Caribbean Market Overview Q4 2017

Transcription

1 Caribbean Market Overview Q 17

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3 Caribbean Market Overview Q 17 Table of Contents Caribbean Market Review... Caribbean Economic Review Anguilla Antigua and Barbuda Aruba The Bahamas Barbados... 1 Belize... 3 Bermuda... 5 Cayman Islands... 7 Costa Rica... 3 Curaçao... 3 Dominica... 3 Dominican Republic El Salvador Grenada... Jamaica... Panama... 5 St. Kitts and Nevis... 7 St. Lucia... 9 Sint Maarten St. Vincent and the Grenadines Suriname Trinidad and Tobago Turks and Caicos... 6 About CIBC... 6 About CIBC FirstCaribbean Notes... 6 CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

4 Caribbean Market Overview Q 17 1 Caribbean Market Review CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

5 Caribbean Market Overview Q 17 Caribbean Market Review Summary Luis Hurtado Macro Strategy 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 17, 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 17, 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 18, 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 17, we expect the reconstruction efforts to support growth in 18. BARBAD (up 9 bps on average) gave back some of the gain posted in Q 17 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$ 75 million in a 1Y bond. As in most of 17, 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$.1 billion in global bonds to cover its financial needs for 18. In Panama, growth has decelerated, and we expect this trend to continue into 18 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 18. 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 18 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 18 Budget, and possibly longer-term financing. ARENA and the FMLN are signalling that an agreement on the 18 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 63, (% of the country s population) Salvadorians in a legal limbo, and disrupt remittances accounting for approximately 17.6% of GDP. CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

6 Caribbean Market Overview Q 17 3 Bahamas: Data up to August 17 indicate that the lingering effects of Hurricane Matthew continue to curtail growth in tourism and contribute to stronger construction output in the Bahamas. Total tourist arrivals declined.8% y/y through the first eight months of 17. Air arrivals declined 6.3% y/y as a 13.3% y/y expansion in arrivals to the Family Islands could not offset declines in arrivals to New Providence and Grand Bahama. Arrivals by sea declined 1.6% y/y across the Bahamas. Since then, the passage of Hurricane Irma and the resulting closure of ports of entry further reduced tourism activity during September 17. On the fiscal front, the IMF anticipates that government s fiscal deficit will decline to 3.7% of GDP during 17/18, slightly higher than the government s budgeted 3.% of GDP (or 3.1% of GDP compared to a budgeted.9% of GDP using revised 16 nominal GDP). The government expects that less spending on reconstruction post-hurricane Matthew, combined with other revenue and expenditure measures, will put the fiscal deficit on a downward trajectory. As such, the IMF expects that central government debt will stabilise by 18/19. Barbados: Latest estimates from the Central Bank of Barbados (CBB) suggest that weaker economic growth during Q3 17 slowed the pace of real GDP expansion to 1.% y/y during the first three quarters 17 compared to.% y/y during H1 17. During the first half of 17/18, the government continued to reduce its fiscal deficit (by 9.% y/y to US$139.5 million or approximately 6.1% of April September 17 nominal GDP). However, on September 7 th 17, Standard and Poor s downgraded Barbados local currency rating from CCC+ to CCC and assigned a negative outlook. The rating change reflects the rating agency s belief that the announced voluntary debt swap of government securities held by the National Insurance Scheme and the Central Bank of Barbados could potentially extend to domestic private creditors and trigger a debt default. Bermuda: Greater tourism and retail activity suggests that real value-added increased y/y during the first three quarters of 17. Total tourist arrivals increased over the first nine months of 17 as additional tourists visited to attend the 35 th America s Cup. Total arrivals by air, cruise, and yachts expanded 1.% y/y, 8.% y/y and 36.% y/y. Expenditure by tourists visiting by air increased 1.9% y/y as the average length of stay increased 5.7% y/y. Including contributions to the sinking fund, the government s nominal fiscal deficit worsened by US$51.5 million y/y to US$1. million (approximately 3.6% of GDP) during the fiscal year ended March 17. Excluding the sinking fund, the deficit increased US$5. million y/y to US$153.8 million (approximately.6% of GDP). Government debt continued to rise and increased 6.% y/y to US$.5 billion (approximately.1% of GDP) by the end of fiscal year 16/17. Costa Rica: Q 17 GDP growth came in at.% y/y, up from the 3.9% y/y posted in Q1 17 but decelerating from Q 16 s.33% y/y. Looking at more recent indicators, growth decelerated in the third quarter as July, August and September posted 3.58% y/y, 3.11% y/y, and.7% y/y increases. Out of the 15 sectors, only utilities (down.38% y/y), and construction (down 3.9% y/y) posted declines. On its latest attempt at fiscal reform this year, the government introduced, once again, legislation that broadened the sales tax to a VAT, but kept the rate at 13% (15% in previous proposal). The government (PAC), and the PLN have remained in favour of increasing the VAT to 15%. Nevertheless, this proposal has faced resistance from the PUSC and ML. The PUSC has maintained the position that it will support the revenue measures, if spending cuts come first. Although the PAC, PLN and FA have enough votes () to fast-track authorization, this outcome is highly unlikely in the middle of the presidential campaign. Dominican Republic: As expected, H 17 real GDP growth came in at.% y/y, as Q growth decelerated to.7% y/y driven by the.6% drop in fixed capital formation. Economic activity picked up in July and August, increasing 3.1% y/y and 5.1% y/y. With this latest number, growth for the January August period remained at.% y/y. Despite the July and August rebound in economic activity and the favourable external environment, we expect 17 growth to land well below the 5.5% growth expected by the government in June, coming in at.6%. Total central government revenue reached DOP billion in the first three quarters of 17, increasing 11.% y/y. Total central government expenditures reached DOP 6.1 billion, up 8.95%. With these numbers, the 1-month fiscal nominal deficit increased to.35% of GDP, while the primary surplus came in at.75% of GDP. As the slowdown in economic growth is expected to take a toll in tax revenues, and the government moves closer to its expenditure target, we expect the nominal deficit to land at.6% of GDP in 17. CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

