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
The economic rebound in advanced economies continued into the second quarter of 2018. Annualised real GDP growth in the US accelerated to 4.2% during Q2 2018, up from 2.2% one quarter earlier. The US Bureau of Economic Analysis suggests that the faster rate of expansion benefited from faster growth in personal consumption, exports, and federal, state, and local government spending, but suffered from slower growth in non-residential fixed investment and weaker activity in private inventory investment. Similarly, growth in goods exports, household expenditure, housing investment, and business capital investment accelerated Q2 2018 GDP growth in Canada to an annualised rate of 2.9%. In contrast, growth in the UK remained modest (up 1.2% y/y during Q2 2018), while the challenging economic environment in Venezuela persisted year-to-date. Finally, global crude oil and natural gas prices’ upward trend continued with the prices of WTI crude oil and Henry Hub natural gas advancing 41.7% y/y and 3.4% y/y during August 2018.
Developments in economic activity in the Caribbean generally responded to global economic trends and external shocks for the year-to-date 2018. Most markets experienced some expansion in real GDP, but those countries affected by Hurricanes Irma and Maria in Q3 2017 and those who depend heavily on the UK or Venezuela for tourist arrivals experienced either modest or negative economic growth over the period. Anguilla, Dominica, and St. Maarten all witnessed contractions in total tourist arrivals of more than a third, and 2018 economic growth is projected to remain negative in each of these markets after contracting in 2017. Moreover, ongoing fiscal contraction, economic uncertainty and a steady decline in the length of stay and average tourist expenditures further reduced economic activity in UK tourist-dependent Barbados during H1 2018, while sharp declines in stay-over arrivals from Venezuela to Aruba and Curaçao constrained faster growth in tourist arrivals for the year-to-date. In sum, despite most markets experiencing some expansion in arrivals thus far in 2018, aggregate stay-over arrivals declined 3.7% y/y during the first four months of 2018 compared to a more modest 1.4% y/y decline a year ago. In contrast, commodity producers generally benefited from more favourable energy prices and increased production of some commodities as well as witnessed other positive signs of economic growth during the period. Finally, surges in capital expenditure in some hurricane-affected markets likely partially offset the fall-out from fewer tourist arrivals, but private sector construction activity likely led growth in overall construction thus far in 2018.
Caribbean Market Review
Emerging market credits traded with a risk premium reflecting ongoing trade concerns as the US imposed tariffs on its closest allies and China. This situation subsided somewhat in the weeks leading to this publication as the US, Mexico, and Canada have reached a new trade agreement in principle, but it still has to be ratified by their respective legislatures. Nonetheless, trade war fears remain front and centre, as further moves against China by the current US administration could put EM credits under additional pressure, especially those credits highly dependent on commodity prices. On the monetary policy front, advanced economies’ monetary tightening continued their course, signaling a similar pace of rate increases into 2019. Still, not a fertile outlook for EM in general terms, but particularly adverse for those credits with significant US$ funding needs.
In the Caribbean and Central America, with the exception of JAMAN and BERMUDA, all credits widened further. The main story of the region was the deterioration of COSTAR, as the odds of an even diluted reform diminished. Moreover, the market’s concerns regarding the government’s ability to find sources of financing at reasonable rates increased as the Central Bank approved buying three month treasury notes from the Ministry of Finance during the last week of September. Considering the overall widening of Central American and Caribbean credits, DOMREP and PANAMA held up relatively well. In DOMREP, the government announced its 2019 Budget with a deficit of 1.7% of GDP (vs. 2.2% in 2018) an optimistic proposal calling for an improvement year-over-year. Regarding issuance for next year, DOMREP will have to finance around US$4bln, of which we expect US$3bln to come from external markets. In Panama, despite the deceleration in growth, the credit has not shown any signs of weakness. We do expect growth to pick up in 2019 and the electoral process to not bring any big surprises with respect to the country’s macro fundamentals. For JAMAN, we expect the credit to maintain a strong performance, supported by its ability to meet the IMF’s targets and expectations of higher growth in the short-term.
In the midst of default and falling FX reserves, the Government of Barbados and the IMF reached an agreement on a 4-year US$290mln financing programme under the Extended Fund Facility on October 1st 2018. The government’s associated fiscal consolidation programme will target an initial primary surplus of 6% of GDP from 2019/20, and in conjunction with proposed debt restructuring, targets a debt-to-GDP ratio of 60% by 2033.
PANAMA widened 18 bps on average since our last publication while DOMREP remained relatively flat, only increasing 14 bps on average during the same period. As stated above, economic growth was disappointing in H1 2018 in Panama; however, we expect economic activity to rebound in the latter part of this year as construction recovers the time lost during the SUNTRAC strike in April/May. Moreover, we expect copper production to improve the country’s external account and act as of one of the main economic drivers in 2019. DOMREP’s amazing growth during H1 2018 has put the country on track for 6% growth in 2018. We expect solid growth to continue into 2019, supporting the good performance of the credit.
In El Salvador, the Minister of Finance Nelson Fuentes confirmed a 2019 deficit of around US$600mln and debt issuance of up to US$1.4bln in 2019, which includes US$800mln to pay the ELSALV 19s. We think liability management issuance is unlikely to get approved before the elections. While the FMLN was pushing for it, ARENA will be reluctant to provide the FMLN government with any additional resources to boost its popularity ahead of the presidential election. Moreover, with Bukele maintaining momentum and looking competitive, both ARENA and the FMLN will likely be reluctant to help an eventual Bukele’s presidency and risk losing their negotiating power in congress. Therefore, we expect volatility to increase in late 2018 and into 2019 and maintain a high level of caution on ELSALV.
On the other side of the spectrum, COSTAR widened 100 bps on average as fiscal concerns rose. Reform discussion delays, reform dilution, extraordinary budgets, non-procedural debt issuance, strikes, and now the sale of treasury notes to the Central bank all materialized since our last quarterly report. Moreover, some of our concerns regarding the procedure of the reform in Congress resurfaced during the last week of September. Judges of the Supreme Court of Justice argued that the reform would alter the operations and functioning of the justice system. This statement is very important and worrisome as the Sala IV of the Supreme Court will decide if the fiscal reform followed a proper procedure in Congress. The issue with this latest development is that the government will need 2/3rds of the votes in Congress to approve any law affecting the operations of the justice system if the court is not in favour. Currently, the government does not have such support.