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The global effects of the COVID-19 pandemic intensified since our last publication. While the spread of the virus flattened in some markets, the outbreak worsened or resurged in others, compelling those Governments to institute harsher and/or more prolonged lockdowns and curfew orders. Consequently, in its June 2020 World Economic Outlook update, the IMF suggested that the pandemic inflicted a more gruesome impact on global economic output during H1 than originally anticipated. For the region’s major trading partners, stay-at-home orders and Government restrictions on mobility deepened the negative economic fallout in Q2 despite the slowing pace of new infections. Specifically, preliminary data suggest that Q2 real GDP plummeted at annualised rates of 32.9% and 43.0% in the US and Canada, following annualised Q1 declines of 5.0% and 8.2%, respectively. Similarly, UK GDP dipped 1.6% y/y in Q1, with a much steeper y/y decline anticipated for Q2. Despite the reopening of several economies toward the end of Q2, global travel remained suppressed largely because of the relentless uncertainty associated with the course of the pandemic, e.g., the new spikes in confirmed cases in the US during July. Meanwhile, oil prices recovered partially since the April 2020 crash, with the price of WTI crude oil stabilizing at around US$40/barrel by the end of July – an OPEC+ deal on supply cuts ended the price war, while demand for crude displayed signs of recovery as economies gradually reopened.
The pandemic’s devastating impact on global travel and oil markets reverberated throughout the Caribbean during H1 2020. The virtual shutdown of the region’s tourism services coupled with lockdown measures led to broad-based contractions across tourism-dependent markets, though declines were particularly acute in the hotel and restaurant sectors. The suspension of commercial air and cruise-based operations has meant near zero arrivals to the region in Q2 and a greater than 50% plunge in arrivals over the first six months of the year. Most markets have begun welcoming international air travel again, but the tourism recovery in the region has been sluggish due to reduced air capacity, apprehension associated with ever-changing protocols on arrival and return, and travel restrictions on markets still deemed high risk, which in a few cases includes an outright ban on travellers from the US, the region’s largest source market. Moreover, since the reopening of borders and after generally successful containment, some markets in the region have experienced a resurgence of positive cases, increasing the likelihood of additional waves of lockdown measures, as very recently instituted in The Bahamas. Meanwhile, the fallout for commodity exporters ensued largely from the containment measures and the reduced price of and demand for oil, although the consequences were likely not as severe as those for tourism-dependents. The subsequent easing of restrictions and the gradual restart of domestic business activity have tapered the number of unemployed persons relative to the initial spikes witnessed in Q2, but unemployment rates likely remain elevated.
The falloff in global oil prices has led to reduced consumer prices or slower inflation in most markets during H1 2020. With a few exceptions, higher prices of food products partially moderated the decline in the ‘transport’ and ‘housing, utilities, gas and other fuels’ sub-components. However, fuel taxes implemented in Curaçao mitigated the drop in oil prices, while consumer prices in Suriname surged since February, with inflation reaching 35.2% y/y in June, attributed to businesses increasing prices to reflect premiums on the parallel exchange rate market.
Greater spending on healthcare and support for COVID-19-affected individuals and businesses coupled with plummeting revenue has severely worsened the fiscal accounts of regional Governments, most of which were already heavily weighed down by debt, and underscores the need for even tighter post-pandemic fiscal consolidation as economies recover. Emergency funding from international financial institutions supported the increased budgetary and external financing needs of most markets. Specifically, the IMF provided financial assistance under its emergency lending facilities to The Bahamas, Jamaica, Dominica, Grenada, St. Lucia and St. Vincent, and to Barbados through an augmentation of its regular IMF programme disbursement. The World Bank and the IDB also provided support to several markets to strengthen their respective COVID-19 responses, while Aruba, Curaçao and Sint. Maarten received financial assistance from The Netherlands, albeit with conditions. Meanwhile, the Government of Trinidad and Tobago made legal provision to permit withdrawal of up to US$1.5bln from its Heritage Stabilization Fund during the current year. However, some Governments faced significant financing challenges. The Belizean Government, in particular, announced in mid-June its intention to consult with holders of its US-dollar-denominated 2034 ‘superbond’ on possible capitalisation of interest falling due from August 2020 through to February 2021, while the Government of Suriname sought and received the consent of bondholders to defer a US$15.6mln principal payment that was due on June 30. Further, sovereign credit rating downgrades have deepened the strain on some regional Governments, particularly in Belize, The Bahamas, Trinidad and Tobago, and Suriname.
Subdued domestic activity and lower oil prices, which contained import outflows, coupled with the proceeds of external borrowing led to increased FX reserves in most markets, despite the dwindling of travel receipts for tourism-dependents. However, FX reserves in Belize remained very close to the internationally accepted three-month benchmark, while reserves in Suriname continued to decline amid FX shortages and limited external funding. Reduced domestic demand also began to weigh on demand for credit, with loan growth slowing across some markets. However, banks’ loan quality generally has not deteriorated, as businesses and individuals that faced repayment challenges associated with the pandemic likely took advantage of loan moratoria offered by financial institutions.