7 Caribbean Market Overview Q 17 El Salvador: Q 17 GDP growth came in.5% y/y, slightly decelerating from the.8% posted in Q1 and the.37% in Q 16. More recent data point to a continuation of this trend with total economic activity coming it at.8% y/y in August, matching the three previous months and improving from the.5% y/y rise in August 16. The government sees GDP growth coming in at.% in 17 and.8% in 18. However, with the possibility of the US not renewing the TPS with El Salvador, leaving around 63, (% of the country s population) Salvadorians in a legal limbo, and disrupting a great source of inflows into the country (17.6% of GDP in remittances), it is difficult to envision a similar scenario in 18. On the fiscal front, ARENA and the FMLN are signalling that an agreement on the 18 budget will be reached. Nevertheless, we see long-term financial approval very difficult. We also see a deal with the IMF 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 revenues, especially during the electoral cycle. Jamaica: Preliminary estimates from the Planning Institute of Jamaica suggest that real GDP expanded.9% y/y during Q3 17. In all, real GDP advanced.3% y/y during the first three quarters of 17. The government of Jamaica reduced its fiscal deficit y/y by 6.8% to US$5.5 million over the period April to September 17. Data from the debt management unit of the Ministry of Finance and the Public Service suggest that total public debt declined 1.6% y/y to US$1.63 billion between June 16 and June 17. The IMF estimates that total public debt including debt to the IMF held by the BoJ accounted for 119.% of GDP as at March 17. On September 5 th 17, Standard and Poor s maintained Jamaica s B rating and stable outlook on its sovereign bonds. Further, on October 3 rd 17, the IMF announced completion of the second review under Jamaica s Stand-by Arrangement. The Fund stated that programme performance remained on track and the government met all quantitative performance criteria and structural benchmarks as at end-june 17. Panama: Q 17 GDP grew 5.% y/y, decelerating from the 6.% y/y posted in Q1 17, but slightly above the 5.3% y/y seen in Q 16. More recent indicators confirmed the deceleration experienced in Q 17. Economic activity growth came in at 3.8% y/y.9% y/y, and 5.8% y/y in July, August, and September. With these numbers, economic activity posted a 5.58% y/y increase for the period between January and September 17, continuing the deceleration in growth initiated in May. Central government revenue for the Q1-Q3 17 period came in at US$ 5. billion (up 1.6% y/y). On the expenditure front, total expenses reached US$ 7.6 billion, increasing 5.1% y/y. With these numbers, the nominal NFPS deficit came in at US$ 1. billion or -.% of GDP, while the primary deficit reached US$ 96 million or -.8% of GDP. We expect the government to comply with the FRL and post adjusted deficits of.5% of GDP in 17 and 18 thanks to the ACP dividends in both years. In line with the above, the Canal of Panama is estimated to contribute US$ 1.66 billion and US$ 5 million directly and indirectly to treasury in 18. This represents a 17.7% y/y increase. Suriname: Data sourced from the Centrale Bank van Suriname indicate that net external demand and investment likely improved thus far in 17. A US$8. million improvement in the balance of goods traded reversed the balance on the external current account from a US$1.8 million deficit year-to-date Q3 16 to a US$58. million surplus year-to-date Q3 17. A 6.8% y/y rise in government s capital expenditure during January to July 17 and a 1.7% year-to-date rise in total retail and commercial mortgages as at September 17 suggest some improvement in investment year-to-date. The government s fiscal deficit continued to widen over the first seven months of 17 the fiscal deficit increased by 7.8% y/y to US$18.5 million. Total public debt increased 11.6% y/y to US$.55 billion between April 16 and April 17. Citing further deterioration in the fiscal accounts and higher debt levels, Moody s placed the government of Suriname s B1 rating on review for downgrade. Trinidad and Tobago: The Central Bank of Trinidad and Tobago (CBTT) estimates that declines in both energy and non-energy output reduced real GDP during H1 17. Since then, latest data suggest that energy production may have bottomed out in H1 17. During the fiscal year ended September 17, the government s fiscal deficit widened by 53.6% y/y to US$1.87 billion (8.5% GDP). On the 17/18 budgetary proposal to parliament, the Minister of Finance sought to increase revenue and diversify the economy toward the non-energy sectors, but few expenditurecutting measures imply that successful fiscal consolidation depends on more efficient revenue collection and no further decline in economic activity. CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

