Wed | Dec 7, 2016

Column: Better times ahead for Caribbean economies

Published:Friday | March 6, 2015 | 12:00 AM

The decade has been pretty tough on the Caribbean.

After posting a growth rate of 4.2 per cent year-on-year in 2011, the region went into a tailspin. In 2012, the Caribbean's GDP growth was 2.6 per cent y/y. It slipped to 2.5 per cent y/y in 2013 and collapsed to 0.8 per cent y/y in 2014.

A combination of sluggish growth in Europe and the United States depressed tourism receipts. Soaring oil prices made the situation worse for most of the countries, since they have to import most of their energy needs.

Barbados' credit rating said it all. At the turn of the century, the island nation was rated A-. It lost its investment grade rating in 2012, and S&P has it marked B, with a negative outlook.

Fortunately, things are about to change. The collapse in oil prices, a rise in remittances, due to the reactivation of the US economy, and the resurgence in tourism, due to an increase in US disposable income, will soon translate into better times for the Caribbean.

Countries on the mend

The economic situation is already on the mend in Barbados, which grew about 0.3 per cent y/y in 2014 after no growth the year before.

But, no one reflects the improvement in the external environment better than Jamaica. The decline in oil prices are expected to trim more than a billion dollars, or more than eight per cent of GDP, off the current-account deficit. The Government is looking at legislation which may breathe new life into the economy, no pun intended.

Kingston is considering legalising marijuana. Although the narcotic may appear to be bountiful and legal, the move would open the country to new forms of tourism and foreign investment.

Pharmaceutical companies have been rushing to Uruguay to develop various strains of the plant for medical use. However, the long history of marijuana and enormous diversity of plants in Jamaica, as well as its close proximity to the US and Europe, could make the country the more attractive destination.

Signs of prosperity are reappearing in Kingston, with a fleet of new cars on the road and building developments cluttering the skyline. After two years of recession, the Jamaican economy grew 0.6 per cent y/y in 2014, and it is poised to expand more than 1.5 per cent y/y in 2015. The fiscal consolidation programme has stabilised the country's prodigious debt load. Not only are lower oil prices improving the country's external accounts, it is giving a large boost to the economy. At the end of last year, S&P changed the country's rating outlook to positive. It was the only upgrade in a sea of downgrades across the emerging world.

The Dominican Republic is another country on the mend. GDP growth in 2014 jumped 7.1 per cent and it is forecast at 5 per cent y/y in 2015.

Dom Rep's debt-to-GDP ratio declined below 50 per cent, and the fiscal deficit is slated to drop to two per cent of GDP in 2015 - after reporting a shortfall of 3.1 per cent of GDP in 2014. This will be the lowest fiscal deficit in more than six years.

In addition to the benefits produced by the decline in oil prices, the accelerating US economy is producing a windfall in remittances. International reserves increased US$5 billion in 2014, and they are poised to go higher as the oil slump continues into the year.

The healthy state of the Dominican Republic allowed it to pay back almost half of the $4.1 billion it owed for PetroCaribe oil.

Cuba rehabilitation

If things look good now, they will look even better when Cuba rehabilitates itself with the international financial community. A spotlight will shine on the Caribbean Basin, and investors will flock to the well-established islands, such as the Dominican Republic, Jamaica and Barbados.

Yet, not all of the region's countries are on the same trajectory. Trinidad & Tobago is the exception, since it is a major oil and gas producer. The decline in oil prices will trim approximately five per cent of GDP off its current-account surplus.

Prime Minister Kamla Persad-Bissessar announced that the government was going to face a shortfall of US$1.2 billion due to the decline in oil and gas royalties.

Part of the damage was mitigated by the fact that gasolene prices in Trinidad are now higher than in parts of the US. In an effort to balance the books, the government cancelled some infrastructure projects and reduced its budget assumption for oil to US$40 per barrel from US$85 per barrel.

Some corporate bonds have been hit by the slump. However, Trinidad is the best managed economy in the Caribbean, and it should easily weather the storm. The decline should be used as a window of opportunity.

Nevertheless, the general impact from the decline in oil prices and the resurgence of the US economy has been wildly positive for the Caribbean Basin.

• Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com