IN its April 2020 World Economic Outlook report, the International Monetary Fund (IMF) significantly downgraded its forecasts for economic growth globally. The Caribbean was not spared in the Fund’s gloomy rhetoric, with growth throughout the region slashed, particularly for countries which are highly dependent on tourism. This year is shaping up to be one of the most challenging for the region in decades, with a culmination of various factors, including the significant economic and human cost of Covid-19, expectations for an above average hurricane season and for the commodity-exporting territories, the plunge in global energy prices.
IMF revised projections: Caribbean
In its October 2019 economic outlook, the IMF projected that the region will average economic growth of 2.3 per cent in 2020, due to the tentative recovery that was predicted for the global economy. Just six months later, amid a considerably different economic landscape, the Caribbean is forecasted to record its deepest recession in five decades, projected to contract by an average of 6.5 per cent (excluding Guyana), ranging from a contraction of ten per cent in Antigua and Barbuda to 4.5 per cent in Trinidad and Tobago and St Vincent and the Grenadines.
External liquidity under pressure
The tourism sector contributes significantly to foreign exchange earnings, with visitor spend accounting for 20 per cent of total exports in the region. Widespread border closures, travel restrictions as well as the halt in the cruise ship industry will have severe implications for the region, in terms of economic activity, employment as well as the region’s capacity to earn foreign exchange. The region is highly dependent on inflows into the financial and capital account of the balance of payments, via foreign direct investment (FDI) or remittances to help finance large imbalances on the current account, due to the perennial issue of narrow export bases for many countries. However, for many commodity-importing countries of the region, lower oil prices should limit the pressure on the current account, while for the commodity-exporters, the lower prices will likely drive a deeper deficit.
Several Caribbean countries have already sought the assistance of multilateral institutions in an attempt to limit the economic and social fallout from the pandemic.
On April 28, the IMF Executive Board approved requests from Dominica, Grenada and St Lucia for emergency financial assistance to help address the challenges posed by Covid-19. The funds were requested under the Rapid Credit Facility (RCF) mechanism which provides rapid concessional financial assistance with limited conditionality to low-income countries facing an urgent balance of payments need. The shock to the tourism sector will have immediate economic consequences and with the hurricane season projected to be above average this year, balance of payment pressure will likely escalate given the region’s vulnerability to natural disasters. Barbados has also requested adjustments to its existing Extended Fund Facility (EFF). According to the IMF, up to US$2.5 billion could be made available immediately to the Caribbean region.
Risk premium increases
As the global financial market continues to experience a massive bout of risk aversion, emerging markets (EMs) bond spreads remain elevated and yields on Caribbean countries’ Eurobonds are no exception. As global economic risks increase, investors are flocking to safe haven assets, including US treasuries and gold, at the expense of riskier assets like equities and EM bonds.
The JP Morgan EMBI+ Sovereign Spread Index has widened sharply since March 2020, increasing by almost 230 basis points (bps) year to date. Yields on Caribbean Eurobonds have exhibited the same pattern as general EM spread movements.
The Government of Trinidad and Tobago (GOTT) 2024 and 2026 Eurobond yields have increased by an average of 300 bps which is also reflective of the plunge in commodity prices. Yields on government of Jamaica Eurobonds have increased by an average of 235 bps. The government of Barbados restructured Eurobonds yields were also significantly higher with the yield on the 2029 bond up by 174 bps, while the shorter tenor 2021 yield increased from 6.11 per cent at the end of January 2020 to currently around 13.6 per cent.
The higher interest rates mean that financing in the international bond market will be expensive, especially as governments are now contemplating financing options for increased expenditure amid the COVID-19 shock.
The IMF is projecting that all the Caribbean countries will rebound in 2021, all forecasted to post positive GDP growth. Major international credit rating agencies have already adjusted sovereign credit ratings in the region based on the significant fallout that the pandemic will have on the tourism sector.
Of the 11 Caribbean sovereigns rated by Standard and Poor’s, three were downgraded, while four countries’ credit rating outlook was revised to negative. Unfortunately in this unique situation, the Caribbean is compelled to wait for a rebound in the global economy.
Until such time, risks may continue to rise in the short term.