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
Economic developments in the Caribbean’s major international trading partners continued to vary throughout the first three quarters of 2017. US GDP growth recovered from its weak performance in Q1 2017, and positive performances in household consumption, business investment and exports expanded output by annualised rates of 3.1% and 3.0% in Q2 2017 and Q3 2017 compared to 1.4% during January to March 2017. Meanwhile, the IMF reported that annualised growth in Canadian output accelerated during the first half of the year and reached 4.5% y/y in Q2 2017 – the strongest quarterly growth rate recorded in six years. Further, UK output rose 0.4% q/q during Q3 2017, 0.1 percentage points faster than in Q2 2017 and the same pace of expansion during Q3 2016. Additionally, while WTI crude oil prices have trended upward since June 2017 to almost US$60 per barrel, economic growth in Venezuela – one of the southern Caribbean’s major trading partners – remains challenged. Finally, the passages of Hurricanes Harvey, Irma, and Maria likely materially affected economic developments in the USA during Q4 2017.
Consequently, trends in economic activity in the Caribbean thus far during 2017 have reflected the net effects of developments in advanced economies, damage inflicted by natural disasters, and ongoing fiscal consolidation. While real GDP likely increased in most of the Caribbean’s markets year to date, economic growth weakened or remained subdued in many markets. Tourism – the Caribbean’s major source of foreign exchange inflows and economic growth – recorded mixed performances across many markets as a slowdown in stay-over arrivals offset greater cruise arrivals across many markets. Stay-over arrivals declined 0.4% y/y during H1 2017 compared to a 3.3% y/y rise in arrivals during H1 2016 as arrivals declined in almost half of our markets. Specifically, arrivals to the Bahamas, and Aruba and Curaçao – which together accounted for approximately 35% of our sample’s arrivals in 2016 – declined on account of the lingering effects of Hurricane Matthew and fewer arrivals from Venezuela respectively. Additionally, arrivals from the UK (where the GBPUSD remains below pre-BREXIT vote levels) to Barbados and the Organisation of Eastern Caribbean States (OECS) – markets that rely heavily on British tourists – either remained flat (as in Barbados) or declined (in the OECS). In contrast, visitors from North America continue to support greater arrivals across the region. Further, construction activity continued to contribute positively to economic growth, but reductions in public capital expenditure in almost 50% of markets limited greater expansions during the period. Finally, while rising commodity prices and/or production appear to be slowly improving economic fortunes in commodity producers, damage to infrastructure and crops inflicted during the passage of Hurricanes Irma and Maria likely reduced economic activity in the affected markets during H2 2017.
Caribbean Market Review
Emerging market credits maintained a positive trend since our last publication despite specific volatility events (i.e. US debt ceiling, tax reform, North Korea, Fed chair nomination). Following a similar path to the one experienced for most of 2017, the development of such events had only a short life cycle with EM credits returning to their previous trend in a matter of days. In the case of the Caribbean and Central American region, most credits exhibited a positive performance. Credits with improving fiscal balances and/or with government policy moving towards that direction, as in previous quarters, benefited the most from such environment. Despite the overall trend mimicking what we experienced earlier in 2017, the market seems to have moved away from the stars (i.e. PANAMA, DOMREP) of the region as positive developments dried up. We think valuations of these credits remain rich, with no negative catalyst. For the rest of the year and going forward into 2018, we maintain our view of a positive environment for EM credits as the market tames expectations of aggressive rate increases in developed markets. Moreover, trends in economic activity in the Caribbean have reflected the net effects of developments in advanced economies (positive), damage inflicted by natural disasters (negative), and ongoing fiscal consolidation. Hence, although the passage of the hurricanes may have a negative impact on tourism in countries directly affected by the hurricanes in Q3 2017, we expect the reconstruction efforts to support growth in 2018.
BARBAD (up 49 bps on average) gave back some of the gain posted in Q2 2017 as the revenue measures implemented by the government were digested by the market. As expected, market participants remain concerned about the expenditure side of the fiscal equation as the government failed to address such problems once again. We do not expect an easy ride for BARBAD bonds as the elections approach. BAHAMA (up 9 bps on average) also lost some ground since our last publication as the market concerns regarding fiscal deterioration increased and the government issued US$ 750 million in a 10Y bond.
As in most of 2017, JAMAN bonds benefited from significant local demand and compliance with the IMF program. Not much has changed since the beginning of the year, and technical factors aside, we remain alert to any headwind signs. On the other hand, the positive environment dominating the strong performance of DOMREP and PANAMA appears to have dissipated for the moment. Lack of positive news in DOMREP is likely to maintain interest in the credit at relatively low levels, especially as the country is set to issue US$2.1 billion in global bonds to cover its financial needs for 2018. In Panama, growth has decelerated, and we expect this trend to continue into 2018 as the positive base effects from the Canal’s expansion dissipate. Although we expect both countries to maintain their fiscal houses in order and post solid growth rates, we do not anticipate any positive surprises heading into 2018.
In Costa Rica, the government (PAC), and the PLN are still pushing for fiscal reform in the current legislative period. Nevertheless, the market remains pessimistic as the latest polls showed Alvarez Desanti’s lead over anti-establishment candidate Diego Castro narrowing ahead of the February 2018 election. With the latest numbers, we expect volatility to increase with a negative tone for the COSTAR curve as we approach the February election. As we stated in previous publications, Alvarez Desanti represents the best-case scenario for fiscal reform, given his support of a more comprehensive approach and his previous experience as head of congress, and we would expect COSTAR to outperform if we see him rebounding in future polls.
On the other side of the spectrum, with high volatility and a somewhat improving story, ELSALV bonds outperformed in the Caribbean and Central American region as concerns of another technical default subsided with the pension reform deal reached by ARENA and the FMLN at the end of September. The market has since maintained an eye on the credit as the government negotiates the approval of the 2018 Budget, and possibly longer-term financing. ARENA and the FMLN are signalling that an agreement on the 2018 budget will be reached. Nevertheless, we see long-term financial approval very difficult. Regarding a deal with the IMF, we also see it as a stretch. Despite slightly better political cooperation, we do not see room for the government and opposition to work on the IMF suggestions to raise taxes, especially during the electoral cycle. Moreover, we maintain a high level of caution on ELSALV as the US is set to discuss the renewal of the TPS in early January and could potentially leave 263,000 (4% of the country’s population) Salvadorians in a legal limbo, and disrupt remittances accounting for approximately 17.6% of GDP.