Caribbean economy: Hit by a triple whammy

The Economist

The small nations of the Caribbean region have been hit by a combination of consequences from the global recession: plummeting tourism receipts, lower remittances inflows and reduced income from commodity exports. With generally weak fiscal positions, most governments of the area have few tools with which to stimulate domestic demand to offset the external downturn. As a result, most of these economies will fall into recession this year, with the effects of the crisis likely to linger beyond the recovery in the US and the UK, their major trading and investment partners.
Signs of economic weakness have emerged on several fronts in recent months. Tourist arrivals are down sharply in most tourism-dependent economies, some by as much as 30% year on year. Around 70% of the Caribbean's tourists come from countries that are now in recession. Investment (and thus construction) is being hurt by lack of available financing and many large-scale projects have been suspended or cancelled.
Remittances are also falling for the first time in years, pinching foreign reserves even further. The contraction of remittances is also likely to have a knock-on effect on private consumption in most countries, with negative implications for bank lending portfolios (something already in evidence in Jamaica). The two largest economies of the non-Spanish-speaking Caribbean, Jamaica and Trinidad and Tobago, are also feeling the impact of lower international commodities prices: alumina production (a major export) has been halted in Jamaica and many downstream activities in Trinidad’s energy sector have been temporarily shuttered.
Fiscally challenged
There is very little space for fiscal manoeuvre in the region as a result of its extraordinarily high debt-to-GDP ratios. Public debt, which in late 2008 was estimated by the IMF to average around 85% of GDP (but is in many cases well over 100% of GDP), will pose a serious threat to fiscal stability in an economic environment characterised by extremely tight liquidity. Rollover risk will remain heightened as a result of low investor appetite for emerging-market debt. At the same time, current spending requirements will remain high.
In commodity-producing countries (mainly Jamaica, Trinidad and Tobago and Guyana) falling global prices will further complicate the fiscal situation. Governments will find it increasingly difficult to generate larger primary surpluses or boost GDP growth in order to maintain debt ratios at their current levels. Those countries that have not already done so will seek to introduce a value-added tax (VAT) to help offset falling revenue from trade taxes. In many countries in the region, however, resistance to expenditure cuts or tax increases will make fiscal improvements hard to achieve. This will force some governments to seek multilateral assistance. Jamaica is expected to soon approach the IMF.
Although we expect oil prices to fall in 2009 to US$40/barrel, they will remain high by historical comparison. This will sustain the cost of subsidising fuel imports and consumption in some countries, representing a further source of fiscal pressure. Further adverse fiscal effects will result from the reduction in EU price support for sugar and the phasing out of the sugar protocol by October 2009. This may push reluctant governments that have not already done so to address the need for agricultural restructuring.
Investment stalls
Investment in mining and energy will be dampened as a result of scarce global liquidity and sharp declines in commodity prices. Although we expect that gold prices will moderate in 2009-10, they will remain robust, benefiting gold producers such as Suriname and Guyana. The prospects of further large-scale investment in bauxite and onshore and offshore exploration for oil and gas in Suriname are less certain.
Oil and gas exploration in Guyana, Barbados, Jamaica and Belize could also be negatively affected by lower oil prices and tight global financing conditions. Similarly, large-scale investment in alumina in Jamaica, which would be of significant benefit to the economy, is likely to be postponed. Trinidad and Tobago will continue its push to become a centre for high-value-added chemicals and metals processing, owing to its natural-gas production and capacity for generating electricity at a comparatively low cost, but will also face the prospect of fewer large investments as a result of the global liquidity squeeze.
Caribbean: GDP forecast, select countries
% real change
2008 2009 2010
Bahamas 1.5 -1.0 --
Barbados 0.6 -1.5 --
Belize 3.6 -0.5 --
Guyana 3.0 -1.2 --
Jamaica -0.4 -3.8 0.8
Suriname 6.0 -1.5 2.0
Trinidad and Tobago 3.5 0.9 1.9
Source: EIU Country Report.
Tourism hurt by falling demand
Tourism is most obviously at risk in the current global climate, and earnings from the sector, the Caribbean’s main source of employment and foreign exchange, will fall dramatically in the 2009-10 period. As the US and UK economies suffer contractions in 2009 we anticipate a sharp drop in tourism demand; this will have negative consequences for employment, tax revenue and foreign-exchange earnings.
