Download Caribbean - Scotia Capital

Spring 2016
Global Economics
Caribbean
Regional Outlook

Caribbean Economic Outlook Weighed Down by Internal Challenges & External Demand Shocks

Growth Prospects Remain Uneven Between Tourism-Reliant & Commodity-Producing Countries
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Favourable Tourism Outlook Faces Downside Risks from the Zika Virus
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Elevated Government Debt Remains an Impediment to Growth & Credit Quality Improvement
Table of Contents
Executive Summary ........................................................................ 2
Dominican Republic ........................................................................ 3
Trinidad and Tobago ....................................................................... 4
Jamaica........................................................................................... 5
The Bahamas.................................................................................. 6
Barbados......................................................................................... 7
Macroeconomic Metrics .................................................................. 8
Foreign Currency Long Term Sovereign Credit Ratings ................. 9
Caribbean Regional Outlook is available on scotiabank.com and Bloomberg at SCOT
Global Economics
Spring 2016
Caribbean
Regional Outlook
Executive Summary
Erika Cain 1.416.866.4205
[email protected]
Caribbean Economic Outlook Weighed Down by Internal Challenges & External Demand Shocks
The Caribbean economic outlook remains fragile. Growth prospects for 2016 are relatively muted and subject to considerable
downside risk given the region’s vulnerability to external demand shocks and internal challenges. Exogenous risks include the
ongoing slowdown in emerging market economies (particularly China as well as key trade partners in Latin America, such as
Brazil), weakness in commodity prices, and uncertainty surrounding the timing of US monetary tightening. Furthermore, given the
Caribbean’s reliance on tourism from Europe, the UK’s in-out referendum on its EU membership in June as well as still high
unemployment could also weigh on European sentiment and travel spending at a time when the outbreak of the Zika virus poses
a significant threat to growth in the Caribbean’s vital tourism sector. Other regional headwinds include tighter global financial
regulation, growing crime rates and security concerns, climate change and recurring weather related-challenges. After years of
regulatory pressures, the Panama Papers could have further adverse repercussions for Caribbean offshore financial centers.
Growth Prospects Remain Uneven Between Tourism-Reliant & Commodity-Producing Countries
We expect real GDP growth in the Caribbean to ease to 3¼% in 2016, after slowing to an estimated 3.9% in 2015. The overall outlook,
however, masks large divergences in growth patterns across countries. The lower-for-longer energy price outlook presents significant
difficulties for commodity-exporting economies, such as Trinidad and Tobago, which in turn will likely have adverse effects on
neighbouring trade partners. However, oil-importing nations should continue to benefit from a lower oil import bill, while the
Caribbean's tourism-dependent economies are set to get an ongoing boost from firmer outbound travel demand in key
advanced markets. Higher remittances should also provide a boost to consumer spending. Indeed, these developments have
engineered a notable improvement in Jamaica, the Bahamas, and Barbados’ external position at a time of lackluster growth and fiscal
consolidation. Subdued oil prices have also helped reduce the current account deficit in the Dominican Republic, which is expected to
remain the region’s fastest growing economy this year. Growth prospects in Jamaica, the Bahamas, and Barbados are forecast to
modestly improve, but remain muted, alongside ongoing fiscal restraint and downside risks to tourism from the spread of the Zika
virus. Meanwhile, the economic recession in Trinidad and Tobago will continue, weighed down by subdued oil and natural gas prices.
Favourable Tourism Outlook Faces Downside Risks from the Zika Virus
Growth in tourist arrivals to the Caribbean came in well above the global average in 2015, up 7% y/y to almost 29 million. According to
the Caribbean Tourism Organization, tourist arrivals rose across all major markets, including the US, Canada, Europe and South
America, and visitors spent an estimated US$30bn, up by 4.2% y/y. Cuba, the Dominican Republic, Barbados, and Trinidad and
Tobago were the top regional performers in 2015, while arrivals to Jamaica and the Bahamas increased at a more modest pace.
Looking ahead, tourist arrivals to the Caribbean are forecast to advance by 4-5% y/y in 2016. Indeed, the relative strength of the US
dollar should remain supportive of outbound travel from the US, which bodes particularly well for the Caribbean given that Americans
account for around 50% of total arrivals. The recovery in Europe, the region’s second largest source of foreign travelers, is also set to
continue at a time when subdued oil prices should remain a boon for travel demand via lower transportation cost and higher household
disposable income. Nevertheless, the mosquito-born Zika virus presents significant downside risks to the outlook. Cases of the virus
have been reported throughout much of the Caribbean and South America, which has prompted a coordinated effort by policymakers
to educate the public and try to contain the spread. It is still too early to assess whether the outbreak and travel warnings issued by the
US Center for Disease Prevention and Control will act as a major deterrent for tourism in 2016. However, given that the virus has been
linked to a wider range of birth defects/pregnancy complications, and a vaccine for use by the general public is unlikely to be available
until at least early 2018, the adverse impact of Zika on Caribbean tourist arrivals and spending could prove substantial.
