From CIBC FirstCaribbean

Caribbean Economic Overview

Summary: Increased tariffs, weakened global trade, and geopolitical tensions characterised the global economic environment in 2019. Against this backdrop, major central banks adopted more accommodative monetary policy aimed at supporting aggregate demand.  In its January 2020 World Economic Outlook, the IMF estimates that global growth decelerated from 3.6% in 2018 to 2.9% in 2019, the slowest pace since 2009, reflecting a weaker performance of both advanced economies (from 2.2% in 2018 to 1.7% in 2019) and emerging markets and developing economies (from 4.5% in 2018 to 3.7% in 2019). Among the region’s major trading partners, real GDP growth is estimated to have moderated in the US and Canada from 2.9% and 1.9% to 1.3% and 1.5%, respectively, while growth likely remained relatively stable in the UK at 1.4%. Meanwhile, oil prices averaged 10.9% lower in 2019 relative to 2018 as greater production in the US restricted the effects of production cuts by OPEC and geopolitical tensions in the Middle East. Further, even though oil prices spiked following the US military operation in Iraq in January 2020, the increase appeared to have been short-lived amid abundant supply, with the price of WTI crude oil falling 15.6% since December 2019 to US$52 per barrel by the end of January.

The slowdown of the region’s major trading partners, alongside persistent drought conditions and domestic operational difficulties, led to slower growth in about half of the region’s markets thus far in 2019. In contrast, data available to date suggest that activities related to the emerging energy sector strengthened Guyana’s economic performance, while delayed recovery from the 2017 hurricanes resulted in a stronger performance and a rebound in economic activity in Dominica and Sint Maarten, respectively. Regional tourism activity continued apace as total stay-over arrivals rose 15.8% y/y during January to September 2019, reflecting growth across all markets except Bermuda. Further, cruise passenger arrivals also expanded, but fell in those markets that received a temporary boost in 2018 due to diversions from hurricane-hit markets. Although The Bahamas recorded a robust tourism performance over the first nine months of the year, visitor arrivals in September specifically fell 12.8% y/y in the aftermath of Hurricane Dorian. Meanwhile, economic output contracted in Curacao and Trinidad and Tobago during H1 2019. Despite recent tourism gains, Curaçao’s economy remained in a prolonged recession largely due to reduced refinery activity, while the continued decline of the oil sector, disruptions to natural gas production and sluggish non-energy output reduced economic activity in Trinidad and Tobago.

Lower global energy prices and slower domestic demand constrained regional consumer price inflation during the 12 months ended September 2019. Regional consumer prices rose 1.5% y/y, a modest deceleration from 2.1% y/y one year earlier and reflecting higher prices in all markets except Belize, St. Kitts and Nevis and St. Lucia, where declines in the price of housing, utilities, gas and other fuels outweighed increases in other price categories. Further, prices accelerated y/y in Barbados only, largely attributed to the effect of drought conditions and seafood scarcity on food prices, as well as higher transportation costs.  Meanwhile, reduced energy import bills coupled with greater tourism receipts led to FX reserve accumulation in most markets. Reinsurance receipts also boosted reserves in the Bahamas, while reserves in Barbados benefitted from greater funding from international financial institutions. Conversely, large external current account deficits in Belize continued to limit FX reserves’ growth recorded at just below three months of imports of goods and services, while the downward trajectory in Trinidad and Tobago persisted to date.

Caribbean Market Review

Summary: Emerging market credits have enjoyed an impressive rally since our last publication. The resolution of the US-China phase-one negotiation, and the USMCA ratification contributed the most to this stance in late 2019 and in early January. Moreover, despite a pause in the easing cycle, the accommodative monetary policy in advanced economies is expected to provide some support for emerging market assets early this year. Nevertheless, a new downside risk for emerging markets credits appeared during the second half of January as the COVID-19 outbreak in China crowded headlines. Global growth concerns have increased since then, with commodity producers taking the largest hit as prices declined. The proactive liquidity injection in the Chinese markets have provided some relief; however, we expect global growth and trade disruption headlines to provide some volatility in the short term with commodity export countries at the largest risk.

In line with the optimism driven by trade deals, and accommodative monetary policy around the world, Central American and Caribbean bonds maintained a solid performance in Q4 2019 and early 2020, providing an ideal environment for a large round of debt issuance in the region. Hence, we saw COSTAR finally issuing US$1.2bln in new COSTAR ‘31s and tapping COSTAR ‘45s for another US$300mln. PANAMA re-opened two bond issues, PANAMA ‘53s (US$1bln) and PANAMA ‘30s (US$300mln) for a total US$1.3bln issuance, while DOMREP covered almost entirely its external financial need for 2020 with US$1bln 20Y and US$1.5bln 40Y bonds. Looking at the intrinsic developments favouring credits in the region, ELSALV was once again the outperformer as the government passed the 2020 Budget after a tax amnesty was negotiated  with ARENA amid President Bukele’s 90% approval rating, and improvements on security. Nevertheless, a recent clash with congress reversed this trend. COSTAR also saw some improvement during Q4 2019; however, this optimism has subsided in recent weeks as the government missed its 2019 fiscal targets by 0.6%-0.7% of GDP.  PANAMA’s lagged behind other credits in the region, as the credit remained expensive, while the long part of the curve absorbed further debt issuance. DOMREP was once more an underperformer as fiscal slippage continued, in line with the start of the 2020 presidential election cycle.

In COSTAR, 2019 Nominal deficit landed at 7.0% of GDP, well above the 6.2%-6.4% expected by the government and our forecast. The improvement in the revenues arising from the implementation of tax measures following the 2018 fiscal reform have yet to translate into lower fiscal deficits as Costa Rica battles a high interest expense burden (up 23.5%) and increasing capital expenditures (up 50% y/y) in line with the government’s efforts to boost sluggish growth and reduce the high unemployment rate. Moreover, despite the implementation of the fiscal rule, we have also seen an acceleration of current expenditures to 9.4% in 2019, 2.9 p.p. higher than the increase in 2018. The consolidation efforts under the fiscal reform depend on fiscal rule compliance, with the government estimating savings of 2% of GDP. We maintain our cautious bias on COSTAR and expect fiscal concerns to remain in place throughout 2020 and accentuate in 2021 as stricter expenditure rules kick in with central government debt jumping above 60% of GDP.

In Panama, the current administration’s goal to implement a considerable fiscal adjustment process remains a difficult task for the years to come as growth prospects remain below potential output. Only in 2019, forecasts were revised steeply downward from 4%-4.5% at the start of the year to end in the 3.1%-3.3% range despite the start of Minera Panama’s operations in H2 2019. Moreover, the 2020 Budget points to further restrictions on expenditures, with capital expenses dropping another 6.7%. 2020 growth forecasts by private and public entities range from 3.0%-5.5%, with the government’s estimates at the high end of the range at 5.2%. The market has remained optimistic on PANAMA with substantial demand on debt issuance despite fiscal concerns; however, we expect the curve to lose steam as growth fails to substantially pick up.

The DOMREP curve has already lagged the impressive performance of similar credits in the region, reflecting fiscal concerns amid the election cycle and the poor performance of the tourism sector. Recent polls point to PRM’s Luis Abidaner (42%-43%) leading the presidential race with a significant 11 to 15 point advantage over PLD and President Danilo Medina’s candidate,  Gonzalo Castillo (28%-31%), while former president Leonel Fernandez (16%-19%) obtained a distant third place. As of now, all seems to indicate that the country will head for a runoff election between Abidaner and Castillo in July 2020, adding to concerns of further fiscal slippage and the underperformance of the DOMREP curve.