Caribbean Economic Overview

Summary: Although economic activity in advanced economies accelerated modestly during Q2 2016, slower growth in Q1 2016 coincided with generally reduced external demand in Caribbean economies. Q2 2016 US and UK economic growth accelerated to 0.3% q/q and 0.6% q/q vs. 0.2% q/q and 0.4% q/q during Q1 2016, and the IMF maintained that, up until June 2016, global economic growth had generally evolved in line with its April 2016 forecasts. Further, average global crude oil prices rebounded 30.5% ytd June 2016. However, since then, heightened uncertainty surrounding the UK’s decision to leave the European Union temporarily rattled global stock markets, and has pushed the British Pound Sterling lower.

The latest data suggest less widespread improvements in economic activity during Q1 2016 as growth in stay-over tourist arrivals decelerated, and cuts to public capital expenditure restricted stronger growth in construction value-added.

Available provisional estimates suggest that since the end of 2015, economic activity improved in most markets – except Anguilla, Belize, St. Vincent and the Grenadines, and Trinidad and Tobago – while mixed sector developments in Aruba and the Bahamas suggest little to no growth in those economies.

Declines in private sector-led construction reduced growth in Anguilla and kept output flat in St Vincent and the Grenadines; while lower agriculture and fuel production reduced economic activity in Belize and Trinidad and Tobago. Regional stay-over arrivals advanced 5.1% y/y during Q1 2016 vs. a 7.0% y/y expansion during Q1 2015, with growth decelerating in 10 of 16 markets. Antigua and Barbuda, Belize, St. Maarten and Grenada recorded double-digit growth, as all but Grenada rebounded from declines in arrivals during the corresponding period in 2015.

In contrast, arrivals to the Cayman Islands, St. Kitts and Nevis, and St. Lucia all declined after moderate growth during Q1 2015. Finally, private sector construction has started to play a greater role in the economic recovery as initial, available indicators suggest that construction value-added expanded in all but four markets so far in 2016.

Caribbean Market Review

Summary: The market recovered strongly over the last quarter and Caribbean sovereign bonds did not miss the run (Chart 3). COSTAR and DOMREP continued to outperform, especially after the market absorbed the US$1 billion in the new DOMREP 6 7/8s ’26s. Certainly, a decline in worries about the US Federal Reserve’s policy normalization explains a good portion of this rally, but lower energy prices continue to help growth and fiscal accounts in addition to the balance of payments, and contributed to the decline in Caribbean yields.

The recovery in tourism continues with some countries outperforming (DOMREP a case in point), while others disappoint (Bahamas comes to mind). The heretofore decent growth numbers were significantly revised downward, contributing to the Moody’s downgrade of Bahamas that came after the government revised down 2015 growth numbers significantly. Although fiscal numbers have not improved, we think that BAHAMA will still perform. The Dominican Republic continues to defy gravity, as growth accelerated again in Q2 2016. Most were expecting a slowdown. However, newly re-elected President Danilo Medina seems to have put off fiscal reform until after a political reform passed congress.

Still, economic and fiscal fundamentals remain strong and we expect further good performance from DOMREP. Barbados’ fiscal performance slipped some more despite better economic growth, eliciting a response from the government.

This response came in the F2016/17 budget, mostly through increases in revenue. This explains the underperformance of BARBAD bonds, BARBAD ‘22s managed to tighten 28 bps with respect to US treasuries in the quarter. Jamaica continues to perform, especially after the August 11, 2016 tender offer in which the government bought 2017s and 2019s in exchange for the reopened JAMAN 8 03/15/39. Moreover, the government kept on track with its IMF program.

We have remained positive on Caribbean credits, and we are not at a point of changing our position. We do not see major obstacles to continued good performance despite the US Federal Reserve inching closer to tightening.

Hence, we would recommend buying ARUBA 4 5/8 09/14/23s, BAHAMA 6.95 11/20/29s, BARBAD 7 08/04/21s, BERMUD 5.603 07/20/20, BERMUD 4.854 02/06/24s, CAYMAN 5.95 11/24/19, new DOMREP 6 7/8 01/29/26, and JAMAN 7 5/8 10/17/25. Costa Rica’s economic growth accelerated and the government talks with congress for the approval of the much awaited value-added tax (VAT) and income tax bills and expenditure cuts have shown some progress. Hence, we favour flatteners in the COSTAR curve.