Following the release of data showing annual contractions in arrivals in much of the English-speaking Caribbean in 2008, the Caribbean Tourism Organisation (CTO) has predicted a decline of between 20% and 35% in arrivals for 2009. Of the countries with full-year 2008 statistics, performance was varied. In Jamaica, the number of tourists visiting the country rose by 3.9% year on year, but arrivals were down by 2.8% in the Bahamas; both countries are heavily reliant on the US market. Nonetheless, most countries showed sharp contractions in the last several months of 2008. The destinations that managed to post positive growth (such as Jamaica) did so by offering deep discounts, which will have a marked negative impact on the sector's profits.
Conditions are expected to deteriorate sharply in the coming months. A recent report from the UN Economic Commission for Latin America and the Caribbean (ECLAC) indicates the heavy toll that the global economic slowdown will have on the region's tourism earnings. According to ECLAC, around 75% of tourists that visit the English-speaking Caribbean come from economies that are now in recession.
Although fuel prices have fallen sharply from their 2008 peak, they will remain high by historical standards; this will have negative implications for both airline and cruise travel costs and will further depress tourism demand. Additionally, with global liquidity scarce, many investments in the tourism sector will be put on hold in 2009, having a further negative impact on employment.
Adding to the woes of the sector is a sharp decline in airline service from its main markets. Total airline capacity to the region is estimated to have fallen by around 10% during the final months of 2008 as airlines cut costs. The number of passenger flights to the Bahamian island of Nassau, a major US tourist destination, has been cut by 25% since the end of 2007 as demand has collapsed. American Airlines (US) has announced widespread cuts to its flight schedule as a cost-cutting measure. Jet Blue, a US-based airline, announced a new flight service to several Caribbean destinations, but this did not fully offset the losses from the cuts to American's schedule.
Higher airfares have also discouraged tourists; many airlines hedged their current oil supplies in mid-2008, when oil prices were at historic highs. In an attempt to prevent airlines from cancelling undersold flights, several governments, including those of Jamaica and the Cayman Islands, have signed revenue guarantee agreements with the airlines to maintain their existing routes.
The region: tourist arrivals, 2008
Destination Period Arrivals % change, year on year
Anguilla Jan-Aug 53,077 -10.8
Antigua-Barbuda Jan-Dec 265.841 -3.2
Aruba Jan-Jun 420,341 15.0
Bahamas Jan-Oct 1,259,189 -2.8
Barbados Jan-Dec 568,873 -1.2
Belize Jan-Dec 245,027 -2.6
Bermuda Jan-Dec 291,431 -2.9
British Virgin Islands Jan-Sep 276,730 -0.5
Cayman Islands Jan-Dec 302,879 3.9
Curaçao Jan-Sep 266,164 30.9
Grenada Jan-Dec 123,770 -4.1
Guyana Jan-May 3,859 -25.8
Jamaica Jan-Dec 1,767,271 3.9
Montserrat Jan-Dec 7,630 -5.0
Saint Lucia Jan-Dec 295,761 2.9
St Maarten Jan-Oct 397,493 3.9
St Vincent and the Grenadines Jan-Aug 60,156 -9.5
Trinidad and Tobago Jan-Jul 267,317 1.1
Source: Caribbean Tourism Organisation; Barbados Tourism Authority.
Slow political response
The response from Caribbean political leaders to the worsening global economic outlook and its impact on the region has been slow, with many heads of state appearing more concerned with domestic affairs than regional ones. A meeting of the Caribbean Community (Caricom) heads of government scheduled for January 30th-31st, which was to have followed a meeting of Caricom's Council for Finance and Planning (COFAP), was cancelled suddenly and rescheduled for mid-March. Attendance by the region's finance ministers, several of them heads of government, at the COFAP meeting was sparse. Even the prime minister of Barbados, David Thompson, who was hosting the event and also acts as minister of finance, did not attend the COFAP meeting.
Nonetheless, officials attending the meeting formed a task force charged with working expeditiously to examine ways in which Caricom member states can collectively combat the effects of the global crisis. The task force, which is chaired by the Caribbean Development Bank (CDB) and was to report to a special COFAP meeting in April, is made up of representatives from governments as well as from regional organisations. In addition to seeking collaborative solutions to issues facing the region's economies, the task force is charged with establishing a system that will continuously monitor the effects of the economic downturn on Caricom states, and identify support mechanisms and strategies for collectively approaching international financial institutions.