Region faces moderate growth in 2013

The president of the Caribbean Development Bank, Warren Smith, has warned member countries of the regional financial institution that “the region must pay close attention to avoiding its own “fiscal cliff” through a gradual but deliberate reduction of its mounting debt stock.”

 

Speaking at a regional news conference in Bridgetown last Friday, Smith said debt levels in at least seven Borrowing Member Countries have become unsustainable.

 

“Anchoring investor confidence, both at home and abroad, will require governments to take corrective policy action,” according to Smith, adding that the “fiscal policy agenda must include measures that tackle improvements in tax yields by reassessing the range of exemptions and concessions being offered, and by improving compliance and collection of arrears.”

 

The CDB president also called on regional countries to accelerate their improvements in expenditure management systems, which he said “should increase the focus to projects and programmes with high development impact and cost minimisation.”

 

On the issue of the region’s economic performance in 2013, Smith said growth in the region is expected to be positive for the most part. 

 

Guyana is forecast to lead the way with real GDP projected at around 5 per cent, while growth in most of the Organisation of Eastern Caribbean States countries is projected at a modest/moderate 1-2 per cent reflecting ongoing efforts at fiscal consolidation. 

 

“Marginal growth of less than 1 per cent is projected for Barbados on the basis of an uptick in tourism based on anticipated growth in major markets. In Jamaica, output could be boosted by the outcome of IMF negotiations which has the potential to release resources from other multilaterals in support of a transformative capital investment programme.”

 

Smith said the weak economic recovery in the region has been “exacerbated” by the collapse of the insurance subsidiaries of the CL Financial group.

 

“The fallout from British American Insurance Company/Colonial Life Insurance Company (Baico/Clico) collapse led to the rising non-performing loans (NPLs) and reduced the bank profitability in some countries,” he said.

 

Smith was speaking at the release of the CDB's annual results and an overview of the Bank's operations in the region over the last year at the CDB’s head office, Bridgetown, Barbados.

 

The CDB said while NPLs edged up marginally in most countries, the monetary and financial system was characterised by relatively soft credit demand; increased deposit growth; and high levels of liquidity. 

 

Notwithstanding the pressures on the financial sector in the region, the CDB said in its 2012 annual report that commercial banks, non-bank financial institutions and insurance companies in most economies generally remained well capitalised with prudential indicators consistent with industry norms. 

 

According to the CDB annual report: “In the Eastern Caribbean Currency Union (ECCU), weaknesses in the financial sector remained on account of the knock-on effects of the continuing softness in the economies of the currency union that kept NPLs high in the commercial banking system and which led to some impairment of capital. 

 

“In 2012, the focus remained on addressing sector vulnerabilities and bringing about urgent reforms needed to underpin the soundness and integrity of the wider financial system, including reforms to accelerate the creation of a single financial space in keeping with the currency union’s Economic Union Treaty. While progress on many of these reforms has been mixed, resolution efforts advanced for one insolvent Bank that was placed under conservatorship in 2011.”

 

CDB’s loan demand

 

The operations of the CDB continued to be influenced by the lingering effects of the global financial crisis in 2012. 

 

As a consequence of the difficult economic environment, reduced fiscal space for undertaking capital expenditure, and strict control over public sector spending across the region, demand for CDB financing by member countries declined in 2012 following a decline in 2011.

 

Loan approval and disbursement performances in 2012 were lower than originally anticipated. Loan approvals totalled US$104 million, down by 28 per cent from US$144 million in 2011. 

 

Loan disbursements in 2012 totalled only US$85 million, compared with US$167 mn in 2011, which was a 49 per cent decrease. 

 

CDB’s financing activities in 2012 supported a range of activities, including road rehabilitation and upgrade (Guyana and St. Vincent and the Grenadines); education sector reform to enhance human capital (Belize); student loans (Jamaica); water and sewerage (Belize and Dominica) and disaster rehabilitation and emergency relief (Bahamas, Dominica, Haiti and St Lucia).

 

But Smith said the development bank is doing more than just offering loans.

 

“Our offerings go way beyond just money. While we are happy to see loans on the books we do not want to put our countries in a position where we are deepening the problem of debt for them. We are not commercial bankers. At a conference in T&T one of our economists was on the team that has helped with the problems in St Kitts and Nevis and spoke of how that country dealt with its problems and how the CDB assisted them,” he said.

 

CDB received a credit downgrade from both Moody’s Investors Service and Standard and Poor’s Ratings Services during 2012, as a result of what the bank says was the uncertain global environment, tentative economic growth across the region and declining creditworthiness of some of CDB’s Borrowing Member Countries (BMCs). 