8 Caribbean Market Overview Q 17 5 Chart 1 High Yield - 1Y Against Benchmark Chart Investment Grade - 1Y Against Benchmark 1 bps DOMREP BARBAD COSTAR JAMAN SURINM ELSALV bps PANAMA ARUBA BAHAMA BERMUD TRITOB Aug-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 5 Aug-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Source: Bloomberg and CIBC Capital Markets Macro Strategy. 1Y bonds are: COSTAR 3/8 /3/5 BARBAD 7 8// DOMREP /5/7 JAMAN 6 3/ /8/8 ARUBA 5/8 9/1/3 BAHAMA 5 3/ 1/16/ BERMUD.85 /6/ TRITOB 3/8 1/16/ PANAMA 7 1/8 1/9/6 SURINM 9 ¼ 1/6/6 ELSALV 6 3/8 1/18/7 Chart 3 Caribbean Bonds Change in Yields Since Last Publication (August 9, 17) December, 17 BARBAD 6 5/8 1/5/35 BARBAD 7 8// PANAMA 5. 1/3/ DOMREP 7 1/ 5/6/1 COSTAR 1/ 1/6/3 BARBAD 7 1/ 1/15/1 BAHAMA 6 5/8 5/15/33 BAHAMA 5 3/ 1/16/ JAMAN 6 3/ /8/8 BAHAMA 7 1/8 //38 COSTAR 3/8 /3/5 PANAMA 3 3/ 3/16/5 COSTAR /1/5 COSTAR 5 5/8 /3/3 COSTAR 7 // PANAMA 3 7/8 3/17/8 BAHAMA //9 PANAMA 9// BERMUD.138 1/3/3 DOMREP 5 7/8 /18/ DOMREP 7.5 /3/ DOMREP 5 1/ 1/7/5 BERMUD.85 /6/ DOMREP 8 5/8 //7 DOMREP /7/5 CAYMAN //19 DOMREP 6.6 1/8/ PANAMA 7 1/8 1/9/6 DOMREP 6 7/8 1/9/6 BERMUD // PANAMA 1/ 5/15/7 PANAMA.3 /9/53 JAMAN 7 7/8 7/8/5 JAMAN 9 1/ 1/17/5 COSTAR /1/ JAMAN 8 3/15/39 TRITOB 5 7/8 5/17/7 PANAMA 9 3/8 /1/9 PANAMA 8 7/8 9/3/7 JAMAN 8 6//19 JAMAN 7 5/8 7/9/5 TRITOB 9 3/ 7/1/ TRITOB 3/8 1/16/ ARUBA 5/8 9/1/3 JAMAN 8 1/ /8/36 ELSALV 7 5/8 9/1/3 SURINM 9 1/ 1/6/6 ELSALV 5 7/8 1/3/5 ELSALV 6 3/8 1/18/7 ELSALV 7 5/8 /1/1 ELSALV /15/35 ELSALV 8 5/8 /8/9 ELSALV 7 3/ 1//3 ELSALV 7 3/8 1/1/19 Source: Bloomberg and CIBC Capital Markets Macro Strategy CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

