ECONOMIES THE CARIBBEAN IN 2012 PART I INTERNATIONAL ECONOMIC DEVELOPMENTS

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1 PART I THE CARIBBEAN ECONOMIES IN 2012 INTERNATIONAL ECONOMIC DEVELOPMENTS Global Recovery Failed To Take Off In 2012 Growth in the global economy weakened in 2012 (3.2%, compared with 3.9% in 2011), resulting from depressed and, in many cases, declining economic performance in the major developed countries. Europe experienced a second recession in three years. There was just 1.3% growth in the developed economies, trailing the global average. Output in the developing economies expanded by 5.1% (6.3% in 2011). In the Euro-Area, growth was undermined by the sovereign debt crisis, unsustainable fiscal balances and robust austerity measures; financial sector instability; and record levels of unemployment (11.7% in December). Output contracted by 0.4%. In the United States (US), output expansion was sluggish - 2.3%, partly reflecting uncertainty engendered by the protracted negotiations over the continuation of previously approved fiscal measures (the fiscal cliff). This further weakened market sentiments and adversely impacted investment decisions. The slowdown in the advanced economies set the tone for the rest of the global economy. Consequently, output growth in developing countries and emerging markets either slowed appreciably or declined in direct response to weak market demand for their goods and services. In Asia, growth was estimated at around 6.6% in 2012, compared with 8.0% in China s overall growth of 7.8%n 2012 was the weakest since Meanwhile, economic activity in India suffered a decline in private investment stemming from macroeconomic uncertainties created after implementation of structural reform agenda. Real Gross Domestic Product (GDP) growth also decelerated in Latin America and the Caribbean (LAC) to around 3% in 8 Caribbean Development Bank Annual Report 2012

2 In all of CDB s BMCs, fish stocks are a critical component of national food security 2012, precipitated primarily by continuing weaknesses in key trading partners. The slowdown in global economic activity and concomitant demand slack in many advanced economies tempered inflationary pressures. Lower commodity prices led to reduced headline inflation (including food and energy prices) to around 1.9% in 2012, down from 2.7% in In emerging markets and developing economies headline inflation declined by almost 2 percentage points to slightly under 5.5%. Caribbean Development Bank Annual Report 2012 Financial Markets Remained Wary The implementation of several policy initiatives led to significant improvement in the global financial markets, particularly during the second half of A consensus was finally reached regarding the creation of a Pan-European Banking Supervisory Agency, as well as the formation and funding of a Pan- European institution with powers to provide support and bail out European economies. The recapitalisation of banks in Europe and the US, together with the expansionary monetary policy stance of the major economies 9

3 also contributed to the return of investor confidence in the global financial markets. Nevertheless, continuing weak fiscal profiles led to credit downgrades among a number of developed countries, including Greece, Spain, Italy and Portugal Outlook Cautiously Optimistic Considerable uncertainty remains and the projections for 2013 are less sanguine. World output is projected to increase by 3.3% even though the forecast is for economic activity in the US to slacken and for the Euro-Area to remain in recession. A US rebound is uncertain and the risk of a policy-induced recession remains real unless mitigated by appropriate adjustments to address the unsustainable public finance and debt situation. Similarly, the crisis in the Euro-Area remains delicately poised, requiring further fundamental structural changes and the right policy mix to address fiscal consolidation, unsustainable public debt levels, banking sector instability, the low-growth trap, and rising unemployment. Economic activity in emerging markets and developing countries is forecast to pick up, but not to attain the high levels reached in Momentum is expected to come from developing Asia, in particular China and India, where growth is projected to reach 8.0% and 5.7%, respectively. Latin America will also provide some impetus. Most notably, targeted fiscal spending and ongoing monetary policy accommodation are forecast to spur growth of 3.0% in Brazil, up from just over 1% a year earlier. REGIONAL ECONOMIC DEVELOPMENTS Growth Performance Weakened The Region continued to struggle to find its economic footing as average output growth slipped to 1.0% in 2012 compared with 1.2% a year earlier. Growth stalled in nine BMCs, with Anguilla, Dominica, Grenada, St. Lucia, Montserrat and Jamaica recording actual decreases in economic activity. Output decline was associated with a falloff in private investment, alongside fiscal consolidation and a concomitant reduction in capital expenditure outlays. Belize (5%) and Guyana (3.3%) were the Region s top growth performers, supported by strong outturns in agriculture and mining, FIGURE I REAL GDP GROWTH (%) 2011 and % ANG ANT BAH BAR BVI BZE CAY DOM GRE GUY HAI JAM MON SKN SLU SVG TT TCI Caribbean Development Bank Annual Report 2012

