From CIBC FirstCaribbean

Caribbean Economic Overview

Summary: Russia’s invasion of Ukraine interrupted the global economy’s rebound from the collapse triggered by the COVID-19 pandemic. Following a solid resurgence of productive activity in 2021, the fall-out from the war has exacerbated already stressed supply chains, aggravating the damage to world trade and spawning far reaching consequences for inflation and economic growth across the globe. The slump in exports from both Russia and Ukraine – as major suppliers of oil and gas, wheat and other primary goods – has intensified the surge in international commodity prices generating the largest shock since the 1970’s. Specifically, the price of WTI crude oil rose 43.1% since December 2021 to US$108/barrel at the end of June 2022 but peaked at US$124/barrel in March, while the IMF’s international food price index climbed 14.3% year-to-date at the end of June. Accordingly, inflation rates in several large economies, including the US and the UK barreled past 9.0% in June, and global central banks have sharply increased benchmark interest rates with efforts squarely focused on battling the tenacious inflation. However, the resultant suppression of consumer demand increases the likelihood of a global recession and has recently sparked fears of stagflation. Already, real GDP in the US declined 0.4% q/q in Q1 2022, while output growth in the UK and Canada both slowed to 0.8% q/q. 

Economic activity in the Caribbean opened 2022 at a drastically different position relative to its major trading partners, where output largely returned to pre-pandemic levels by the end of 2021. Even though most markets in the region regained some of the output lost, 2021 recoveries were generally mild due to prolonged pandemic restrictions, a limited tourism rebound and operational challenges with commodity production. Against this background, several markets posted a strengthening recovery in Q1 2022 largely bolstered by an upsurge in tourist arrivals credited to improved capacity and demand, as well as increased output in related sectors. Stay-over arrivals to the region expanded 236% y/y in Q1 2022 reaching near 70% of the corresponding 2019 level, and reflecting a turnaround from all major source markets, while cruise passenger activity continued to build on the modest gains registered in the second half of 2021, but capacity restrictions on vessels kept arrivals significantly below pre-pandemic levels. The improvement in hospitality services coupled with an uptick domestic demand due to the removal of restrictions also spurred increased activity in the distribution, transport and business services sectors. However, preliminary indicators for Trinidad and Tobago suggest a mixed performance in Q1 2022 as oil production registered an uptick but most other categories of energy production slipped, and non-energy output displayed signs of weakening. Meanwhile, Guyana’s non-oil economy expanded y/y in Q1 2022, but oil production fell marginally y/y due to planned maintenance work.

Inflation rates in the Caribbean also spiralled higher reflecting the region’s heavy reliance on imported goods. Global price pressures pushed regional consumer prices (excluding Suriname) higher by 6.0% y/y in March 2022, relative to a 1.2% y/y uptick one year earlier with all markets posting accelerated growth. Most categories of domestic prices recorded increases, but the food, fuel, housing, utilities and transport sectors in particular, posted steep inclines. In response to the soaring inflation and rising inflation expectations, the Bank of Jamaica (BOJ) increased its policy interest rate on the seventh occasion since September 2021, to reach 5.50% effective 30 June 2022.

Rebounding revenue collections associated with the ongoing economic recoveries in tandem with the waning of COVID-19 related transfers to public entities and individuals led to improved fiscal positions for most markets. Further, the rise in international and domestic prices led to a tax revenue windfall for several markets, with a few implementing temporary targeted measures to shield consumers from the full burden of pass-through. However, most regional Governments still possess limited fiscal space to allow for a broad-based response to rising international commodity prices. Further, on top of a sharp increase in public debt in the wake of the pandemic, the ongoing monetary tightening in key advanced markets implies higher interest costs on floating rate debt held by regional Governments. The Bahamas Government recently leveraged a US$200mln guarantee from the Inter-American Development Bank to secure US$385mln on the international capital market in June, but gross financing requirements suggest financing risk remains elevated for FY2022/23. However, higher energy prices boosted energy receipts in Trinidad and Tobago, spawning a turnaround in its fiscal position and prompting Standard and Poor’s to revise its outlook from ‘negative’ to ‘stable’ in anticipation of faster than expected fiscal consolidation and stabilization of debt ratios. Meanwhile, despite having no immediate need, the Cayman Islands Government opted to draw the remainder of a loan secured in December 2020 from a consortium of local banks, citing the favourable interest rate that was set to expire in June. The proceeds have been invested in US securities until required to finance upcoming capital programmes.

After expanding in 2021 owing to significant external borrowing and/or the IMF Allocation of Special Drawing Rights (SDRs) in August, FX reserves in most markets slipped year-to-date but remained at adequate levels. Tourism receipts have started to rebuild, but the recovery of import volumes coupled with rising import prices placed pressure on the reserve balances and import cover. However, additional FX borrowing by the Government led to a sharp increase in The Bahamas year-to-date. Despite the upswing in economic activity, credit extended by banks in the region generally remained lackluster in Q1 2022, but expanded in a few markets including Belize, Jamaica and the Eastern Caribbean Currency Union. However, deposit balances climbed higher preserving the elevated excess liquidity positions of most markets, while banks’ asset quality and profitably improved in all but a few.

In July, the IMF revised upward its global inflation projections due to the quickening pace of rising food and energy prices and revised downward its projections for global economic growth reflecting the greater than expected direct and spill-over effects from the war in the Ukraine, a worse than anticipated slow-down in China, and the aggressive monetary policy tightening in advanced economies. Specifically, the IMF revised downward its projection for world real GDP growth by 0.4 and 0.7 percentage points to 3.2% and 2.9% in 2022 and 2023, respectively, relative to its April outlook. Further, while the recent deal between Russia and Ukraine around grain exports is encouraging, uncertainty in food and energy markets remain very high, tipping risks to the outlook disproportionately to the downside. Meanwhile, economic activity in the Caribbean will likely continue to rebound in 2022 but the global headwinds increase uncertainty with the pace of expected recoveries. Slower growth and rising prices in the region’s key source markets could delay the return of tourism output to pre-pandemic levels, while spiralling domestic inflation could dampen domestic consumption and postpone investment in capital projects. Regional Governments’ fiscal balances will likely improve further, as revenue collections continue to rebound in line with economic recoveries – aided by price-induced tax revenue windfalls – but will likely be tempered by higher costs of goods and services and higher interest costs on existing and new external debt. Nevertheless, the road to recovery for the region remains slippery, particularly for tourism-dependent markets with elevated public debt ratios.