from a promise to cut expenditures from the 2022 budget. Hence, we do not anticipate the approval of an IMF agreement until at least Q2 2021, further pressuring the local curve and increasing the government’s debt servicing costs.
In the case of PANAMA, severe lockdown measure and a large contraction in growth have prompted the government to revise its fiscal targets once again, and rating agencies to revise the country’s ratings. Although we expect PANAMA to retain its investment grade status, driven by a significant rebound in growth in 2021, we do not discount the possibility of further negative rating actions due to the lack of concrete fiscal measures and constant and substantial changes to the country’s Fiscal Responsibility law.