9 Caribbean Market Overview Q 17 6 Chart Caribbean Investment Grade YTM ARUBA '3 TRITOB BERMUD ' ' BAHAMA ' TRITOB ' BERMUD ' BERMUD '3 Source: Bloomberg and CIBC Capital Markets Macro Strategy TRITOB '7 BAHAMA' 33 BAHAMA '9 BERMUD '7 BAHAMA '38 Modified Duration Chart 5 Caribbean High Yield 11 YTM BARBAD '1 DOMREP '1 JAMAN DOMREP '19'18 BARBAD ' DOMREP 1/8/ DOMREP /18/ Source: Bloomberg and CIBC Capital Markets Macro Strategy BARBAD '35 SURINM DOMREP '6 //7 JAMAN '39 DOMREP '6 DOMREP ' JAMAN '5 DOMREP JAMAN '36 DOMREP '5 JAMAN 1/5/7 1/17/5 DOMREP '5 JAMAN 7/9/5 Modified Duration Chart 6 Central America Panama and Costa Rica Chart 7 BARBAD 1s vs. DOMREP 1s and JAMAN 5s YTM 8 ELSALV '35 ELSALV '9 ELSALV '1 7 COSTAR ' ELSALV '3 COSTAR '5 6 ELSALV '3 ELSALV '7 COSTAR '3 ELSALV '19 ELSALV '5 5 COSTAR '5 COSTAR '3 PANAMA '7 COSTAR ' PANAMA '7 PANAMA '9 PANAMA '8 PANAMA ' PANAMA 1/3/ PANAMA '5 PANAMA '6 PANAMA ' Modified Duration Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Source: Bloomberg and CIBC Capital Markets Macro Strategy Chart 8 COSTAR s vs. DOMREP s Spread Z-Score (RHS) -6 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Source: Bloomberg and CIBC Capital Markets Macro Strategy Source: Bloomberg and CIBC Capital Markets Macro Strategy Chart 9 PANAMA s vs. BAHAMA s and BERMUD s PANAMA 's - BAHAMA 's PANAMA 's - BERMUD 's Source: Bloomberg and CIBC Capital Markets Macro Strategy BARBAD '1s - DOMREP '1s BARBAD '1s - JAMAN '5s -3 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

10 Caribbean Market Overview Q 17 7 Table 1 Public Sector Fiscal Accounts and Debt 17/18 17/18 Primary/Adjusted Balance Nominal Balance Gross Government Debt Net Public Sector Debt Real GDP Growth % of GDP % of GDP % of GDP % of GDP % of GDP Antigua and Barbuda.8% -1.7% 83.7% NA 3.1% Aruba.6% -.1% 7.% 8.% 1.5% The Bahamas -.6% -3.7% 73.3% 7.7%.5% Barbados 3.9% -.1% 97.9% 76.6%.9% Belize 3.1%.1% 96.5% 9.%.5% Bermuda -.1% -.1%.9% -6.%.9% Cayman Islands.1% 3.% 15.8% NA.1% Costa Rica -3.% -6.6% 9.% 3.1% 3.5% Dominica -.% -3.9% 69.% NA -6.% Dominican Republic -.1% -.6% 38.% 37.%.6% El Salvador % -3.3% 6.% 6.7%.% Grenada.%.1% 7.7% NA.5% Jamaica 7.% -.3% 113.% 19.8% 1.6% Panama -.5% -.% 39% 18.% 5.% St. Kitts and Nevis.9% -.7% 61.7% NA.7% St. Lucia.% -1.5% 66.5% NA 1.6% St. Vincent and the Grenadines.5%.6% 78.% 75.6% -.7% Suriname -3.7% -6.3% 63.% 58.7% -1.% Trinidad and Tobago -9.7% -13.% 79.6% 31.1% 1.9% Sources: IMF, Bloomberg, CIBC Capital Markets - Macro Strategy, Cayman Islands' Economics and Statistics Office (ESO), Standard and Poor's NA: Not available Table Ratings of Caribbean Sovereigns Ratings Key 17 Ratings Investment Grade High Yield S&P Moody s S&P Moody s S&P Moody s Aruba BBB+ NA AAA Aaa BB+ Ba1 The Bahamas BB+ Baa3 AA+ Aa1 BB Ba Barbados CCC+ Caa3 AA Aa BB- Ba3 Bermuda A+ A AA- Aa3 B B Cayman NA Aa3 A+ A1 B- B3 Costa Rica BB- Ba A A CCC+ Caa1 Dominican Republic BB- Ba3 A- A3 CCC Caa El Salvador CCC+ Caa1 BBB+ Baa1 CCC- Caa3 Jamaica B B3 BBB Baa CC Ca Panama BBB Baa BBB- Baa3 C C Suriname B B1/*- D Trinidad and Tobago BBB+ Ba1 *-: On review for downgrade CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