Elevated Government Debt Remains an Impediment to Growth & Credit Quality Improvement
The Caribbean has become one of the most indebted regions in the world. According to the IMF, gross government debt-to-GDP
has risen to an average of roughly 75%, which is well above sustainable levels for small, open and undiversified economies. The
build-up of debt has occurred over many years as the region has struggled with the slump in tourism following the 2001 US 9/11
terrorist attacks, the 2008-09 global financial crisis and subsequent banking sector challenges, and more recently, the downturn in
oil prices. Indeed, the Caribbean economy is highly reliant on industries such as tourism, financial services and energy that are
cyclical in nature and vulnerable to external shocks and global economic fundamentals. The region’s fiscal woes have been
further exacerbated by the fact that it is geographically situated in one of the most disaster-prone areas in the world, with tropical
storms and floods estimated to cost the Caribbean 2% of GDP per year. Fiscal imbalances have also been a problem. IMF
estimates suggest that Caribbean governments have averaged a budget deficit of roughly 3½% of GDP per year since 2000,
which is forecast to improve, but remain elevated at 2¼% in 2016-17. Against this backdrop, sovereign credit ratings will likely
remain constrained. Of the countries featured in this report, credit rating agencies currently hold a “negative” outlook on Trinidad
and Tobago, the Bahamas, and Barbados, while the Dominican Republic and Jamaica are upgrade candidates. The Jamaican
government has met most of the IMF’s targets under the extended fund facility. The 11th and 12th review will be held in May.
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Global Economics
DOMINICAN REPUBLIC
Spring 2016
Caribbean
Regional Outlook
Pablo F.G. Bréard 1.416.862.3876
[email protected]
Capital Market Dynamics
Foreign Exchange ► The Dominican economy maintains a relatively stable exchange rate environment (down 2.5% versus
the US dollar over the past 12 months) despite the high volatility affecting emerging markets at large. The country’s terms of
trade received a positive boost from a sharp decline in crude oil prices, an increase in tourism activity and remittances inflows
as a result of solid employment conditions in the United States. The central bank is actively pursuing an interventionist policy
through the use of the exchange rate as an anchor to contain inflationary pressures. Net international reserves total US$5.1
billion as of March 2016.
Sovereign Debt & Credit Ratings ► The country’s sovereign debt profile remains manageable with the following credit ratings:
B1 (Moody’s), BB– (Standard and Poor’s), and B+ (Fitch). Last December, Fitch upgraded the country’s outlook to “positive” on
the back of relative solid growth and progress on fiscal consolidation. The intensification of external debt issuance aimed at
boosting international reserves has emerged, however, as an issue of concern in an election year. In line with heightened stress
and risk re-pricing in emerging market assets, the Dominican Republic’s sovereign debt spread versus equivalent US bonds
modestly widened by 125 basis points to 420 bps since June 2014. On a positive note, the prepayment of debt obligations owed
to Venezuela’s Petro Caribe at a sizable discount is seen as a structural enhancement to the country’s sovereign debt profile.
Economic Outlook
Growth ► The Dominican Republic is the fastest growing economy in the Western Hemisphere. Real GDP expanded by 7%
y/y in 2015, supported by favourable credit conditions boosting local consumption, high tourism and remittances activity, a fiscal
impulse to upgrade infrastructure, and low inflation. Looking ahead, the expected post-election fiscal adjustment combined with
US monetary policy normalization will moderate the pace of economic activity towards the potential growth rate of 4.5-5.5% in
2016/17. The construction sector has been a source of strength, expanding at double-digit rates. The project to develop a coalfired facility will help to redefine the energy matrix and reduce structural costs for business and households.
Inflation & Monetary Context ► Price stability will remain the norm in the year ahead. Supported by the exchange rate
anchor, favourable terms of trade, a reduction in the oil import bill of nearly US$1 billion, and stable labour costs, consumer
prices have remained well contained below the 4% ± 1% target. Headline inflation was 1.6% y/y in March 2016. The likelihood
of post-election tax adjustments, coupled with temporary weather-related shocks to food prices due to El Niño Southern
Oscillation episode, may fuel modest near-term price pressures. The central bank kept its policy-setting interest rate unchanged
at 5% last March.
Fiscal & Current Account Balance ► The fiscal situation presents some challenges. The non-financial public sector debt-toGDP ratio will close the year at around 35% of GDP, yet the inclusion of the electricity subsidy and debt securities issued by the
central bank might increase total public sector debt to near 50% of GDP. A fiscal adjustment through higher taxes in selected
goods and services together with lower public sector investments appears to be the likely scenario for the second half of 2016.
