Published On: Thu, Aug 29th, 2013

RBC – Caribbean Economic Report August 2013

Interest rates and economic data move higher

RBC_August reportRecent economic indicators tell a more convincing story of sustained global growth, as discussed by RBC Economists in their August 2013 Financial Markets Monthly report— For example, the Global Composite Purchasing Managers’ Index, which averaged 52.5 for H1 2013, jumped to 54.1 in July 2013—the highest level in 15 months. But the IMF’s Managing Director Christine Lagarde has cautioned global policymakers that there should be “no rush to exit” quantitative easing or other unconventional monetary policies (UMPs), which she asserts added over 1% to global growth. Lagarde suggested that there should be greater policy coordination across countries, particularly with regard to tighter monetary policy.

Pre-crisis levels of employment remain elusive According to the International Labour Organisation’s 2013 World Of Work report, “based on current trends, employment rates across emerging and developing economies will return to pre-crisis levels in 2015; while employment rates in advanced economies will only return to the pre-crisis situation after 2017”. Global unemployment reached 5.4% before the crisis, rose to 5.9% in 2012, and is expected to reach 6% at the end of 2013. The number of unemployed persons is expected to continue rising, reaching 208 million by 2015, up from current levels around 200 million. Since the onset of the crisis, the incidence of long-term unemployment (over 12 months) has increased in over 60% of countries with data, causing high levels of discouragement, such that labour force participation rates have declined between 2007 and 2012 in over half of the countries analysed. Countries with falling labour force participation rates could by extension, report understated unemployment rates. The report lists the Dominican Republic as having employment levels in excess of the pre-crisis level, while Trinidad and Tobago and Barbados have shown improvement but remain below pre-crisis levels. Jamaica displays continued deterioration in employment levels throughout the post-crisis period.

Aruba— 2nd highest dependence on tourism globally

The IMF’s Article IV report highlighted the concentrated nature of Aruba’s economy—over 80% dependent on tourism and rising, with 60% of stop-over arrivals from the USA. Economic output remains 12% below the pre-crisis level, owing partly to the shutdown of the Valero oil refinery, and is only projected to return to pre-crisis levels in 2018. Aruba’s tourism industry has performed better than most Caribbean neighbors and market share is rising.

Bahamas— 2nd steepest decline in stop-overs regionally

According to the Caribbean Tourism Organization, January to May 2013 saw an 8.6% y-o-y decline in stop-over arrivals, but a 3.8% increase in cruise passenger arrivals to the Bahamas. Baha Mar is carded to launch in December 2014 and in its recent budget, the Government allocated USD10 million for the marketing and promotion of this resort. It is hoped that Baha Mar and Atlantis will reverse the flat / negative trend in stop-over arrivals, and would diversify the source markets away from an overdependence on US visitors (80% of total), towards more Asian travellers in particular.

Barbados— Tough medicine for severe ailments

The recently delivered budget contains tough revenue and expenditure measures aimed at reducing the fiscal deficit by BBD417 million to 2.8% of GDP over 19 months (from 9.4% in June 2013), with growth projected at 1% of GDP. The longer-term fiscal deficit goal is 2% of GDP by 2020/21. Higher solid waste, tobacco and income taxes, a new tax on commercial bank assets, and sweeping reductions in transfers and subsidies are among the many measures roposed. An international bond issue is expected soon, to bolster USD reserves. For H1 2013, stop-over tourists declined by 6.7% y-o-y.

The Cayman Islands— Population grew by 2.2% in 2012

The Economics and Statistics Office reported that the population reached 56,732 in 2012, having recorded the highest growth rate since 2008. The proportion of Caymanians stood at 56.8%, down from a recent peak of 59% in 2009. The Cayman Islands Monetary Authority’s latest statistics which cover 2011, polled roughly 7,000 regulated funds (81% of the total) with a total Net Asset Value of USD1.798 trillion (a y-o-y increase of 4%). Net Income on these funds fell from USD170 billion in 2010 to USD14 billion in 2011—a 92% decline. In H1 2013, there was a 6.2% y-o-y increase in stop-over arrivals.