11 Caribbean Market Overview Q 17 8 Table 3 Caribbean Bonds and Indicative Prices/Spreads (December, 17) Aruba Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch ARUBA 5/8 9/1/ % BBB+ NR BBB- Bahamas Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch BAHAMA 5 3/ 1/16/ % BB+ Baa3 NR BAHAMA 6 11/1/8* % NA BB+ Baa3 NR BAHAMA // % BB+ Baa3 NR BAHAMA 6 5/8 5/15/ % BB+ Baa3 NR BAHAMA 7 1/8 // % BB+ Baa3 NR Barbados Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch BARBAD 7 1/ 1/15/ % CCC+ Caa3 NR BARBAD 7 8// % CCC+ Caa3 NR BARBAD 6 5/8 1/5/ % CCC+ Caa3 NR Bermuda Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch BERMUD // % A+ A WD BERMUD.138 1/3/ % A+ A WD BERMUD.85 /6/ % A+ A WD BERMUD /5/ % A+ A WD Cayman Islands Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch CAYMAN // % NR Aa3 NR Costa Rica Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch COSTAR /1/ % BB- Ba NR COSTAR 1/ 1/6/ % BB- Ba BB COSTAR 3/8 /3/ % BB- Ba BB COSTAR 5 5/8 /3/ % BB- Ba BB COSTAR 7 // % BB- Ba BB COSTAR /1/ % BB- Ba BB Dominican Republic Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch DOMREP 7 1/ 5/6/ % BB- Ba3 BB- DOMREP 5 7/8 /18/ % BB- Ba3 BB- DOMREP 6.6 1/8/ % BB- Ba3 BB- DOMREP 5 1/ 1/7/ % BB- Ba3 BB- DOMREP 6 7/8 1/9/ % BB- Ba3 BB- DOMREP /5/ % BB- Ba3 BB- DOMREP 8 5/8 // % BB- Ba3 BB- DOMREP 7.5 /3/ % BB- Ba3 BB- DOMREP /7/ % BB- Ba3 BB- El Salvador Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch ELSALV 7 3/8 1/1/ % CCC+ Caa1 B-u ELSALV 7 3/ 1// % CCC+ Caa1 B-u ELSALV 5 7/8 1/3/ % CCC+ Caa1 B-u ELSALV 6 3/8 1/18/ % CCC+ Caa1 B-u ELSALV 8 5/8 /8/ % CCC+ Caa1 B-u ELSALV 7 5/8 9/1/ % CCC+ Caa1 B-u ELSALV /15/ % CCC+ Caa1 B-u ELSALV 7 5/8 /1/ % CCC+ Caa1 B-u Jamaica Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch JAMAN 8 6// % B B3 Bu JAMAN 7 5/8 7/9/ % B B3 Bu JAMAN 9 1/ 1/17/ % B B3 Bu JAMAN 6 3/ /8/ % B B3 Bu JAMAN 8 1/ /8/ % B B3 Bu JAMAN 8 3/15/ % B B3 Bu JAMAN 7 7/8 7/8/ % B B3 Bu CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