4 respectively. Increases in GDP were also recorded in The Bahamas, BVI, Haiti, Trinidad and Tobago. However, output in the East Caribbean Currency Union countries as a group contracted by 0.71%. Mixed Tourism Growth The modest recovery in main source markets, coupled with stronger destination marketing, provided impetus to the tourism sector in Arrivals from Europe remained depressed, with only four countries reporting increases from this source. Long-stay visitors increased, with very strong performances in Guyana (17%) and Belize (10%), and modest ones in others, including Antigua and Barbuda, The Bahamas, and Jamaica. There were declines in Grenada, Anguilla, and St. Lucia. This reflected a combination of reduced airlift, particularly out of the US; contraction in the UK economy; and the adverse effects of the Air Passenger Duty on flights out of the UK. The 2012 Olympic Games in London, and the run-up to the US Presidential Elections also had significant dampening effects on North- South travel over the period. In addition, high cost continued to adversely impact intraregional travel. 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. As a consequence, apart from The Bahamas, the Cayman Islands, and Jamaica which registered growth ranging from 6.1% to 20.8%, most BMCs recorded falloffs in excess of 10% over the first 11 months of Construction Activity Weak Constrained by relatively low FDI inflows and weak public sector financing, construction activity was generally subdued. FDI in the Region has declined sharply since the global economic crisis unfolded: from around $6.8 bn in 2008, net FDI to CDB s BMCs dropped to around $2.7 bn by FIGURE II STAYOVER VISITORS ANNUAL (%) GROWTH 2011 and (%) ANG ANT BAH BAR BVI BZE CAY DOM GRE GUY JAM MON SLU SVG Caribbean Development Bank Annual Report

5 FIGURE III CRUISE PASSENGER ARRIVALS (%) GROWTH 2011 and ANT BAH BAR BVI BZE CAY DOM GRE JAM SLU SVG Caribbean Development Bank Annual Report 2012

6 Construction activity which slowed because of low FDI inflows was partly dependent on CDB financing and domestically generated resources. Preliminary data suggest little upward movement in General Improvement in Agriculture For the most part, the agriculture sector performed creditably in Belize and Guyana, the principal producers in the Region, registered relatively strong gains in sugar production, notwithstanding an unsettled industrial climate, particularly in Guyana, which led to work stoppages during the year. The sector expanded by 26.5% in Belize on account of robust citrus and bananas output, while Grenada benefited from a 20.3% increase in cocoa production for the first six months of the year. In St. Lucia, the sector was characterised by strong growth as the post-hurricane Tomas recovery, coupled with increased investment in fertilisers and other critical inputs, continued to pay dividends. In contrast, output in some BMCs was adversely Caribbean Development Bank Annual Report 2012 affected by weather-related factors, including hurricane Sandy, which impacted production, particularly in Jamaica and Haiti, during the latter half of the year. In Trinidad and Tobago, excessive rainfall, pest infestation, increased cost of some livestock, and competition from cheaper imports resulted in a 4.9% decline in agricultural output. Mixed Performances in Manufacturing and Mining The Region continued to struggle with competitiveness issues in the manufacturing sector, with notable output declines in Barbados, Jamaica and Trinidad and Tobago. There was a rebound of soap production in Dominica. Light manufacturing, particularly electronic components production in St. Kitts and Nevis, was boosted by increased US demand. In Guyana, agro-processing in the manufacturing/milling activity expanded as rice output rose to record levels 13

7 and production of rum and non-alcoholic beverages increased. The mining sector s performance was generally weak, with most of the Region s main producers registering declines in In Jamaica, supply interruptions precipitated by mechanical problems at two plants led to a significant reduction in average capacity utilization and a concomitant 9% reduction in bauxite production. In Guyana however, solid performances in bauxite and gold led to a 32% increase in production. Bauxite performance was attributable to an increase in international demand while favourable international prices supported gold production. Meanwhile, Belize and Trinidad and Tobago recorded a petroleum-induced slump. Price Increases Slowed; Unemployment High Declining global commodity prices, weak consumer demand and few supply disruptions in the agriculture sector were primarily responsible for the relatively slower increase in prices in Unemployment, which has crept up since the crisis unfolded, remained elevated. Private sector employment was hard hit by still-sluggish external demand; weak foreign investment; and lingering uncertainty both at home and abroad. Financial Sector Stayed Stable The financial system was characterised by relatively soft credit demand; increased deposit growth; and high levels of liquidity. Notwithstanding the marginal increase in nonperforming loans, the financial system in most BMCs remained generally well capitalised, with prudential indicators consistent within industry norms. On the other hand, weaknesses in the ECCU s financial sector remained on account of the knock-on effects of the continuing softness in the economies of the Currency Union which kept commercial banks non-performing loans high and which Small-scale retailers in Grenada will benefit from the Grenville Market project in Grenada. 14 Caribbean Development Bank Annual Report 2012