High labour informality (unofficially estimated to be around 50% of the total workforce) and the lack of an imminent solution to
the structural rigidities in the electricity sector remain key impediments to fiscal consolidation. The central bank estimates the
fiscal deficit to close the year at 2.3% of GDP (versus 3.4% estimated by the IMF). The current account deficit will end at 2% of
GDP in 2016.
Institutional Framework & Political Environment
Governance ► Presidential elections will take place in May 2016. The ruling Partido de la Liberación Dominicana (PLD), under
the leadership of President Danilo Medina, is positioned to win another four-year term. A socially inclusive policy framework will
remain in place. Diplomatic relations with the US remain sound given strong political (the Dominican vote) and trade (tourism
and remittances) ties. The crisis in Haiti remains an unresolved issue affecting the Hispaniola island, and a frequent source of
diplomatic tension due to the risk of disorderly migration flows. The re-establishment of diplomatic relations between the US and
Cuba is both a threat (diversion of tourism flows) and business opportunity (cultural affinities) for selected sectors of the
Dominican economy.
Financial Sector ► The banking sector continues to be systemically sound and adequately capitalized (solvency ratio at 15%).
Asset quality of deposit-taking firms (NPL ratio at 1.5%) remains healthy. Domestic credit grew at an annualized rate of 12.5%
last March. Growth-sensitive sectors retain comfortable access to local credit while a low interest rate environment abroad has
led to an increase in the securitization of domestic banks’ balance sheets. Local banks and pension funds are primary holders of
debt issued by the central bank and the National Treasury.
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Global Economics
TRINIDAD AND TOBAGO
Spring 2016
Caribbean
Regional Outlook
Erika Cain 1.416.866.4205
[email protected]
Capital Market Dynamics
Foreign Exchange ► After maintaining the Trinidad & Tobago dollar’s (TTD) quasi-fixed exchange rate of 6.3-6.4 per US dollar
(USD) for several years, the Central Bank of Trinidad and Tobago (CBTT) has allowed the TTD to weaken by roughly 3½% to
6.6 against the USD. Indeed, foreign exchange reserves have declined by over 17% since the end of 2014 to US$9.37bn in
March as policymakers have fought to defend the peg amidst the sharp downturn in global energy prices and USD strength on
the back of a bias towards monetary tightening by the Fed and supportive growth differentials. The shift towards greater
currency flexibility has eroded confidence in the exchange rate regime, prompting a coordinated effort by the government and
the CBTT to defend and stabilize the TTD. Authorities have indicated that appropriate measures will be taken to cap the
depreciation of the TTD to 7% of the rate prevailing in September 2015, which equates to 6.81 per USD. Given the country’s
relatively high level of foreign reserves/exchange buffers (import coverage is still above 10 months) and fiscal resources, we
believe this is manageable in the absence of a renewed drop in energy prices or a rise in global financial market turmoil.
Sovereign Debt & Credit Ratings ► Trinidad and Tobago’s creditworthiness has come under adverse pressure. After recently revising
its outlook to “negative”, Moody’s downgraded the country’s sovereign credit rating to “Baa3” on April 15th. Standard & Poor’s also
maintains a “negative” outlook on Trinidad and Tobago’s “A” rating, which is four notches higher than Moody’s rating. The downgrade
and less favourable outlook reflects the country’s ongoing vulnerability to sustained weakness in global energy prices, which has sharply
lowered fiscal revenues, dampened economic growth, and increased public sector debt levels. Indeed. gross government debt surged
to 58¼% of GDP in 2015, up from 52¼% in 2014, and is expected to edge modestly higher to 60% through 2017. Nevertheless, this is
still comparatively low relative to neighbouring economies in Latin American and the Caribbean, while public sector borrowing costs
remain low and debt financing is easily accessible in financial markets. The government also holds net assets of roughly US$5.7bn or
20% of GDP in the Heritage and Stabilization Fund, which it intends to draw $1.5bn from to cover part of fiscal shortfall in 2016-17.
Capital Market Dynamics
Growth ► Trinidad and Tobago’s economic outlook remains weak. After an estimated 2% contraction in 2015, real GDP is
forecast to decline by 1½% this year, weighed down by subdued energy prices, fiscal tightening, and delays in the construction
of a major petrochemicals project and production from the Starfish field. We expect a gradual recovery to materialize in 2017 as
modest improvements in energy prices, billions of dollars of investment slated for energy projects, and higher natural gas output
from the Juniper field will lift real GDP growth to around 1½%.
Inflation & Monetary Context ► Inflation will likely remain contained. After averaging 7.2% y/y in 2010-14, headline retail price
growth in Trinidad and Tobago stood at 3.4% y/y in February 2016, while core inflation has edged up slightly to 2.1% alongside the
increase in government-controlled fuel prices. We expect annual average headline inflation to hover around 4½% in 2016-17 as tax
reforms and modest gains in commodity prices feed through to prices. The CBTT paused its monetary tightening cycle in January,
holding its benchmark repo rate at 4.75%, after announcing eight consecutive hikes since September 2014. However, policymakers
are expected to resume a gradual pace of tightening later this year in order to mitigate adverse capital flows and stabilize interestrate differentials with the US as Fed monetary normalization continues. The CBTT’s repo rate will likely end 2016 at 5.25%.
