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The unprecedented COVID-19 pandemic shocked the world in 2020, stunning global financial markets, stifling productive activity, and pushing oil prices to unrivaled lows. While liquidity injections by major central banks aided in the reclamation of sentiment on equity markets, global economic output suffered a 3.3% contraction at the hands of the pandemic (IMF April 2021 estimate), and oil prices remained around 20% lower y/y at December 2020. Following deep Q2 declines, real GDP in the region’s major trading partners recovered somewhat in Q3 consistent with the reopening of economies that tailed the flattening of the initial wave of infections. However, virus resurgence and the ensuing reintroduction of restrictions interrupted recovery progress in Q4. Real GDP in the US and Canada declined 3.5% and 5.4%, respectively, overall in 2020, as federal governments’ sizeable fiscal stimulus and reduced import demand partially counteracted the impact of containment measures on exports, private consumption and investment, while real economic output in the UK contracted 9.9%, amid tense talks on the post-Brexit trade deal sealed in December. Meanwhile, the launch of vaccine distribution in some markets in December has increased hope for a turning point of the global crisis, but the race against new waves and variants of infection remained a real threat. However, since December 2020, the price of WTI crude oil strengthened 24% to US$60/barrel by the end of March 2021, signaling increased demand.
Despite the reopening of most borders since the initial collapse in Q2, the global travel industry remained scarred throughout the year. The reintroduction of travel restrictions and lockdowns in response to new waves and rising cases both domestically and in the region’s major source markets, particularly in Q4, continued to thwart the Caribbean’s tourism recovery. Consequently, stay-over arrivals to the region fell approximately 70% y/y in 2020, while cruise-based operations remained largely suspended. The decimation of tourism activity in tandem with the impact of business interruption on private consumption and investment generated a steep economic fall-out for the largely tourism-dependent region. Most markets, including Aruba, Barbados, Bahamas, Belize, Curaçao, Sint Maarten and Turks and Caicos Islands, are estimated to have registered double-digit declines in real GDP, although the impact for Curaçao also stemmed from a plunge in manufacturing output. Meanwhile, the resilience of the international financial sector likely cushioned the tourism blow restricting the decline to single-digits for Cayman Islands and Bermuda, while commodity exporters, Suriname and Trinidad, also suffered a major, but relatively less severe economic impact due to the global contraction of demand. Exceptionally though, Guyana’s surge in oil production overtook the slump in non-oil output, likely posting Guyana as the only market in the region to record positive economic growth in 2020.
The lower global energy prices compressed regional consumer price inflation over the twelve months ended December 2020. Regional consumer prices (excluding Suriname) rose 0.4% y/y, a moderate deceleration from 1.9% y/y recorded one year earlier, and reflecting either price declines or slower inflation in all markets except Antigua and Barbuda, Belize, Dominica and Trinidad and Tobago. Meanwhile, consumer prices in Suriname surged 61.0% y/y during December 2020, up from 4.3% y/y during December 2019 as prices continued to rise following the close to 90% devaluation of the Surinamese dollar against the US dollar in September 2020.
Despite efforts to reduce spending by a few, the slump in regional economic activity and resulting collapse in government revenues generated a sharp deterioration in the fiscal accounts of all regional Governments except Dominica, where reduced spending more than compensated for revenue losses resulting in a lower deficit in 2020 relative to 2019. The IMF and other multilateral financial institutions quickly responded to the increased financing needs of most governments, while the Netherlands provided zero-interest bullet loans to Aruba, Curaçao and Sint Maarten, and some governments, including Bahamas, Bermuda and Trinidad and Tobago, also raised funding on the international capital market, generating a ballooning of external borrowing by the region during year. Consequently, latest available data suggest escalating sovereign debt ratios across all markets except, the Cayman Islands and Guyana, and a reversal of the downward trajectory for Barbados, Jamaica, and Grenada, in particular. Remarkably, the Governments of the Cayman Islands and the Turks and Caicos Islands relied on fiscal savings to support their respective operations, although the latter secured a credit facility in late December 2020, following no new borrowing during the year. Further, the stress on public purses prompted a wave of sovereign credit rating downgrades that hit Bahamas, Belize, Curaçao, Trinidad and Tobago, and Suriname in 2020, and more recently, Aruba and Sint Maarten in March 2021. Moreover, the Governments of Suriname and Belize faced default during the year, with the former now in technical discussions with the IMF regarding its request for a funded macroeconomic reform program amid ongoing discussions with bondholders.
