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
Following almost two years of robust growth, the IMF indicates that global economic activity lost momentum in latter half of 2018 amid trade tensions, declining business confidence, tightening financial conditions and higher policy uncertainty across many economies. Consequently, the IMF estimates that global growth decelerated to 3.6% during 2018, 0.2 percentage points lower than 2017. While this pattern was generally broad-based among advanced economies, the US was an exception as growth remained strong overall for 2018 despite the softening from Q3 2018. Specifically, real GDP growth in Canada and the UK slowed to 1.5% (down from 1.8% in 2017) and 1.2% (down from 1.4% in 2017), respectively, with the latter primarily reflecting the prolonged uncertainty surrounding Brexit negotiations. However, the US Bureau of Economic Analysis estimates that 2018 real GDP growth accelerated to 2.9% (up from 2.2% in 2017), due to broad-based improvements across the private and government sectors. Meanwhile, Venezuela’s economic crisis continued to worsen. After surging in October 2018 to the highest point since 2014, crude oil prices slumped by the end of 2018, partly due to record production in the US. However, although OPEC’s response to cut oil production has caused prices to rebound thus far in 2019, the average price of WTI crude oil remained 3.6% lower y/y during April 2019. Finally, following the upward trend in natural gas prices during 2018 (up 43.2% y/y), the price of Henry Hub natural gas fell 34.4% during April 2019 since then, and 5.4% y/y.
Despite the global slow-down, economic growth in the Caribbean likely strengthened during 2018 but with mixed performances. With the exception of Curaçao and St. Maarten and Barbados, real economic activity in all other markets likely advanced on the back of primarily US-based tourism and construction activity, as well as increased commodity production. A surge in reconstruction activity, following the passage of the 2017 hurricanes in Anguilla and Dominica in particular, reversed the impact of the slump in tourism output and led to a small recovery in real GDP. However, rebuilding efforts were insufficient to mitigate the effects of reduced arrivals in Sint Maarten. Further, while the tourism outturn of the Southern Dutch Caribbean rebounded despite the continued contractions of arrivals from Venezuela, Venezuela’s economic slump continued to strain Curaçao’s economic performance. Meanwhile, Trinidad and Tobago’s strong energy rebound in H1 2018 dissipated during the second half of the year, moderating output growth for the year and Barbados’ economic contraction continued into Q1 2019, reflecting the dampening effects of its economic reform programme.
Increased capital outlays associated with reconstruction efforts led to a deterioration in the fiscal position of hurricane-hit markets: Anguilla, Antigua and Barbuda, Dominica, and Sint. Maarten. However, improved balances were evident in all other markets. Efforts to achieve the targets of the recently enacted Fiscal Responsibility Law led to a reduction of the fiscal deficit in the Bahamas, while the Government of Grenada recorded an improved fiscal surplus, greatly surpassing the primary surplus target of its Fiscal Responsibility Act. Meanwhile, the Central Bank of Barbados reported that the Government reduced its deficit to 0.3% of GDP and met its primary surplus target for FY2018/19, as agreed with the IMF. Finally, amid preparation to exit IMF funding later in 2019, the IMF supported a reduction in Jamaica’s primary surplus target from 7% to 6.5% of GDP for FY2019/20, to facilitate increased spending and boost economic growth.
Caribbean Market Review
Following an impressive rally during the first quarter of 2019, emerging market assets lost some steam in late April and May. This time the unsuccessful US-China trade negotiations soured the market sentiment as concerns regarding global trade and growth increased. Although we have seen signs of progress on the approval of the USMCA agreement (US, Canada and Mexico agreed to lift some tariffs) on this side of the world, we are still to hear an explicit support from Democrats in the US. Moreover, political and economic concerns in Argentina and Turkey also increased the risk off environment late in April. In Europe, concerns surrounding potential US tariffs on autos remain in place; however, these have been extended for another six months as the US delays the announcement. On the monetary front, the market appears to be comfortable with the idea of a pause in advanced economies’ monetary tightening cycle for the rest of 2019. In our opinion, this should continue to help EM credit going forward, softening any negative impact from global trade headlines.
Despite trade concerns softening the impressive rally in emerging markets over the last month, Caribbean and Central America credits have achieved an impressive performance since our last publication. Recovering from financing trade concerns and the uncertain approval and implementation of the tax reform, COSTAR leads gains in the region with the curve tightening 93bps on average over the last three months. Not so far behind, TRITOB tightened 75bps on average across the curve driven by the increase in oil prices during the same period. DOMREP and PANAMA continued to take advantage of their strong economic growth levels and relatively low levels of debt, despite questions regarding their ability to meet their fiscal targets this year. ElSALV also showed some improvement (-31bps on average) but at a much lower magnitude than its regional peers as uncertainties regarding Bukele’s economic policies and his low support in congress prevail.
We expect COSTAR to benefit from declining financing concerns for 2019, as the government secures multilateral loans, and completes its local market issuance plan without hiccups. Moreover, the better than expected fiscal account numbers year-to-date (12-month deficit at 5.7% of GDP), and the boost to revenues from the increase in the VAT should provide further support if sustained with the implementation of the fiscal rule.
In Panama, we expect concerns regarding fiscal accounts and slower economic growth to temper the recent strength of the PANAMA curve going into 2019 H2. This should provide excellent opportunities for those looking to get back into one of the fastest growing economies in the region. Moreover, following the issuance of around US$1bln in external markets (likely a July event), we favour long positions in the long-end of the curve PANAMA 43’s and 57’s, particularly as the possibility of tapping these bonds was mentioned in our recent trip to the region.
The Dominican Republic has solely relied on successful issuance in local markets year-to-date. Out of the US$1.4bln they expect to collect from local markets this year, they have already obtained US$1.14bln so far. The remainder of the country’s US$4.4bln financing needs for 2019 should come from multilateral loans (US$750mln) and external issuances (US$2.25bln). With regards to the timing of issuance in external markets, it is still difficult to identify a precise time frame; however, recent statements by the Minister of Finance suggest that this is imminent, aligning with our view of a late Q2 issuance. In terms of which part of the curve they will be looking to issue in the external markets, we do not expect the government to significantly change what they have been doing. They would likely place paper in the 5Y, and 30Y range. In ELSALV, although congress has already approved issuance of up to US$1.1bln for this year, timing remains uncertain as Bukele is yet to appoint an economic team. With a minority in congress, we expect Bukele to encounter difficulties in negotiating budgets and debt issuance. In this situation, we see GANA 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. If this were to happen, we are likely to see the return of slow budget and debt issuance approval discussions into next year. We would 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.