Curacao and St. Maarten— FX reserves on upward trend

The Central Bank’s Official Reserves level in August 2013 maintained the upward trend in place since May, suggesting that the monetary tightening employed to stem the outflow of USD may be working. RBC estimates the current level of reserves at 2.3 months of import cover, which is still below the precautionary benchmark of 3 months however. For H1 2013, Curacao recorded a 6.4% y-o-y increase in stop-over arrivals, while St. Maarten saw growth of 1.4%.

The Dominican Republic— Policy rate steady at 4.25%

The Central Bank has not changed its policy rate since the 75bps cut to 4.25% in May 2013, as data indicate that inflation is stable, and should remain within the target 5% +/- 1%. In July 2013, inflation fell to 4.8% y-o-y, down from 4.99% y-o-y in June. The Central Bank also reported that the DOP had depreciated by 3.9% y-t-d. This could stoke inflationary pressures in the coming months, along with ongoing fiscal and monetary stimulus and credit expansion. Stop-over arrivals increased 0.8% in H1 2013 to 2.93 million visitors.

Eastern Caribbean—Deteriorating business conditions

Results of the Central Bank’s Business Outlook Survey for July-December 2013 again reveal that in each member state, economic conditions faced by businesses deteriorated in H1 2013 y-o-y. Businesses expect economic conditions to improve in H2 2013 y-o-y, however. It is worthy of note that given available data from 2009, the results of the survey consistently show that business conditions deteriorated or were worse than expected. In some cases, further deterioration was expected, but at times businesses expressed optimism that the environment will improve in the months ahead, as currently obtains.

Guyana— GYD depreciation intensifies, reserves slide

Bank of Guyana’s Net International Reserves continue to slip, falling from USD733.5 million in May 2013, to USD701.3 million in June. At the same time, the exchange rate has continued to depreciate against the USD, rising from an average selling rate of GYD205.80 in May 2013, to GYD207.43 on August 28th, 2013.

Jamaica— IMF : Overall policy implementation strong

An IMF Mission conducted the first review under the Extended Fund Facility, and reported that “all quantitative performance targets and indicative targets for end-June were met” including a fiscal outturn that beat projections. The report also stated that the economy contracted by an estimated 0.7% in FY2012/13, and deteriorated further from April to June 2013. Based on a sharp expansion in the labor force, unemployment jumped to 16.3% in April 2013. Inflation increased to 9.7% in July 2013 y-o-y.

Trinidad and Tobago— Where have all the reports gone?

Following a Mission in March 2013, the IMF’s Executive Board concluded T&T’s 2013 Article IV discussions on June 14th 2013, and the press release was disseminated on August 12th. We await the release of the full Article IV staff report however. The IMF is projecting growth of 1.5% in 2013 hinging mainly on the execution of budgeted capital spending. In the FY2012/13 budget, TTD7.5 billion was earmarked for spending on Capital and Net Lending. According to the Central Bank, TTD3.6 billion was actually spent on that category up to Q3 FY2012/13, which is almost TTD2 billion below the (pro rated) budgeted figure for that period. As a comparison, expenditure on Transfers and Subsidies reached TTD23 billion up to Q3 FY2012/13, which is TTD1.3 billion above the (pro rated) budgeted figure for that period. The level of spending on Capital up to Q3 FY2012/13 is therefore less than one-sixth the level spent on Transfers and Subsidies for the same period. The IMF advocated the “phasing-out over time of poorly-targeted and unsustainable subsidies (notably on fuels) and transfers”. The Central Bank announced changes to its inflation and policy rate reporting structure, whereby the next announcement will be released on September 27th 2013, and roughly every two months thereafter, versus the usual month-end repo report. The Government will announce its Fiscal Budget for FY2013/14 on September 9th 2013, and local government elections are constitutionally due by October 25th, 2013.

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