Fiscal & Current Account Balance ► Elevated budget deficits will spur ongoing fiscal consolidation. The sharp decline in oil and
gas export prices is expected to continue to weigh heavily on the government's energy revenues, which are forecast to account
for less than 20% of total revenues this year, down from roughly 45% in 2014. In order to offset this shortfall, the government
plans to reduce its operational expenditure by 7%, widen its the tax base, cut fuel subsidies, dramatically reduce program
spending, and boost one-off capital revenues from extra-ordinary income/the divestment of stated owned assets (including the
sale of Clico assets and shares in Republic Bank, as well as dividends from NGC). As such, after nearly doubling its original
deficit target in FY2015 at 3.9% of GDP, the government intends to lower its budget deficit to 2.5-3% in FY2016, which could
prove optimistic. The IMF estimates that gross government debt will come in at 10% of GDP this year. Due to low energy prices,
the country’s current account surplus will remain very low by historical standards, at 1¼% of GDP in 2016 and 1¾% in 2017.
Institutional Framework & Political Environment
Governance ► The People's National Movement (PNM), led by Prime Minister Keith Rowley, won the September election with
23 of 41 seats in Parliament. The new government is committed to fiscal consolidation, boosting non-energy sources of growth,
reducing corruption/crime, and addressing shortcomings in economic data and revenue collection.
Financial Sector ► The banking sector remains well-capitalized and highly liquid. The Tier 1 capital ratio stood at 20.5% of risk
weighted assets in September 2015, while commercial banks nonperforming loans have declined to 3.5% from a peak of 7.5% in
September 2011. However, muted growth prospects and monetary tightening will likely contribute to the deceleration in lending growth.
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Spring 2016
Global Economics
Caribbean
Regional Outlook
JAMAICA
Erika Cain 1.416.866.4205
[email protected]
Tuuli McCully 65.6305.8313
[email protected]
Capital Market Dynamics
Foreign Exchange ► After losing nearly 30% of its value since 2012, the Jamaican dollar (JMD) is expected to maintain a
defensive tone against the US dollar (USD). The value of the JMD will continue to be affected by weaker sentiment towards
emerging markets as the US Fed gradually tightens monetary conditions, as well as by investors’ perceptions regarding the
implementation of the austerity program under the four-year Extended Fund Facility (EFF) loan agreement with the IMF. We
forecast a further depreciation in the JMD from a year-end rate of 120 in 2015 to around 125 this year and 130 in 2017 per USD.
Net international reserves stood at US$2.4 billion in March, equivalent to over 5 months of import coverage.
Sovereign Debt & Credit Ratings ► Jamaica’s creditworthiness is improving as reflected by the steady decrease in the
country’s sovereign debt yield spread since mid-February. Fitch recently upgraded Jamaica's sovereign credit rating to “B” and
assigned it a “stable” outlook. The revision reflects the successful implementation of the IMF program, strengthening external
finances, and decreasing public debt. Standard & Poor’s and Moody’s rate Jamaica in the “B” (stable outlook) and
“Caa2” (positive outlook) categories, respectively. According to the IMF, the public sector debt reduction program is estimated to
lower the general government debt-to-GDP ratio to below 117% in 2017 from 124.7% in 2015. Indeed, the buyback of
PetroCaribe debt in August at a discounted face value lowered the country’s public debt ratio by 10 percentage points and will
ease the external debt repayment burden.
Economic Outlook
Growth ► There are cautious signs of economic improvement in Jamaica. Domestic demand and industrial activity indicators
show that momentum strengthened in the final months of 2015. We estimate that Jamaica’s real GDP expanded by 0.8% in
2015 and that growth will likely pick up to 1½% in 2016 and 1¾% in 2017. Consumer and business confidence is set to recover
gradually, while unemployment — still elevated at above 13% — is expected to decrease over the coming quarters, which
should translate into a pick-up in private sector demand. Public spending will remain constrained by the government’s debt
reduction efforts. A sound US consumer will support the Jamaican economy by way of increasing tourism and remittance flows.
Inflation & Monetary Context ► Lower international oil prices have contributed to reduced inflationary pressures in Jamaica.
Growth in the consumer price index has declined from an average rate of 8¼% y/y in 2014 to 3% in March 2016. We expect that
CPI inflation will stabilize over the coming months as higher food prices following last year’s drought are offset by ongoing
commodity prices weakness. CPI inflation is forecast to end the year at around 3½% y/y in 2016 and 5% in 2017. Given the
country's favourable inflation environment and smaller macroeconomic imbalances, the Bank of Jamaica will likely maintain a
cautious monetary easing bias in order to support the economic recovery. The benchmark interest rate was cut by 25 basis
points to 5.25% in August 2015 following an equivalent cut in April. Meanwhile, the central bank remains aware of the need to
continue to accumulate reserves and limit any depreciatory pressure on the Jamaican dollar.