8 CDB s social enhancement programmes establish centres for improved community health such as in Grand Riviere St. Lucia. led to some impairment of capital. The focus remained on addressing sector vulnerabilities and undertaking urgent reforms to safeguard financial soundness and integrity, including the creation of a single financial space. While progress on many of these reforms was mixed, resolution efforts advanced for an insolvent bank that was placed under conservatorship in Fiscal Outturns Improved Generally but Capital Expenditure Reduced Based on preliminary data for 2012, fiscal outturns, on average, were mixed but BMCs showed improvement. Several countries continued their efforts at fiscal consolidation. Overall deficits ranged from 1% to 5.5% of GDP in 2012, compared with 3% to 7% in Concerns remained about the sustainability of public finances, especially with at least 10 BMCs reporting debt-to- GDP ratios above 60%. Barbados high debt levels and delays in dealing with rapid debt accumulation triggered credit downgrades during the year. Concerns about a weakening fiscal position prompted Jamaican authorities Caribbean Development Bank Annual Report 2012 to take new policy measures to raise revenues and curtail expenditure growth. Also, shortfalls in grants and external loan financing, coupled with an increase in current expenditure on debt service payments, led to acute liquidity difficulties in Grenada. Attempts to provide fiscal stimulus through tax concessions and exemptions, and through employment creation programmes, resulted in widening overall balances and precipitated an uptick in St. Lucia s debt-to-gdp ratio. On the other hand, Antigua and Barbuda and St. Kitts and Nevis made progress with their IMF-supported adjustment programmes, having satisfied agreed fiscal and structural targets. Meanwhile, the authorities in Belize were, towards yearend, renegotiating with creditors the terms of a super bond. In the Overseas Territories, UK-stipulated restrictions on borrowing, in order to balance budgets and restore compliance with fiscal and debt prudential limits, led to more favourable fiscal outcomes. During 2012, the UK moved to further anchor fiscal discipline as part of public finance management laws. Its broader 15

9 Framework for Fiscal Responsibility places emphasis on medium-term fiscal frameworks, stricter management of liabilities, improved project appraisal and evaluation, and more transparent procurement practices. Outlook Positive But Still Subdued The macroeconomic outlook for the Region is conditioned largely by developments in the international economy. Two additional sets of issues - improving international competitiveness and debt sustainability - will also shape the near-term outlook. Tourism dependent economies will have to pay careful attention to airlift logistics and balancing the deployment of marketing efforts between traditional, new and potential markets. The Region will have to be creative and collaborative in leveraging its combined efforts in accessing new source markets. Increasing competitiveness through sustained efforts to enhance service quality; reduce crime; and reduce cost of intra-regional travel will also be important. Developments with respect to international business and the potential fallout from the imposition of the US Foreign Account Tax Compliance Act represent a downside risk to growth in some BMCs. In 2013, the US Treasury Department will engage the Caribbean and other jurisdictions in active dialogue towards concluding inter-governmental agreements to improve international tax compliance. A regional approach should be contemplated to mitigate the potential fallout in the sector. The manufacturing sector is also facing additional challenges as subsidies being given to US-based rum producers could pose a major threat to the future viability of the sector. Beyond these issues, the Region must pay close attention to avoiding its own fiscal cliff through a gradual but deliberate reduction of its mounting debt stock. In at least seven BMCs, debt levels are projected to be unsustainable. Anchoring investor confidence, both at home and abroad, will require governments to take corrective policy action. The fiscal policy agenda must include measures that can lead to improvements in tax yields by reassessing the range of exemptions and concessions being offered and by improving compliance and collection of arrears. Improvements in expenditure management systems should increase the focus on projects and programmes with high development impact and cost minimisation. Growth in the Region is cautiously expected to be positive. Supported by stepped-up public sector investment and gains in agriculture, Guyana is forecast to lead the way with real GDP projected at around 5%. Haiti is also expected to register strong growth on account of reconstruction efforts, together with improvements from gains in the manufacturing and agriculture. Moderate growth of 1-2% is projected for most of the member countries of the Organisation of Eastern Caribbean States, reflecting ongoing efforts at fiscal consolidation. Marginal growth of less than 1% is projected for Barbados on the basis of an uptick in tourism based on anticipated growth in major markets, while in Jamaica, the outcome of IMF negotiations, which has the potential to release resources from other multilaterals, could boost output. In the OTs, growth is also expected to be positive based on the projected sustained recovery in offshore business activity, together with a pickup in leisure activity in Caribbean Development Bank Annual Report 2012