 

Responding to concerns raised by the credit rating agencies about risk and risk management in CDB dominated the attention of Bank management during the year. The Bank moved swiftly to put a comprehensive risk management framework in place, including creating the supporting institutional framework and building internal capacity in the area.

 

Along with the CDB, The Bahamas, Barbados and Belize were downgraded during 2012 while including Suriname and Grenada.

 

Growth stalls

 

As a result of the tepid international economic recovery, growth momentum stalled in nine of CDB’s BMCs, with six countries recording actual decreases in economic activity.Output fell in Anguilla, Dominica, Grenada; St. Lucia, Montserrat and Jamaica driven, primarily, by weak aggregate demand associated with a falloff in private sector investment, alongside fiscal consolidation and a concomitant reduction in capital expenditure outlays.

 

Output in the Eastern Caribbean Currency Union countries contracted by 0.71 per cent. Belize and Guyana were the region’s top growth performers in 2012, supported by strong outturns in agriculture and mining, respectively. 

 

Increases in GDP were also recorded in The Bahamas, the British Virgin Islands (BVI); Haiti; and T&T. 

 

In Haiti, growth was recorded in all sectors except agriculture, which was adversely affected by drought and the impact of hurricane Isaac. 

 

Output growth in BVI was associated with increased activity in the tourism and off-shore sectors, while the outturn in The Bahamas was on account of strong performances in both tourism and construction.

 

Growth in Trinidad and Tobago averaged 1.2 per cent on the basis of a strong performance in the services sector, against a backdrop of declining production in the petroleum sector. 

 

Antigua and Barbuda grew marginally during the year, while output growth remained flat in Barbados, constrained by poor outturns in the key tourism and construction sectors.

 

Tourist arrivals resilient

 

Despite the uncertain economic climate, international tourist arrivals remained strong, with the CDB quoting a report by the United Nations World Tourism Organisation (UNWTO) that international arrivals grew by 4 per cent (or by 28 million) in the first eight months of 2012, when compared to the similar period in 2011. International air travel was expected to expand by 5 per cent in 2012.

 

In its 2012 report, the CDB said: “The modest recovery in main source markets, coupled with stronger destination marketing, provided impetus to the tourism sector in 2012, although there was evidence that the pace of growth slowed or declined in some countries. Arrivals from Europe remained depressed, with only four countries reporting increases from this source. On a positive note, long-stay visitors increased by:

 

• 2.9 per cent (January-November) in The Bahamas; 

• 2.3 per cent (January-November) in Jamaica; 

• 2.3 per cent in Antigua and Barbuda (January-December). 

• 10.1 per cent in Belize (January-November); and 

• 17.2 per cent in Guyana (January-November).

 

According to the CDB, the number of cruise passenger arrivals to destinations in the Southern Caribbean continued to be severely affected by the redeployment of several cruise vessels, particularly during the summer months, to more lucrative markets in Australia, New Zealand and the Mediterranean. 

 

This redeployment led to many cruise ship destinations in the Southern Caribbean recording falloffs in excess of 10 per cent in this market segment, with Grenada experiencing a contraction in the number of cruise ship passenger arrivals of 21.7 per cent for 2012 (January-December) in Grenada, while similar arrivals declined by 19.4 per cent (January-November) in Dominica, 14.7 per cent (January-December) in Barbados; and 9.1 per cent in Antigua and Barbuda (January-December).

 

But North Caribbean cruise ship destinations did not suffer as much with Jamaica, The Bahamas and the Cayman Islands, registering robust growth of 20.8 per cent; 6.1 per cent; and 8.3 per cent, respectively, over the first 11 months of 2012

 

Meanwhile, Smith said the private sector and business people have done more than politicians in fostering integration and development in the Caribbean.

 

“I think the private sector is way ahead of the politicians. I do not think the private sector is the problem. There are good examples of private-sector risk taking but still there is not enough. There are fantastic entrepreneurs in the region,” he said.

 

Guyanese journalist Ricky Singh during the press briefing said the regional private sector in the region is in a “rot” and has not played the role it ought to be playing.

 

Smith responded by saying he is not “pessimistic” about the role private businesses play, but there should be an “explosion” and further growth of them.

 

Asked if he felt there was need for political change in the region that would create the environment for development, Smith said good policy by governments is good for economic growth.

 

“If better policies emanate from political change then it is good for the country. Good policies are good for the region and we at the CDB is behind it. Political change must be accompanied by good policy change,” Smith replied.

 

Smith also said T&T's economy grew in 2012 but the growth was not as high as regional neighbours as Guyana and Belize. Reporting by Raphael John-Lall in Barbados