Fiscal & Current Account Balance ► The Jamaican government remains committed to fiscal consolidation and debt
reduction. Despite campaign promises, we believe that the new government will not deviate from the austerity measures
required under the EFF loan agreement with the IMF, worth US$932 million, which expires in April 2017. The government is
forecast to register a small fiscal deficit of around 0.3% of GDP in FY2015 and FY2016. However, given a widening debtinterest bill and the new government’s promise to cut taxes, the public sector budget deficit could start to widen gradually to
0.6% of GDP in 2017 and around 1% by 2019. Nevertheless, the sizable primary surpluses of around 7% of GDP will help lower
the public debt load. Jamaica’s external position should continue to improve thanks to lower oil prices as well as higher tourism
and remittance flows. After averaging a double-digit deficit over the past decade, Jamaica’s current account deficit is forecast to
remain at around 3% of GDP this year before edging up to 3¾% in 2017 as commodity prices recover.
Institutional Framework & Political Environment
Governance ► The elections on February 25th resulted in a surprise victory for the Jamaica Labour Party (JLP), which captured
a slim majority of 32 of 63 seats in Parliament. Prime Minister Andrew Holness’ key policy priorities include promoting the
business environment, investment, private consumption and job creation as well as reducing crime. Despite campaign rhetoric,
radical shifts in fiscal policy are unlikely given the JLP’s narrow majority.
Financial Sector ► The government continues its efforts to strengthen financial sector resilience as agreed with the IMF.
Jamaica’s capital adequacy ratio stood at 14.9% in December 2015, while the non-performing loan ratio continued to improve to
4.1% of total loans, down from 5% in December 2014. Private sector credit growth also accelerated to 9.4% y/y, up from 6.6%
at end-2014.
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Global Economics
THE BAHAMAS
Spring 2016
Caribbean
Regional Outlook
Erika Cain 1.416.866.4205
[email protected]
Capital Market Dynamics
Foreign Exchange ► The Central Bank of the Bahamas (CBB) remains committed to supporting the Bahamian dollar’s (BSD)
1:1 currency peg to the US dollar (USD) by maintaining adequate foreign exchange reserves, at BSD951.8 million in February,
representing around 3 months of import coverage. Further USD strength against other Caribbean and Central American
currencies could adversely impact the country’s already weak external accounts and tourism competitiveness.
Sovereign Debt & Credit Ratings ► The Bahamas’ investment grade status continues to be supported by its reputation of
generally prudent government policies and a relatively high standard of living. The government also continues to make progress
in terms of fiscal consolidation owing to expenditure cuts and efforts to broaden its tax base. Nevertheless, the country’s
creditworthiness remains constrained by ongoing budget shortfalls, elevated external imbalances, and muted economic growth,
which is being undermined by repeated delays and pending legal disputes surrounding the country’s largest tourism
development, Baha Mar. As such, Standard & Poor’s downgraded the Bahamas sovereign credit rating to “BBB-” with a
“negative” outlook last summer. Meanwhile, expectations that Moody’s will follow suit by lowering its “Baa2” rating have risen as
the ongoing conflict between the developer and the contractor of Baha Mar is likely to delay its opening well into 2016 at a
minimum. In this challenging environment, government efforts to curb spending and address much needed energy, financial
sector and productivity-enhancing reforms will likely remain limited and progress very slowly. After more than doubling over the
past decade, general government gross debt is forecast to peak at 62¾% of GDP in 2016 and edge modestly lower thereafter—
which still compares favourably relative to many other Caribbean nations.
Economic Outlook
Growth ► Economic growth is expected to modestly improve over the coming years, but will remain subdued by persistently high
unemployment as well as elevated public and private sector debt levels. Meanwhile, the much-anticipated economic boost from
the Baha Mar resort is also set to be pushed back until at least 2017. The island’s tourism industry, which accounts for roughly
45% of GDP, faces further downside risks from concerns over the spread of the Zika virus across much of the Caribbean and
Latin America, elevated crime rates, and improved US-Cuba diplomatic relations. Nevertheless, economic activity should
continue to be supported by foreign investment in tourism-related projects and infrastructure. Tourism receipts will also likely get a
boost from stronger growth in the US and Europe at a time when low oil prices should remain a boon for consumer spending and
lower airfares. Bahamian real GDP growth is forecast to rise from 1.2% in 2015 to 1½% this year and 1¾% in 2017.