12 Caribbean Market Overview Q 17 9 Panama Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch PANAMA 5. 1/3/ 16..1% BBB Baa BBB PANAMA 9// % BBB Baa BBB PANAMA 3 3/ 3/16/ % BBB Baa BBB PANAMA 7 1/8 1/9/ % BBB Baa BBB PANAMA 8 7/8 9/3/ % BBB Baa BBB PANAMA 3 7/8 3/17/ % BBB Baa BBB PANAMA 9 3/8 /1/ % BBB Baa BBB PANAMA 6.7 1/6/ % BBB Baa BBB PANAMA 1/ 5/15/ % BBB Baa BBB PANAMA.3 /9/ % BBB Baa BBB Suriname Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch SURINM 9 1/ 1/6/ % B B1 /*- NR Trinidad and Tobago Bond Price Yield 3m Yield Change Z-Spread S&P Moody's Fitch TRITOB 9 3/ 7/1/ % BBB+ Ba1 NR TRITOB 5 7/8 5/17/ % BBB+ Ba1 NR TRITOB 3/8 1/16/ % BBB+ Ba1 NR Source: Bloomberg and CIBC Capital Markets Macro Strategy *Since November 11, 17 CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

13 Caribbean Market Overview Q 17 1 Caribbean Economic Review CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

14 Caribbean Market Overview Q Caribbean Economic Review Shane Lowe CIBC FirstCaribbean Economic developments in the Caribbean s major international trading partners continued to vary throughout the first three quarters of 17. US GDP growth recovered from its weak performance in Q1 17, and positive performances in household consumption, business investment and exports expanded output by annualised rates of 3.1% and 3.% in Q 17 and Q3 17 compared to 1.% during January to March 17. Meanwhile, the IMF reported that annualised growth in Canadian output accelerated during the first half of the year and reached.5% y/y in Q 17 the strongest quarterly growth rate recorded in six years. Further, UK output rose.% q/q during Q3 17,.1 percentage points faster than in Q 17 and the same pace of expansion during Q3 16. Additionally, while WTI crude oil prices have trended upward since June 17 to almost US$6 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 Q 17. Consequently, trends in economic activity in the Caribbean thus far during 17 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.% y/y during H1 17 compared to a 3.3% y/y rise in arrivals during H1 16 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 16 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 5% 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 H 17. Lower revenues and higher spending reduced fiscal balances in twelve of seventeen markets covered thus far in 17. Almost all governments increased current expenditure, while just over half spent more on capital expenditure. Further, revenues fell in half of the region, primarily driven by lower non-tax revenues. Specifically, in the OECS, those countries most dependent on citizenship by investment inflows - Antigua and Barbuda, Dominica, and St. Kitts and Nevis all recorded substantially lower non-tax receipts during H1 17. Consequently, debt increased in most markets. Chart 1 Trends in Regional 1 Tourist Arrivals Chart Regional Loan Growth (y/y; %) mth moving average growth (%) Total Stay-Over Arrivals (R) Growth in Tourist Arrivals (L) (mln) Jun-13 Dec-13 Jun-1 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Caribbean Tourism Organization, Eastern Caribbean Central Bank and CIBC FirstCaribbean Mortgages Corporate Loans Consumer Loans -1 Jun-13 Dec-13 Jun-1 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Regional authorities and CIBC FirstCaribbean 1 Caribbean region includes: Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, British Virgin Islands, Cayman Islands, Curaçao, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, St. Maarten and St. Vincent and the Grenadines. Caribbean region includes: Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Curaçao, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, St. Maarten, St. Vincent and the Grenadines, Trinidad and Tobago, and Turks and Caicos Islands. CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

