From CIBC FirstCaribbean

Caribbean Economic Overview

Summary: The global economic slowdown became more entrenched in Q2 led by quarterly real GDP declines in the US, Russia, and China, and weakening growth in several other major economies. In addition to the humanitarian and economic toll in Ukraine and the impact of sanctions on Russia’s economic output, knock-on consequences of the war have been suffered throughout Europe via trade disruptions, higher commodity prices, and waning consumer confidence. Meanwhile, the impact of the sinking real estate market coupled with extended lockdowns due to its zero-COVID policy, weighed heavily on economic activity in China. And, at the same time, aggressive policy action by central banks to quell persistently high inflation – initiated by supply chain issues and the strong rebound in 2021 and compounded by war-induced price shocks – started to cool domestic demand in advanced economies, particularly the US, where the Federal Reserve raised its benchmark interest rate 375bps since March 2022. With fears of a potential global economic recession mounting, oil prices began to slide from mid-year highs, while food prices also declined since the implementation of the Black Sea grain agreement in July. However, latest available data suggest that inflation rates in the region’s main trading partners, remained elevated – consumer prices climbed 8.2% y/y and 10.1% y/y in the US and the UK, respectively, in September 2022. Moreover, a decision by OPEC+ in early October to slash oil production over the remainder of 2022 and 2023 coupled with vicissitudes in Russia’s commitment to the grain deal in late October threaten to reverse these trends, renewing concerns around global food supply challenges. 

Global price pressures continued to weigh heavily on domestic inflation rates in the Caribbean, indicative of the region’s heavy reliance on imports. Growth in regional consumer prices accelerated to 7.5% y/y in June 2022 compared to 2.1% y/y one year earlier with quickening evidenced across all markets. Consumers faced sharp hikes in the price of food, fuel and gas, transportation, and housing despite efforts by a few Governments to shield consumers from the full burden of pass-through. Further, dissimilar to advanced markets, monetary policy action by regional central banks generally remained muted, due to the external nature of the price shock, pre-mature recoveries of economic activity, and limited scope of some to influence interest rates due to excessive domestic liquidity. Exceptionally though, given its inflation targeting mandate, the Bank of Jamaica (BOJ) increased its policy interest rate by 600bps since September 2021, to 6.50% effective 29 September 2022.

Despite the soaring domestic consumer prices, the Caribbean’s economic recovery continued to advance following generally timid recoveries in 2021. The recovery of tourism services led the expansion supported by an accompanying pick-up transportation, wholesale and retail trade, and business services. Stay-over arrivals to the region expanded 143% y/y in the first half of 2022 reaching 78% of the corresponding 2019 level, with preliminary data for most markets suggesting a continued recovery since then. Cruise passenger activity also continued to build on the modest gains registered in the second half of 2021, but capacity restrictions on vessels kept arrivals considerably below pre-pandemic levels. Meanwhile, following a tepid Q1 performance, natural gas production appears to be turning the corner in Trinidad and Tobago, and accelerated crude oil production coupled with the lifting of all COVID-19 restrictions boosted oil and non-oil real economic activity in Guyana during the first half of 2022.

The upsurge of economic output alongside the rising price level boosted revenues, generating notable improvement in the fiscal balances of most regional Governments. However, as economies revert to a sense of normalcy, the fiscal consolidation plans of some that were shelved during the pandemic, have now become top of mind. Recently, the Barbados Government reached a staff-level agreement with the IMF on 3-year successor funding arrangement that is expected to provide access to a total of US$293mln through another Extended Fund Facility and the IMF’s new Resilience and Sustainability Trust, citing its commitment to achieving a 60% debt-to GDP ratio by FY2035/36. The Government also completed a US$150mln debt-for-nature swap in September that reduced its borrowing costs and unlocked US$50mln for marine conservation. Latest available data on Jamaica’s fiscal performance also suggest that the Government remains steadfast in its commitment to achieve its 60% debt-to-GDP target by FY2027/28. However, despite an improved fiscal performance and the engagement of Rothschild and Co. in a debt advisory capacity, Moody’s downgraded the Government of Bahamas credit rating from ‘Ba3’ to ‘B1’ in October, citing the Government’s growing liquidity risk due to tight funding options and elevated external borrowing costs. Meanwhile, despite a deteriorated non-energy fiscal deficit, higher energy prices led to an overall fiscal surplus in Trinidad and Tobago over the first nine months of FY2021/22, while the Government of Guyana’s first withdrawal from its Natural Resource Fund (NRF) in Q2 augmented current revenue, permitted increased spending, and contributed to a fiscal surplus during the first six months of 2022.

Notwithstanding the rebound of tourism inflows, recovering import volumes together with the rising price of imports placed downward pressure on external reserves and import cover year-to-date, following a sharp increase in 2020 and 2021. FX reserves of most markets declined – though they remained at adequate levels – but climbed in the Bahamas, largely owing to Government’s external borrowing. Commercial banks’ loans outstanding rose modestly over the 12 months to June 2022 as greater residential mortgages and credit to private businesses outweighed reduced public sector credit, though overall balances in a few markets continued to decline. Meanwhile, deposit growth slowed following robust growth over the last two years, but excess liquidity of most markets remained elevated, and interest rates generally sustained their downward trend. Banks’ non-performing loan ratios improved in most markets but profitability in some markets slipped.

In its October 2022 World Economic Outlook (WEO), the IMF revised upward its projections for global inflation in 2022 and 2023, and conversely, revised downward its projection for global output in 2023, while maintaining its GDP forecast for 2022, relative to its July 2022 WEO update. The IMF now expects that global inflation will accelerate from 4.7% in 2021, to 8.8% in 2022, before subsiding to 6.5% in 2023, while global real GDP will slow from 6.0% in 2021 to 3.2% in 2022, and 2.7% in 2023. Nevertheless, extreme uncertainty linked to several factors continue to muddy projections, including the ultimate impact of policies implemented to tame inflation, a potential worsening of China’s property crisis, the unknown course of the war in Ukraine and any geopolitical consequences of OPEC+ production agreements. Meanwhile, inflation rates in the Caribbean will likely climb higher over the remainder of 2022, and could remain elevated for much of 2023, reflecting the lagged pass-through of higher global commodity prices to domestic consumer prices. The region’s economic recovery is expected to advance in 2022 and 2023, as output continues to strive toward pre-pandemic levels, but the current global economic environment implies considerable downside risk associated with the outlook. In addition to the spill-over effects of slower growth and higher prices in the region’s key source markets, the relative appreciation of the US dollar coupled with the volatility of the British pound due to recent political and economic disruptions could magnify the potential fall-out for UK-dependent markets.