From CIBC FirstCaribbean  CIBC World Markets Inc.

Caribbean Economic Overview

Summary: In the IMF’s latest World Economic Outlook issue of January 2018, it points to a significant y/y acceleration in world economic expansion during 2017, as 120 economies experienced some acceleration in growth over the period. Faster growth in advanced economies (up from 1.7% in 2016 to 2.3% in 2017) and emerging and developing markets (up from 4.4% to 4.7%) pushed real GDP growth 0.5 percentage points higher to 3.7%. Specifically, economic growth accelerated in two of the Caribbean’s three major trading partners, as activity in the United States of America (USA), and Canada increased by 2.3% y/y and 3.0% y/y compared to 1.5% and 1.4% in 2016, while growth remained relatively stable in the United Kingdom (UK), falling 0.2 percentage points y/y to 1.7%. Meanwhile, the prospects of stronger global economic growth, adverse weather in the USA during the latter half of the year, ongoing geopolitical tensions in the Middle East, and OPEC’s agreement to extend its cuts to oil production, pushed global crude oil prices 23.1% higher y/y in 2017. However, economic activity remains weak in Venezuela, one of the southern Caribbean’s major trading partners.

Nonetheless, despite stronger global growth, economic growth in the Caribbean in 2017 appeared to have slowed. The effects of Hurricanes Irma and Maria – two category 5 hurricanes that impacted the region during September 2017 – curtailed economic activity in the northern Caribbean, while arrivals from Venezuela and the UK have yet to rebound in those markets most heavily dependent on those countries for their source of tourism. Further, ongoing fiscal consolidation in some markets has restricted faster economic expansion. Available data suggest that while economic activity expanded in just over half of the region’s markets during 2017, growth decelerated or remained weak in many instances. Latest estimates suggest that stay-over tourist arrivals declined by at least 0.2% y/y during the first three quarters of 2017, compared to a 2.5% y/y expansion over the same period one year prior. Stay-over arrivals declined across most markets, with arrivals from the Bahamas, Aruba, and Curaçao – which together accounted for approximately 35% of our sample’s arrivals in 2016 – suffering from the effects of hurricanes (in the case of the Bahamas) and fewer visitors from Venezuela (in the case of the latter two markets). Further, since then, the effects of Hurricanes Irma and Maria likely substantially reduced arrivals to Anguilla, the British Virgin Islands, Dominica, and Sint Maarten during Q4 2017. In the rest of the Eastern Caribbean, arrivals from the UK to Barbados and the Organisation of Eastern Caribbean States (OECS) – markets that rely heavily on British tourists – fell 0.1% y/y during 2017 and 1.5% y/y year-to-date Q3 2017. Construction value added benefited from greater private sector activity across the region as government capital expenditure fell in just under half of our markets. Finally, rising commodity prices and/or a rebound in agriculture/energy production have generally supported more favourable economic outcomes in commodity-producing markets.

Caribbean Market Review

Summary: Short-lived periods of volatility in the emerging markets credit space continued, as fears of faster-than-expected reflation resurfaced in the developed world, especially in the US. Moreover, concerns regarding protectionist measures around the world continued with the US aluminum and steel tariffs announcement, which kept markets on alert to any retaliatory measures. In the case of the Caribbean and Central American region, most credits with the exception of BAHAMA and ELSALV widened in this environment. As we mentioned in our prior publication, the market had already started to move away from the stars of the region (i.e. DOMREP, PANAMA) as positive developments dried up and credit valuations remained rich. This continued during the last quarter and, in the case of DOMREP, this situation was exacerbated by the US$ 1bln issuance of 30Y bonds in February. For the rest of the year, as in previous quarters, we would focus on credits where we were starting to see an improving trend. The legislative election in El Salvador has created a positive environment in the short-term with the approval of the 2018 budget and the favourable legislative election outcome on March 4. Costa Rica, although improving on the margins as congress approved the fast-track route for the long awaited VAT and Income tax bills, still has to deal with the second round elections and a fragmented congress – an interesting story to keep track of in 2018.

BARBAD (+140bps on average) was the worst performing credit since our last publication. Sellers appeared close to the end of 2017 and the market continues to digest the flow. Moreover, with not a date set for the election, uncertainty has increased, as the market remains concerned about future fiscal adjustment measures.

PANAMA and DOMREP widened +59bps and +49bps on average during the last quarter. DOMREP positive developments dried up in 2017 in tandem with the deceleration in growth. Moreover, in February, the Dominican Republic issued a US$1bln 30Y bond at 6.5% supporting the widening of the curve as concessions were built in before the announcement. In the case of Panama, growth has remained, supported by the external side of the economy, while consumption remains sluggish. The absence of significant positive news in the pipeline, in our opinion, and its high cost relative to other credits in the region has worked against the credit. In the case of JAMAN, not much changed over the last quarter – local buying endures, although not as robust as earlier in 2017, while the country continues to comply with the IMF guidelines.

After a volatile start to the year, COSTAR gained some ground in March as the government approved the fast-track route for the much awaited VAT and Income tax bills, and Fabricio Alvarado (PRN) appointed a market friendly economic team. Nevertheless, given the volatility experienced in the two weeks prior to the first round election, we remain cautious about the credit in the short-term. We recognize that the fiscal situation has slightly improved, however, further fiscal adjustments on the expenditure side remain to be seen. We could get a clearer picture on the magnitude and pace of further adjustments close to the end of H1 2018. Of course any signals of having enough votes to proceed with fast-tracking expenditure measures would provide support for the COSTAR curve. For now, the PRN and PLN together with 31 votes would have to negotiate another 7 votes to show some advancement on this front.

With the approval of the 2018 budget and the positive outcome of the legislative elections on March 4, we expect ELSALV bonds’ positive trend to continue as the market interprets ARENA’s victory and the FMLN losing its veto power as a sign of improving government effectiveness going into 2018. If momentum carries into next year, ARENA is likely to be the first government since the civil war that could bypass any opposition veto. Nevertheless, the extension of the short-term positive environment would depend on the odds of the FMLN making a comeback and the IMF Article IV review to be released late in March. For more details please refer to our El Salvador – 2018 Legislative elections note published on March 7.