From CIBC-FC

Summary: The IMF notes that global economic growth accelerated to 3.8% y/y during 2017, as growth in both advanced and emerging markets picked up relative to one year earlier. Since then, economic activity in the US, Canada, and the UK continued to expand in Q1 2018, albeit at slower rates. The US Bureau of Economic Analysis estimates that real output increased at an annualised 2.0% during Q1 2018 (relative to the 2.9% expansion one quarter earlier) as greater business investment, consumer spending, exports, and government expenditure outpaced a rise in total imports. Similarly, real GDP in the UK increased 1.2% y/y compared to a 2.1% y/y expansion four quarters earlier, while Canadian output increased at a more modest 1.3% during the first quarter of 2018 after a 3.0% expansion during 2017. Meanwhile, global crude oil prices continued to trend upward and advanced 23% during H1 2018. However, notwithstanding much higher energy prices, economic activity remains subdued in Venezuela, one of the southern Caribbean’s major trading partners.

Trends in economic growth painted a mixed picture of developments in the Caribbean in 2017 and year-to-date 2018. Those markets in the Eastern Caribbean most negatively affected by Hurricanes Irma and Maria all suffered sharp declines in output in 2017 and likely experienced further contractions y/y during Q1 2018 – the most buoyant quarter for tourism in the Caribbean economic calendar. Additionally, economic developments in Venezuela continue to weigh heavily on tourism performance in the southern Caribbean, while ongoing fiscal consolidation has restricted faster economic expansion in a few others. Consequently, stay-over tourist arrivals declined approximately 0.7% y/y during 2017 compared to growth of 0.7% y/y during 2016. Arrivals declined across most markets in the Caribbean during the year, with only Barbados, Belize, Bermuda, the Cayman Islands, Grenada, Jamaica, and St. Lucia experiencing growth. Aruba and Curaçao continued to suffer from a persistent decline in visitors from Venezuela, while markets in the northern and north eastern Caribbean suffered from the lingering effects of Hurricanes Matthew, Irma, and Maria. Since then, while arrivals likely continued to fall in those markets affected by hurricanes during Q3 2017, latest available data suggest that stay-over arrivals increased in the Bahamas, Barbados, Belize, the Cayman Islands, Jamaica, Aruba, and Curaçao during the first few months of 2018. Further, construction activity has been mixed regionally as some governments struggled to maintain capital expenditure in light of required fiscal tightening. Finally, economic activity in commodity-producing markets appears to have bottomed out and has started to trend upward again.

Caribbean Market Review

Summary: Global trade concerns together with reflation and interest rate increases in the developed world have dominated market sentiment since our last publication. The US administration threats of imposing import tariffs on its closer partners and allies materialized in June, and the countries involved retaliated immediately. Not only did the Trump administration place tariffs on imports from its closest allies (Canada and Mexico), but also implemented tariffs imports from China which added to global uncertainties and the volatility in commodity prices. In this environment, emerging market credits continued to face downward pressures as investors looked for safe havens and the era of extremely low interest rates in developed markets appears to have reached its end.

In the Caribbean and Central America, all credits, with the exception of COSTAR, widened since our last publication. Of course, the main story in the region was the debt restructuring announced in Barbados, where the new government found the fiscal accounts and debt numbers in a much more precarious state than originally estimated. DOMREP and PANAMA held up relatively well to global uncertainties. However, the recent 10Y US$1.3bln issue prompted some selling in the belly of the DOMREP curve. In Panama, we expect the steep deceleration in growth in Q1 and Q2 and the start of the 2019 presidential race to put downward pressure on the credit in H2 2018. Signs of political cooperation in ELSALV and COSTAR provided a boost to both credits earlier in the year and to some extent in Q2 2018. Nevertheless, we expect this sentiment to diminish into the second half of the year as both countries negotiate issuance to cover their financial needs for the next four years. Moreover, we expect the presidential race to add uncertainty to ELSAV. Looking at COSTAR, political capital has already been spent on measures to reduce the fiscal deficit this year, and suggested adjustment is likely to prove insufficient.

BARBAD was the worst performing credit since our last publication. The newly elected PM announced on June 1 that the government would seek a full debt restructuring as fiscal numbers were much worse than estimated. The government has asked the IMF for assistance and discussions are underway. Although a set of initial measures to reduce the fiscal issue have been proposed, agreement on an IMF program would ultimately depend on putting the complete set of fiscal measures in place and completing restructuring negotiations with investors in domestic and external debt markets.

PANAMA remained flat on average since our last publication while DOMREP widened 31bps on average during the last quarter. The acceleration in growth experienced in Q1’s and Q2’s leading indicators have maintained DOMREP as one of the darlings in the region, despite the issuance of US$1.3bln on July 12. On the other hand, we expect the strike endured by Panama in May together with the deceleration in growth in Q1 to take a toll on the PANAMA curve, especially as uncertainty increases with the start of the 2019 presidential race.

Fiscal restraint measures in Costa Rica are likely to prove insufficient, despite the willingness of the new government to discuss new fiscal measures. In our opinion, we are unlikely to see significant progress on top of the already announced fiscal measures amounting to around 2.0% of GDP in the most optimistic scenario. Hence, we do not see room for further improvement in the COSTAR curve in the short-term. In El Salvador, despite signs of political cooperation since the election of the new Congress in March, we see volatility returning as Congress prepares to discuss the approval of debt issuance to roll-over debt maturing in the next four years. We expect Congress to agree on the approval of at least US$1.1bln for next year. However, financing risks for subsequent years are likely to remain in place as 2019 budget discussions begin in Q4 2018 and the presidential race intensifies.