On Tuesday April 8, 2014, the International Monetary Fund (IMF) released its World Economic Outlook (WEO). From the discussions, the IMF believes that the global economy will be supported by the stronger performance of the advanced economies, particularly that of the United States.
Expectations for an improved economic outturn in the United States is likely to outstrip the weakness in some of the emerging markets, such as some of the infamous BRIC economies as well as weakness in Japan and Europe. Overall World Output growth of 3.6 per cent is projected for 2014, further increasing to 3.9 per cent in 2015 from 2013’s growth of 3.0 per cent.
Indeed, expectations for the emerging market and developing economies are muted, when compared to previous years, with growth of 4.9 per cent forecasted for 2014 and 5.3 per cent for 2015. In 2012, output in these economies was registered at 5.0 per cent.
Economic activity in the Latin American and Caribbean (LAC) region is expected to remain subdued in 2014 and 2015, constrained by lower commodity prices, tighter financial conditions and supply bottlenecks in some countries. The IMF also noted that growth in the Caribbean region remains inhibited by high indebtedness as well as weak competitiveness.
The LAC region is forecasted to post growth of 2.5 per cent in 2014 from an estimated 2.75 per cent in 2013. Within the Latin American region, performances will be mixed, with expectations for Mexico on the optimistic side due to the country’s ongoing reforms in the energy and telecommunications sectors, which will boost medium-to-long term economic prospects.
Colombia, Peru and Chile are also expected to experience an uptick in economic growth because of fairly strong domestic consumption underpinned by low jobless rates as well as solid growth in real wages. On the flipside, Brazil is expected to remain in “low gear” with growth projected to slow to 1.8 per cent in 2014 from 2.3 per cent in 2013.
The Brazilian Central Bank in April decided to end its monetary tightening cycle in an effort to shift policy from tempering inflation to boosting economic growth as private investment remains weak. Argentina and Venezuela are both expected to underperform as “loose macroeconomic policies have generated high inflation and a drain on foreign exchange reserves.”
Growth in the Caribbean region is forecasted to increase to 3.3 per cent in 2014 from an estimated 2.8 per cent in 2013. The improved prospects are related to the expected improvement in the external economy and its impact upon the tourism-dependent economies in the region. However, the restrained expectations for the Caribbean are linked to the fiscal inflexibility, which many governments face. Indeed, the region continues to grapple with weak fiscal accounts as well as the associated high and rising public sector debt.
In 2012, tourism-dependent Caribbean countries had an average public sector gross debt of 87.4 per cent of GDP while the commodity exporters’ average was significantly lower at 50.9 per cent of GDP. Grenada and Jamaica recorded a ratio of over 100 per cent of GDP (109.5 per cent and 146.1 per cent of GDP, respectively), while only three countries had a debt-to-GDP ratio of under 50 per cent.
Furthermore, interest payments on existing debt stock in the most highly indebted countries with rising debt ratios, are already in the range of 16 per cent to 41 per cent of total government revenues.
Given the challenges of the past few years for the region, in terms of poor tourist arrivals, low capital inflows (foreign direct investments, remittances, tourism receipts) and high commodity prices, governments in the region had little muscle to implement counter-cyclical fiscal policies and those countries that ramped up spending are now feeling the pressure. First Citizens Research and Analytics concurs with the IMF forecasts for a subdued economic performance in 2014.
The Caribbean region continues to face significant challenges stemming from unsustainable external positions and heavy external public debt loads. Within the past two year, several countries have had to resort to debt-restructuring exercises including St Kitts and Nevis, Jamaica and Belize.
Grenada, last year failed to service its debt obligations and has recently entered into a three-year Extended Credit Facility Arrangement with the IMF for US$21.9 million. The main objectives of the programme are to restore fiscal and debt sustainability, boost long-term growth through structural reforms and safeguard the resilience of the financial sector.
According to the IMF, “the fiscal adjustment will be complemented by a comprehensive debt restructuring, which will aim to secure meaningful debt reduction, address financing shortfalls, and put Grenada’s public debt firmly on a downward path towards the Eastern Caribbean Currency Union (ECCU) regional target of 60 percent of GDP by 2020.” Some of the risks that the Caribbean will face in the medium term are:
• Tourism sector likely to slowly recover and not to pre-crisis levels;
• With deteriorating fiscal accounts and onerous debt profiles, there exists the possibility of more credit events in more vulnerable countries. Caribbean countries have limited borrowing room and have endured difficult fiscal adjustment processes;
• Lack of monetary policy as a macroeconomic policy tool, given the fixed exchange currency regimes in place for many of the Caribbean countries;
• Exchange rate pressures due to the fixed exchange rate framework within which several countries operate, given the expectations of a slowdown in capital inflows;
• The uncertainty of the PetroCaribe— Caribbean economies are highly vulnerable to a sharp spike in energy import costs as Venezuela is beginning to signal its growing discontent with supplying much of the region with subsidised oil. If Venezuela amends the terms of or dismantles the agreement, the region’s already weak external position can come under further pressure.
Particularly for countries which maintain a fixed exchange rate: any reduction in subsidised oil will result in higher oil import bill and erosion of foreign exchange reserves. We believe that the Caribbean growth will be supported by:
• Improved external economy, which will drive export growth;
• The partial recovery of the world economy could create some space for boosting regional export volumes, exports of services (particularly tourism) and remittances receipts.