In June, the IMF revised its projection for global economic growth in 2020 to -4.9% from the -3.0% forecasted in April, with the region’s major trading partners, the US, UK and Canada, projected to decline 8.0%, 10.2% and 8.4% respectively. Even though uncertainty remains high due to the ongoing nature of the pandemic, the consensus suggests steep and in several cases double-digit declines in economic activity for the markets of the Caribbean in 2020. The slow tourism recovery is likely to persist for the remainder of the year, and while domestic business activity has restarted in most markets, reducing the number of unemployed persons, some businesses have not survived the crisis, and the tenure for most unemployment benefits has either already ended or will do so shortly. In addition to the limited fiscal support provided by most regional Governments, as well as a thrust to induce capital investment projects, some markets have sought novel avenues for boosting economic activity. Specifically, efforts have been underway to make Citizenship by Investment programmes in the ECCU more attractive by offering new and/or more affordable options, while Barbados’ newly launched ‘Welcome Stamp’ visa, designed to alleviate some of the concerns of a typical ‘long-stay visitor’ during this period, has the potential to pick up some of the slack left by regular tourism activity.
Caribbean Market Review
The eruption of the COVID-19 pandemic forced many Governments to implement virus containment measures, including mobility restrictions and quarantines, and to substantially increase Government spending to ramp up health services and provide assistance to those losing their jobs. Despite the initial increase in volatility and flight to safety in March and April, the ample liquidity and stimulus measures provided by advanced economies prompted a stabilization and rebound in global equity markets. Moreover, the rate cuts in advanced and emerging economies in addition to a deluge of issuance forced credit curves steeper initially, before quantitative easing, forward guidance, and non-traditional monetary tools gave rise to a reach for yield, pushing investors back into duration in recent weeks. 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.
The Caribbean and Central American region was not indifferent to this trend as border closures and mobility restrictions severely impacted one of its largest growth engines, the tourism sector. Despite the significant hit to growth metrics and the aggressive expansionary fiscal measures though, the region has enjoyed a significant rally since our last publication. As with other asset classes around the world, the disconnect between the fundamental picture and the performance of Caribbean and Central American credits has been evident. Initial concerns about the ability of Governments in the region to find much-needed financing were alleviated by rapid multilateral loan negotiations, and in many cases, renewed hopes of IMF stand-by agreements. This was the case with ELSALV and COSTAR, with average yields across their curves dropping 262bps and 140bps, respectively.
Although initially outperforming, JAMAN and DOMREP are now in the middle of the pack. Concerns that Jamaica’s fiscal adjustment plan comes at the expense of growth should keep investors wary of JAMAN in the short term. DOMREP’s performance was influenced by uncertainties about the presidential election outcome. However, we expect DOMREP to recover some ground into Q4. President-elect Luis Abinader will have a majority in the lower house and the senate with the PRM securing 97 out 190 and 19 out of 32 seats, respectively. Initial comments from the new administration suggest a willingness to deal with fiscal imbalances. Among the measures mentioned to address fiscal concerns are the possibility of broadening the tax base in line with the IMF’s recommendation and the consolidation of electricity distribution companies.
PANAMA was the underperformer of the region since our last publication as significant revisions to growth forecasts and large fiscal deficits increased credit rating concerns. We maintain a downward bias with respect to the Government’s -9% GDP growth forecast for this year. The spread of the pandemic in the country is still to dictate how quickly internal demand will rebound and the next steps towards the reopening of the borders.
We maintain a pessimistic view on ELSALV and COSTAR on the lack of fiscal reform support in each congress, delays in the approval/ratification of multilateral loans, and higher-than-expected fiscal deficits. However, we recognize that the start of discussions on potential agreements with the IMF could provide support for both credits for the remainder of Q3. The continuation of that trend will depend on any agreements with each congress, 2021 Budget discussions and external issuance approvals during the last part of the year – a scenario difficult to envisage given the minority Governments in both countries. In the case of PANAMA, although the market is likely to continue to give the country the benefit of the doubt, we do not discount the possibility of negative credit actions without a credible fiscal consolidation plan into the medium term. Hence, we would await the announcement of new deficit targets and the culmination of the 2021 Budget and financing needs discussion early in Q4 before getting back on the long PANAMA bandwagon. Finally, we expect DOMREP to benefit from a much stronger fiscal position and the dissipation of electoral uncertainty. Moreover, the possibility of engaging the IMF, although yet to be mentioned, provides a safety net for the credit. Hence, with political uncertainties out of the way and with attainable financing needs for the rest of the year, we continue to favour long DOMREP positions.