Caribbean & Central America - November 2018

The latest International Monetary Fund (IMF) Regional Economic Outlook talks of a general improvement in the economic prospects for the Caribbean “supported by higher US and global growth”. But there is a huge range in likely outcomes for the sub-region, from a contraction of -14.1% projected for Dominica this year, as it continues to struggle with the aftermath of Hurricane Maria, to growth of 3.4% for Guyana as it begins to feel the first positive effects of the forthcoming oil bonanza. Overall, tourism-dependent Caribbean will grow by just 1.4% in 2018 and 1.8% in 2019. The region’s commodity exporters (Belize, Guyana, Suriname, and Trinidad & Tobago) will grow by a similar 1.4% this year and 1.6% in 2019.

It is the strength of the US economy that is providing support to some of the more attractive tourism destinations, notably St Lucia (3.4% forecast growth for 2018) and Grenada (3.6%). Other countries are experiencing more modest growth, like Jamaica with a forecast advance of 1.2% for 2018. The other countries that make up the ‘tourism-dependent’ category are Antigua & Barbuda (3.5% forecast growth for 2018), Aruba (1.1%), The Bahamas (2.3%), Barbados (-0.5%), St Kitts & Nevis (2.7%), and St Vincent & the Grenadines (2.0%). There is also the special case of Dominica.

Among the commodity-exporters, the best that can be said for Trinidad & Tobago is that it is no longer in recession after contractions of -6.1% in 2016 and -2.6% in 2017. The forecast growth for this year is 1.0%.

Fiscal deficits and debt remain a major concern in the region, with Barbados the leading concern with its public-sector gross debt of 157% of GDP in 2017. Now the IMF has been called in to impose a programme aimed at restoring macroeconomic stability, but not swiftly enough to prevent another downgrade from Standard & Poor’s in mid-October.

Under the programme, Barbados is aiming to achieve a primary surplus by 2019/20 of 6% of GDP, and (according to the IMF) “maintain it at that level for several years thereafter”. Another key objective is to reduce the drain on government funds from transfers (amounting to 7.5% of GDP) to state-owned enterprises (SOEs). The IMF says: “The program aims to reduce transfers by about 2 percentage points of GDP, by a combination of much stronger oversight of SOEs, supported by improved reporting; cost reduction, including reduction of the wage bill; revenue enhancement, including an increase in user fees; and mergers and divestments.”

The average level of debt for the tourism-dependent countries (measured as a percentage of GDP) is forecast to be 81.1% in 2018, coming down slightly to 79.1% in 2019. Behind this improvement is an average public-sector primary balance of 1.7% for 2018 and 1.5% for 2019.

Debt levels are lower for the commodity exporters, at 64.9% for 2018, but the public-sector primary balance is a negative -2.5% for 2018, improving to -2.0% for 2019.

Discussing the overall position, the IMF says: “High fiscal deficits and public debt remain major vulnerabilities for the region.” However, it adds, “in some tourism-dependent economies, debt ratios are now retreating from very high levels.” It singles out Grenada (64.6% in 2019, down from 90.1% in 2015); Jamaica (97.4% in 2019, down from 121.3% in 2015); and St Kitts & Nevis (63.6% in 2019, down from 66.1% in 2015).

It is less enthusiastic about Antigua & Barbuda, with its primary deficit of -2.8% and debt-to-GDP ratio of 88.2% for 2018. It says: “In Antigua and Barbuda, there is a clear need to tighten the fiscal stance, in combination with structural reforms to bolster growth, to reduce public debt. A well-designed fiscal rule could help guide the consolidation effort and broaden support for it.”

With regard to the commodity exporters, the IMF says: “In commodity exporters such as Suriname and Trinidad and Tobago, the sudden decline in commodity prices in 2014-15 contributed to large fiscal deficits and a rapid increase in public debt. In these cases, tighter fiscal policies in the context of medium-term macroeconomic adjustment are needed to re-establish a sustainable fiscal path and ensure debt sustainability.”

Dominica struggles…

As mentioned above, Dominica is one of two main outliers in the Caribbean (the other being Guyana, see below). For Dominica, the problem was Hurricane Maria, a Category 5 hurricane which hit the island in September 2017 while it was still recovering from tropical storm Erica. Damage was estimated at US$1.3bn, or 226% of GDP. Output in 2018 is projected to fall by 14%, and it is likely to take five years for the economy to recover to pre-hurricane levels.