Although export receipts dwindled, the region’s high reliance on external borrowing in 2020 served to strengthen FX reserves of tourism dependent countries, supported by reduced import outflows associated with the weaker domestic environments and lower oil prices. In contrast, Suriname’s primary dependence on Central Bank financing coincided with a fall in FX reserves, while reserves in Trinidad and Tobago rose only marginally during 2020 as external proceeds, including more than of US$1bln withdrawn from the Heritage Stabilization Fund, barely mitigated the tightening conditions on the foreign exchange market. Meanwhile, the use of external funding for budgetary support, against the backdrop of measures taken by regional central banks to augment domestic liquidity in the early stages of the pandemic, led to a sharp rise in banks’ excess liquidity across most markets. However, banks’ asset quality deteriorated in the latter half of the year as initial loan moratoria offered to clients came to an end, while banks’ net income shrank on account of lower interest revenue and heightened provisions for expected credit losses. Capital adequacy also nudged downward, but ratios generally remained in excess of regulatory minimums.
Very recently, the IMF revised upward its projection for the global economic rebound in 2021 to 6.0% (April 2021 World Economic Outlook), from the 5.5% projected in January 2021, and the 4.4% projected in October 2020. The Fund based its most recent revision on supplementary fiscal stimulus in a few major economies and the potential for a vaccine-strengthened recovery over the latter half of the year, but cautioned however, that ongoing uncertainty and the growing challenge of uneven vaccine progress across the globe could alter the course of post-crisis economic growth. In contrast, expectations for the Caribbean’s recovery in 2021 have declined over time, in line with surging cases, fresh travel restrictions and new lockdowns in most markets, and a more measured rebound in tourism activity than initially anticipated. Further, despite concerted efforts to roll out vaccination programs across the region, access has been choppy with the Caymans Islands administering at least a first dose to over 45% of its population by the end of March, but at other end of the spectrum, several territories not achieving any material headway. Meanwhile, the protracted regional recovery implies extended fiscal ramifications and even higher public debt levels in 2021, highlighting an immediate need for most Governments to develop targeted fiscal programmes that cover the post-crisis medium term.
Caribbean Market Review
Following increased uncertainty stemming from the pandemic and the surge in volatility across asset classes, emerging market credits experienced a quick rebound into the latter part of 2020, on the back of positive vaccine news, a slight recovery of economic activity and the dissipation of political risks related to the US elections. This environment opened a brief opportunity window, allowing many countries to satisfy their financing needs for 2020 and pre-emptively obtain funding for 2021. Unfortunately for emerging market credits, this positive backdrop did not last for too long. The return of the reflation theme has dominated market headlines as US yields have resumed their upward path, with a clear acceleration of this trend since mid-February. As expected during such episodes, curves across the space shifted higher and steepened as the market reassessed the rate increases in advanced economies. Since then, the Fed and other advanced economies’ central banks have maintained dovish stances. Moreover, the “dots” in the latest Fed rate announcement suggest that rates could remain on hold throughout 2021-2022. Nevertheless, with financing costs on the rise, we expect investors to start paying more 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.
Caribbean and Central American (CAC) economies benefited from a better issuance environment in late 2020 and 2021, with the likes of Dominican Republic, Panama, and Bahamas completing their financing needs for 2020, funding a significant proportion of their 2021 financing needs, and even undertaking some liability management. 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. It is partly explained by the sharp drop in global rates and the search for yield across asset classes. Nevertheless, as rates start to normalize, we expect to see a ramp-up in the scrutiny of credits in the region – a situation already in play.
Looking at the performance of CAC credits since our last publication, COSTAR and ELSALV gained the most ground, with average yield declines of 75bps and 149bps, respectively, across their curves. Costa Rica’s IMF agreement and advanced discussions for an extended fund facility in El Salvador were the main reasons behind these rebounds, allowing each country to significantly reduce its financing costs while providing a much-needed source of funding for 2021. However, such positive performance has stalled, in line with the recent increase in US yields. In the case of Costa Rica, we do not expect much of an improvement from current levels as Congress’ approval of the IMF deal and a rapid implementation of the reforms remain short-term risks. On the other hand, El Salvador should receive a final boost on its potential agreement with the IMF and rapid approval as governability improves with the official party obtaining more than two-thirds of the seats in Congress.
PANAMA and JAMAN were the regional underperformers, with average yields across their curves moving +56bps and +24bps, respectively. The lack of an immediate fiscal adjustment plan in Panama and the 18% decline in GDP growth prompted a round of downgrades by Fitch, Moody’s and S&P in early 2021, increasing investors’ concerns of further credit rating action that could cost the credit its investment grade in the coming years. Looking at JAMAN, the credit’s underperformance could be attributed to the lack of an effective response to the health crisis, resulting in low growth and greater fiscal concerns.