Caribbean Market Overview
Dear valued clients,
Please find attached the latest edition of the Caribbean Market Overview. We hope you find this publication useful, and as always, we look forward to your feedback. We encourage you to contact your relationship manager if you have any queries.
Caribbean Economic Overview
In its World Economic Outlook released in January 2019, the IMF estimates that global growth slowed to 3.7% y/y in 2018 (down from 3.8% in 2017), as Q3 growth in some advanced and emerging market economies underperformed relative to expectations. Specifically, economic growth slowed in two of the Caribbean’s three major trading partners. The US Bureau of Economic Analysis estimates that Q3 annualized real GDP growth decelerated to 3.4% (down from 4.2% in Q2), primarily on account of a downturn in exports and a slowdown in non-residential fixed investment and personal consumption. Similarly, Canada’s real GDP grew at an annualized rate of 2.0% during Q3 (down from 2.9% in Q2), reflecting slower growth in household spending coupled with a decline in housing investment and business gross fixed capital formation. However, an expansion in household consumption post the weather-related disruption earlier in the year accelerated the UK’s GDP to 1.5% y/y in Q3 (up from 1.2% in Q2). Meanwhile, the economic crisis in Venezuela deepened during 2018. The upward trend in global crude oil prices continued through to September 2018 (up 40.7% y/y), but declined sharply thereafter reflecting the softening global demand, continued geopolitical tensions, and supply factors. These factors contributed to a 14.4% y/y decline in the average price of WTI crude oil during December 2018. However, natural gas prices continued to trend upward with the price of Henry Hub natural gas advancing 43.3% y/y during 2018.
Economic growth in the Caribbean generally sustained previous trends, with increases in growth stemming mainly from tourism (primarily US-based) and/or reconstruction in most tourism-dependent economies, as well as higher commodity production in some commodity producers. Real GDP likely expanded in all but six markets. Growth in Anguilla, Dominica and Sint. Maarten continued to suffer from the impact of the devastation of Hurricanes Irma and Maria, each recording greater than 35% y/y declines in stay-over arrivals. While overall arrivals to Curaçao recovered, the ongoing crisis in Venezuela (one of the island’s main trading partners) continued to negatively affect economic growth. Barbados and Bermuda also recorded declines. Under the current fiscal adjustment programme, tourism gains in Barbados were insufficient to offset the fall-off in all other economic sectors, and economic activity returned to normal levels in Bermuda after hosting the 35th America Cup in 2017. Further, despite growth in the number of long-stay arrivals, tourism output was constrained by reduced length-of-stay for Curaçao, Barbados, Bermuda, and Jamaica. An uptick in construction activity related to reconstruction efforts and tourism-related investments contributed to regional growth, particularly in Antigua and Barbuda, Dominica, Cayman Islands, Grenada, St. Kitts and Nevis, and Sint. Maarten. Finally, while energy output boosted Trinidad and Tobago’s GDP during H1 2018, the Q3 performance slowed economic growth for the year-to-date.
Fiscal consolidation efforts across the region appear to have gained root, with improved fiscal balances being recorded in all but four markets. However in most instances, fiscal prudence remains a major priority for the medium term to ensure debt sustainability. In Antigua and Barbuda and Dominica, fiscal balances deteriorated due to lower Citizenship by Investment (CBI) flows and higher capital spending, primarily for reconstruction efforts. In contrast, CBI flows in St. Lucia and St. Kitts and Nevis substantially improved non-tax revenues, the latter experiencing a doubling of its fiscal surplus due to flows associated with the CBI programme’s Hurricane Relief Fund. Barbados’ fiscal deficit improved to a small surplus over the period, with progress towards achieving the targets under the recently approved EFF programme with the IMF.
Caribbean Market Review
Emerging market credits benefitted from a quick change in investor sentiment, as ambiguous Fed signals in December prompted the market to diminish expectations of one to two rate hikes in 2019 to almost zero. Moreover, difficult Brexit discussions in Europe pushed the breaks on expectations of a gradual tightening cycle on that side of the world. This situation provided an excellent environment not only for stocks, but also for emerging market credits in January, prompting a new round of issuance during the first weeks of 2019.
In line with the diminished expectation of monetary tightening around the world, the Caribbean and Central America enjoyed an impressive rally since our last publication, with most of the positive moves concentrated in January. Without a doubt the outperformer of the region was ELSALV, as the 2019 budget and financing discussions reached a positive outcome in December, limiting the uncertainties behind the presidential race in the short term. DOMREP and PANAMA also took advantage of the favorable conditions, as both countries maintained their house in order with growth rates well above the regional average and low fiscal deficits. JAMAN maintained its strong performance as locals continued to support the curve and Fitch upgraded its credit rating to B+. On the other side of the spectrum, COSTAR continued to lag credits in the region as fiscal concerns remained in place, despite the approval of the fiscal reform late in 2018.
In El Salvador, despite Bukele’s victory and the return of complicated dynamics to congress, we do not expect this outcome to significantly impact asset prices in the short term as the uncertainties regarding 2019 debt issuance and budget approval are now out of the way. With this result, we expect the GANA party to start looking for alliances in congress, especially with FMLN as it tries to obtain the veto power against ARENA’s coalition holding 49 out of the 84 seats in congress. If this occurs, we are likely to see the return of slow budget and debt issuance approval discussions into next year, but also expect ARENA to keep GANA and the FMLN in check, preventing them from implementing measures that could put the fiscal account in further jeopardy, hence maintaining the status quo.
DOMREP tightened -50bps on average since our last publication, driven by spectacular growth in 2018 and favourable external conditions. For 2019, we expect the Dominican Republic to maintain a solid growth pace and to take advantage of favourable financing conditions early this year. The government will need to finance DOP231.8bln (US$4.6bln), including DOP75.5bln for budgetary purposes and DOP156.4bln to meet amortizations during 2019. Moreover, from the debt issuance approval granted in late 2018, we know that the government could issue up to DOP190bln in bonds and the remaining DOP40bln should come from loans with international organizations; hence, maintaining the same ratio of external vs internal sources of funding as per the 2019 Budget. We expect to see around US$2.6bln in external issuance this year.
Fitch upgraded JAMAN to B+ (stable outlook) with little impact on prices, as it was already trading in line with credits three notches higher. Fitch cited a record of large primary surpluses that has cut general government debt/GDP significantly. Moreover, they argued that there is cross-party support for the economic reforms that began with the IMF program six years ago and that they expect this would be maintained when the current stand-by arrangement ends in November 2019.
In Costa Rica, S&P, Moody’s and Fitch downgraded Costa Rica’s credit rating with a negative outlook. The credit rating agencies were aligned in their view of the credit with both S&P and Fitch, and Moody’s assigning BB- and Ba3 ratings to COSTAR. All rating agencies point to the government's optimistic numbers on the actual adjustment coming from the fiscal reform which we agree on. The government seems to rely heavily on its ability to comply with the fiscal rule in the near future. Given the constitutional mandate of some of the expenditure items, this is still doubtful. More importantly, they highlight that delays in the discussions of external debt issuance could trigger further reviews. A key date to watch is the end of April, which is the government's target to achieve some progress in congress towards issuance approval.