Inflation & Monetary Context ► Inflation is expected to be well contained. Consumer price pressures have eased after
surging by 2.2% y/y in January 2015 due to the introduction of the 7.5% VAT. The annual change in the retail price index stood
at 2.0% during the fourth quarter of 2015 and is forecast to remain subdued at around 1½% y/y in 2016 given the country's
relatively muted growth outlook and exposure to lower commodity prices. The CBB has kept its key discount rate unchanged at
4.5% since mid-2011. However, monetary authorities will likely begin a gradual tightening cycle later this year as the US Fed
continues to raise its target rate. We expect the CBB’s discount rate to end 2017 at around 5¼%.
Fiscal & Current Account Balance ► The Bahamas’ large fiscal and external imbalances remain concerning; although the shortfalls
should continue to narrow. Estimates suggest that the fiscal deficit has declined to 2.3% of GDP in FY2015 (July-June), down from
3.3% in the prior year, owing largely to the revenue boost from the VAT. Fiscal consolidation efforts will continue; however, the pace of
deficit reduction is set to slow amid ongoing delays in the opening of Baha Mar, increased expenditure to remedy the damages of
Hurricane Joaquin in FY2016, and the anticipated rise in government spending ahead of the 2017 election. We expect the fiscal deficit
to hover around 2% of GDP in 2016-17. The Bahamas’ current account deficit will remain sizable but should continue to narrow to
7½% of GDP by 2017 from 22% in 2014, underpinned by lower oil prices, rising tourism receipts and remittances.
Institutional Framework & Political Environment
Governance ► The Progressive Liberal Party (PLP), led by Prime Minister Perry Christie, is expected to serve a full five-year
term until the next election in May 2017. However, Mr. Christie’s leadership has come into question following the resignation of
two PLP members last June, while popular support has suffered amid subdued growth, unfavorable tax reforms and an increase
in crime. Nevertheless, the PLP’s strong majority in parliament should ensure support for the government’s policy agenda,
which includes repairing public finances while promoting the economy, and energy reforms.
Financial Sector ► Bahamian banks maintain adequate capitalization, with the Tier 1 Capital ratio at 31.9% at end-2014 or
23.4% under the Basel III framework. That said, industry performance remains constrained by weak credit demand and elevated
loan arrears, with non-performing loans at 14.8% of total loans in December. This, combined with increased international
competition and global banking standards scrutiny, will continue to hamper bank profitability.
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Global Economics
BARBADOS
Spring 2016
Caribbean
Regional Outlook
Erika Cain 1.416.866.4205
[email protected]
Capital Market Dynamics
Foreign Exchange ► The Central Bank of Barbados (CBB) is committed to maintaining the Barbadian dollar’s 2:1 fixed peg
against the US dollar (USD). Barbados’ stock of foreign currency reserves stood at USD$927 million at end-2015, which is
slightly above the minimum threshold of sustainability at three months of import coverage.
Sovereign Debt & Credit Ratings ► After a series of downgrades in 2009-14, the government’s commitment to fiscal
consolidation has kept major credit rating agencies on hold. However, given the country’s still-high fiscal deficit and rising debt
burden, as well as its high reliance on foreign tourism demand, Barbados remains highly susceptible to external shocks.
Standard & Poor’s (S&P) and Moody’s maintain a long-term sovereign credit rating of “B” and “B3”, respectively, with a
“negative” outlook. S&P assesses that there is the potential for a rating downgrade if fiscal slippage prevents planned deficit
reduction, tourism investment fails to materialize and boost growth, or there is a renewed deterioration in the sizeable current
account deficit. Gross government debt reached 106.8% of GDP in 2015 — double its 2007 level — and is forecast to stabilize
at around 107½% through 2017.
Economic Outlook
Growth ► Barbados’ economic growth is set to improve, although the outlook remains constrained by ongoing fiscal
retrenchment and elevated unemployment, at around 11⅓%. We expect Barbados’ real GDP to advance 1½% in 2016 and 2%
in 2017, up from ½% in 2015. The tourism industry should continue to drive growth, with roughly US$1 billion of hotel
investment in the pipeline over the next four years. This will be further bolstered by ongoing gains in port and airlift capacity at a
time when tourist arrivals from the US, Canada and the UK have risen sharply. While investment prospects and external
conditions appear supportive of higher tourist arrivals in 2016, increased crime and several reported cases of the Zika virus
pose downside risks to the outlook. The UK’s in-out EU referendum could also weigh on British consumer sentiment and travel
spending, which is particularly concerning for Barbados given that the UK is the island’s largest source of visitors. Still, the
recovery in the tourism sector — accounting for 10% of GDP or up to 45% if indirect spillovers are included — is forecast to
continue, which bodes well for construction, real estate and retail activity.
Inflation & Monetary Context ► Inflation remains subdued. Given the country’s position as a net importer of key commodities,
such as oil and agricultural products, consumer price pressures in Barbados have been constrained by weakness in global
commodity prices. Inflation stood at -0.2% y/y in October 2015. The headline print is expected to return to positive territory in the
months ahead as the government’s new value-added tax (VAT) increases feed through to prices. Annual inflation is estimated to
have averaged 1% y/y in 2015 and is forecast to edge up gradually to 1¼% this year and 2% in 2017 as oil prices recover and
base effects fade. The CBB will likely maintain an accommodative monetary policy stance.