However, there are signs of recovery. This started in the construction and public sector and can now even be seen in tourism. Prior to Hurricane Maria, Dominica was visited by around 220 cruise ships a year. In the 2017/18 season, this fell to just 33. However, for 2018/19, the industry is predicting a total of 181 cruise ship visits, with over 300,000 passengers. On the hotels side, it is estimated that of some 960 hotel rooms on the island, over 500 are now available.

Not surprisingly, the IMF is concerned about the effect of the disaster on indebtedness. The debt-to-GDP ratio is expected to reach 87.8% this year, up from 75.3% in 2015. With this in mind, the IMF says that it recommends “containing current spending extraneous to recovery”. However, in its latest Article IV consultation, published in early September, it does add: “Given Dominica’s vulnerability to natural disasters, directors noted that investment in resilient infrastructure was appropriate, despite its higher cost.”

Looking further ahead, the IMF adds: “Once output recovers, directors recommend fiscal consolidation to sustain reconstruction while generating a primary surplus sufficient to set public debt on a downward trajectory.” Dominica’s primary deficit is likely to be -2.1% this year, rising to -2.2% in 2019.

One final point of concern for the IMF, with regard to Dominica, is financial-sector regulation, not least because it sees the vulnerabilities as having been exacerbated by Hurricane Maria. The IMF is urging Dominica to develop stronger financial-sector regulation and supervision, and to take “decisive action to reduce non-performing loans and capital shortfalls”. In its Article IV report, it also urged Dominica to strengthen its Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework, and it “welcomed the phasing out of the off-shore bank sector”.

The IMF also raised this point in its Regional Economic Outlook report with regard to the Eastern Caribbean Currency Union (ECCU). It said that, while the authorities “have made progress on reforms to strengthen bank resilience”, further steps are required, particularly on “the oversight of nonbank financial institutions and further enhancing the capital adequacy of indigenous banks”.

On AML/CFT regulations within ECCU, the IMF pointed out how important effective implementation was if the region were to regain or replace the correspondent banking arrangements which have been withdrawn due to fears over money-laundering issues.

…while Guyana plans for golden future

There are also concerns about Guyana, but they are of an entirely different nature to those hovering over the rest of the Caribbean. Guyana is now just two years away from ‘first oil’ in what is projected to be a hugely transformative bonanza. The main concern is that small, inexperienced, Guyana will suffer from the ‘resource curse’, of which neighbouring Venezuela is one of the best examples. But one this is for certain: Guyana is not short of advice on how to avoid this trap.

The latest organisation to offer its advice is the American Security Project, in a report published in early October. It highlights all the well-known pitfalls of small poor nations coming into great wealth, and it highlights the security threat posed by Venezuela and its long-standing claim to Guyanese territory. But, on a positive note, it says: “As soon as oil begins to flow in 2020, Guyana will become an energy exporter – no longer dependent upon the whims of foreign politics. With that will come new challenges like a dependence on global market prices and all the problems of the resource curse, but it also provides a great opportunity.”

In particular, the ASP highlights with approval the Guyana government’s stated commitment to “use their incoming resources to fund a clean, resilient economy”, put forward in the government’s Green State Development Strategy. The plan envisages Guyana moving to 100% renewable energy by 2025, only seven years from now.

The ASP is of the view that Guyana is “engaging in the critical, long stage process of preparing for oil resources”. But, it warns, “political pressures will increase” as the 2020 presidential election approaches. Certainly, the election will be the most important in living memory, given that the flow of oil-money after 2020 will multiply the traditional power of incumbency many times.

The size of the bonanza to come was emphasized in a recent report by the oil specialists Wood Mackenzie entitled Guyana – the richest corner of South America? According to the report, 4.5bn barrels of oil equivalent (boe) has already been found offshore. The discovery, the report estimates, “accounts for 15% of all conventional crude found globally since 2015”.

Woodmac adds, “the 10 exploration wells drilled so far have yielded eight discoveries, and 80% success rate”. Furthermore, ExxonMobil’s target of producing more than 750 thousand barrels per day (kb/d) by 2025 would represent “the fastest ever growth trajectory for a deepwater area from a standing start”.

Another plus is that the development is relatively straightforward, with water and reservoir depths of 1,500-2,000m and 5,500-6,000m respectively. The drilling conditions are benign, and existing technologies are sufficient for the task.

As a consequence, Guyana, with a population of around 750,000, “has hit the jackpot”. Woodmac says that, based on current proven and probable (2P) reserves, Guyana will benefit from lifetime revenues of US$215bn. It adds that, over the 30-year producing life, this will represent a GDP increase of US$7.2bn per year and US$9,500 per capita. Currently, Guyana’s GDP is around US$3.45bn, and its per capita GDP is US$4,582.