Fiscal & Current Account Balance ► Barbados’ fiscal and external imbalances remain elevated, although the gap should
continue to narrow on the back of ongoing austerity and low commodity prices. Since surging to 11.0% of GDP in FY2014, a
series of corrective actions in the form of tax increases and spending cuts have helped reduce the central government’s budget
deficit to 6.7% in FY2015. This, combined with additional consolidation measures planned, including widening the VAT base,
and new taxes on casinos and mobile-telephone usage, is forecast to lower the shortfall to around 5¼% of GDP this year and
next. While this is encouraging, the deficit will remain significantly higher than pre-crisis levels. The current account deficit, at
8.9% of GDP in 2014, is estimated to narrow to 5.2% in 2015 and to 4% by 2017 thanks to subdued energy prices and higher
tourism receipts.
Institutional Framework & Political Environment
Governance ► The governing Democratic Labour Party (DLP), led by Prime Minister Freundel Stuart, is expected to remain in
office until the next election in 2018. The administration remains committed to fiscal consolidation, trade diversification, and
crime reduction, and is unlikely to face much pushback given the deeply divided opposition. Mr. Stuart has announced plans to
make Barbados a republic, with a vote to be held on whether to replace the British monarchy with an elected head of state by
November 30th.
Financial Sector ► The banking system is well-capitalized, with commercial banks’ capital adequacy ratio at 20.6% as of the
third quarter of 2015. Nevertheless, credit growth has been in negative territory since 2011, commercial banks’ nonperforming
loans ratio remains elevated at 10.8%, and tighter global regulations have dampened demand for bank services in offshore
markets. Government reforms to boost financial sector transparency should help reduce the strain, while loan growth should
start to recover alongside stronger economic growth.
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Spring 2016
Global Economics
Caribbean
Regional Outlook
Macroeconomic Metrics
Real GDP Growth (% Change)
5.5
18.0
Current Account Balance (% of GDP)
5.0
4.5
4.8
Last Decade
12.0
Last Decade
2016-17 (f)
4.0
2016-17 (f)
3.5
6.0
3.0
2.5
1.5
0.0
2.0
1.5
-3.4
-4.3
1.8
1.7
1.6
-6.0
1.0
-2.0
-7.4
0.5
0.0
0.0
Trinidad &
Tobago
1.0
Bahamas
Jamaica
Barbados
Dominican
Republic
Public Sector Fiscal Balance (% of GDP)
0.0
-12.0
Bahamas
140
-0.5
-1.0
Trinidad &
Tobago
120
Last Decade
117.8
2016-17 (f)
107.4
80
-4.0
-5.3
-5.0
60
62.6
59.5
-6.0
40
-7.0
35.5
-8.0
-9.0
Dominican
Republic
100
-3.0
-3.0
Jamaica
Gross Public Sector Debt (% of GDP)
-2.0
-2.0
Barbados
Last Decade
20
2016-17 (f)
-9.8
0
-10.0
Trinidad &
Tobago
Barbados
Dominican
Republic
Bahamas
Trinidad &
Tobago
Bahamas
Barbados
Jamaica
Central Bank Short-Term Interest Rate (%)
10
Inflation (Annual % Change)
10.0
Dominican
Republic
Jamaica
Trinidad & Tobago
9.0
Jamaica
Dominican Republic
8
Last Decade
8.0
Bahamas
2016-17 (f)
7.0
6
6.0
5.0
4
4.0
4.3
3.0
4.3
3.3
2
2.0
1.6
1.8
Source: National authorities, International Monetary Fund, Bloomberg and Scotiabank Economics. Data as of April 19, 2016.
8
Apr-16
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Trinidad &
Tobago
Oct-12
Jamaica
Apr-12
Dominican
Republic
Jan-12
Bahamas
Jul-11
Barbados
Oct-11
0
0.0
Apr-11
1.0
Spring 2016
Global Economics
Caribbean
Regional Outlook
Foreign Currency Long Term Sovereign Credit Ratings
INVESTMENT GRADE
Moody's
RATING
Aaa
EUROPE
ASIA & OCEANIA
Canada
United States
Austria (-)
Denmark
Finland (-)
Germany
Luxembourg
Netherlands
Norway
Sweden
Switzerland
Australia
New Zealand
Singapore
United Kingdom
Hong Kong (-)
France
Macau *South Korea
Aa1
Aa2
Aa3
A1
Cayman Islands
Chile
Belgium
Bermuda
Czech Republic
Mexico (-)
Peru
Baa3
Japan
Malta
RATING
AAA
AA+
Kuwait *Qatar *United Arab
Emirates *-
Saudi Arabia *-
Israel
Malaysia
Thailand
Bahamas
Colombia
Panama
Uruguay
Iceland
Italy
Spain
Kazakhstan *Philippines
Trinidad and Tobago (-)
Romania (+)
Slovenia
Turkey (-)
India (+)
Indonesia
Oman *-
AA-
A+
EUROPE
ASIA & OCEANIA
Canada
Denmark
Germany
Luxembourg
Netherlands
Norway
Sweden
Switzerland
United Kingdom (-)
Australia
Hong Kong (-)
Singapore
United States
Austria
Finland (-)
Fitch
MIDDLE EAST &
AFRICA
Belgium
France (-)
New Zealand
Chile
Czech Republic
China (-)
South Korea
Taiwan
Bermuda
Ireland
Slovakia
Japan
Kuwait
Qatar
A-
BBB-
EUROPE
ASIA & OCEANIA
AAA
Canada
United States
Denmark
Germany
Luxembourg
Netherlands
Norway
Sweden
Switzerland
Australia
Singapore
Austria
Finland
United Kingdom
Hong Kong
Belgium (-)
France
New Zealand
Kuwait
South Korea
Saudi Arabia (-)
AA
A+
Chile
A
Slovenia (+)
BBB
AMERICAS
AA-
Israel
Aruba
Mexico
Peru
Turks and Caicos
Iceland
Malta (+)
Poland (-)
Spain
Colombia (-)
Panama
Uruguay
Malaysia
Saudi Arabia
Thailand
Philippines
Italy
Romania
Bahamas (-)
India
Kazakhstan (-)
Morocco
Oman
South Africa (-)
MIDDLE EAST
& AFRICA
RATING
AA+
Trinidad and
Tobago (-)
BBB+
South Africa *-
AMERICAS
AA
A
Ireland (+)
Baa1
Baa2
China (-)
Taiwan
MIDDLE
EAST &
AFRICA
Poland
Slovakia
A2
A3
Standard & Poor's
AMERICAS
A-
Czech Republic
Slovakia
China
Taiwan (+)
Ireland
Malta
Japan
Israel
Poland
Malaysia
Iceland
Italy
Slovenia (+)
Spain
Kazakhstan
Thailand
India
Indonesia
Philippines (+)
Bahrain (-)
Morocco
South Africa
ASIA & OCEANIA
MIDDLE EAST
& AFRICA
Vietnam
Tunisia (-)
BBB+
Mexico
Peru
BBB
Colombia
Panama
BBB-
Aruba
Uruguay
Romania
Russia (-)
Turkey
RATING
AMERICAS
EUROPE
BB+
Brazil (-)
Costa Rica (-)
Hungary (+)
Portugal
Guatemala
Croatia (-)
SPECULATIVE GRADE
Moody's
RATING
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
AMERICAS
EUROPE
Costa Rica (-)
Guatemala (-)
Hungary (+)
Portugal
Russia *-
Brazil (-)
Croatia (-)
El Salvador (-)
Standard & Poor's
ASIA & OCEANIA
MIDDLE
EAST &
AFRICA
Bahrain *Morocco
Tunisia
Papua New Guinea *Sri Lanka
Vietnam
Jordan
Nicaragua
Cambodia
Lebanon (-)
Ecuador
St. Vincent and the
Grenadines (-)
Pakistan
Egypt
Cyprus
Barbados
BB-
B+
B
B-
CCC
Greece
EUROPE
ASIA & OCEANIA
Hungary
Portugal
Russia (-)
Turkey (-)
Indonesia (+)
Brazil (-)
Guatemala
Croatia (-)
Costa Rica (-)
Dominican
Republic
Cyprus (+)
El Salvador
Nicaragua
Fitch
MIDDLE EAST &
AFRICA
Bahrain
Bangladesh
Vietnam
Jordan
Papua New Guinea (-)
Sri Lanka (-)
Belize
BB
BB-
B+
Barbados (-)
Ecuador
Jamaica
CCC+
Belize
Cuba (+)
Jamaica (+)
Venezuela (-)
AMERICAS
BB+
BB
Bangladesh
Dominican Republic
RATING
B
Greece
Pakistan (+)
Egypt
Lebanon (-)
Venezuela (-)
CCC
-
CC
CC
-
C
SD
Ecuador
Jamaica
Sri Lanka (-)
Pakistan
Egypt
Lebanon (-)
CCC+
CCC-
Argentina
Cyprus (+)
B-
CCC-
Ca
Dominican
Republic (+)
El Salvador
Venezuela
Greece
C
Argentina
RD
Note : (+) positive outlook (-) negative outlook N.R. - Not Rated.
When Moody's places a rating on watch in the short-term *+ denotes possible upgrade, *- denotes possible downgrade & * denotes developing. A credit is removed from the Watchlist when the rating is upgraded, downgraded or confirmed.
Ratings as at April 2016
9
Spring 2016
Global Economics
Caribbean
Regional Outlook
CONTRIBUTORS
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1.416.862.3174
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1.416.862.3908
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