15 Caribbean Market Overview Q 17 1 Higher global commodity prices have driven consumer prices higher in 17. Excluding Suriname where prices surged following a sharp exchange rate depreciation, regional prices increased 1.% y/y in June 17 compared to a.% y/y rise in June 16. Thus far this year, prices increased everywhere except in Aruba, and have accelerated in all markets except Aruba, Barbados, Grenada, and Trinidad and Tobago. Additionally, the accumulation of foreign exchange (FX) reserves in tourism-dependent markets has slowed with all but the Bahamas and Jamaica both markets that have increased net external borrowing recently experiencing a decline or no growth in FX reserves. Finally, weak energy production and prices continue to reduce reserves in Trinidad and Tobago, but an improved external current account balance has increased FX reserves in Suriname. Faster deposit than loan growth increased excess liquidity across the region y/y in Q 17. Domestic deposits expanded 3.1% y/y, while total loans and advances contracted marginally by.3% y/y. Growth in retail loans accelerated to.1% y/y, as a decline in mortgages partially mitigated greater demand for consumer loans, while corporate lending remained weak and declined.9% y/y. Nonetheless, non-performing loans continue to decline from high levels across the Caribbean, and capital adequacy continues to exceed globally-accepted minimums. Since the IMF released its July 17 update to the World Economic Outlook, it has revised its expectations for economic growth in some of the Caribbean s major trading partners. While the Fund has kept 17 and 18 economic growth projections for the UK unchanged at 1.7% and 1.5%, relatively positive developments for the year-to-date have led to improvements to the USA s and Canada s forecasts. The IMF now expects US real GDP to expand by.% and.3% in 17 and 18, while growth will likely reach 3.% and.1% in Canada over the same period. Hence, pre-hurricanes Irma and Maria, the IMF expected that economic growth would accelerate in the tourism-dependent Caribbean to 1.8% and.3% in 17 and 18, while, after a 1.9% y/y decline in commodity producers output, economic activity would likely rebound by.% in 18. However, the passages of Hurricanes Irma and Maria will likely reduce the pace of GDP expansion in 17 in tourism-dependent markets, but reconstruction efforts in 18 will likely accelerate GDP growth at a faster pace than expected in 18. Chart 3 Regional 3 Inflation and Intl. Commodity Prices (%; end of period) Regional Inflation Rate (L) Growth in International Oil Prices* (R) Growth in International Food Prices+ (R) -1-7 Jun-13 Dec-13 Jun-1 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Regional authorities, International Monetary Fund and CIBC FirstCaribbean * Average of U.K. Brent, Dubai and West Texas Intermediate + International Monetary Fund Food Index Caribbean region includes Anguilla, Antigua and Barbuda, Aruba, Barbados, Belize, British Virgin Islands, Cayman Islands, Curaçao, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, St. Maarten, St. Vincent and the Grenadines and Trinidad and Tobago. CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

16 Caribbean Market Overview Q Anguilla Shane Lowe CIBC FirstCaribbean Production, Prices, and Employment After likely modest growth in real GDP during Q1 17, improvement in tourism, construction, and financial services likely accelerated real GDP growth during H1 17. Total visitor arrivals increased 8.% y/y, while spending by tourists advanced 1.5% y/y during H1 17. Stayover arrivals rebounded 6.6% y/y after declining.% y/y in Q1 17, as more arrivals from the USA (up 6.1% y/y), Canada (up.9% y/y), the UK (up 33.% y/y) and other markets outside of the Caribbean (up 1.% y/y) eclipsed a 3.% y/y fall in Caribbean arrivals. The number of excursionists advanced 9.% y/y. Despite a 1.5% y/y fall in the value of imported inedible crude materials excluding fuel, other indicators of construction activity suggest greater construction value-added during the period. The government spent 13.% more y/y in capital expenditure, while commercial bank lending to construction companies and for residential construction increased 19.3% year-to-date and.5% year-to-date. Meanwhile, greater loan balances (up 5.9% year-to-date) and wider commercial bank interest rate spreads (up 13 bps year-to-date) suggest that financial intermediation output also expanded during the first half of the year. However, since then, damage caused by Hurricane Irma will likely slow real GDP growth in H 17, as any disruptions to hotels and other businesses reduce tourist arrivals and delay increased spending expected during the Christmas period. Notwithstanding a 1.% y/y fall in the price of housing, utilities, gas, and fuels (the highest weighted category in the consumer price index), higher prices for food and non-alcoholic beverages (up 1.% y/y), transportation (up.% y/y), and communication (up.% y/y) pushed consumer prices.7% higher y/y in Q 17. Developments in Financial Markets After years of persistently negative loan growth, rebounds in both retail and corporate lending increased total loans y/y in September 17. However, faster growth in deposits boosted commercial bank liquidity y/y during the same period. Total loans and advances expanded.7% y/y. Mortgages, consumer loans, and business loans increased.8% y/y, 1.5% y/y, and 8.8% y/y, but lending to the public sector fell 3.% y/y. However, total deposits expanded 16.% y/y as higher retail (up 1.8% y/y) and corporate (up.9% y/y) balances supported a 7.7% y/y surge in non-resident deposits. The loan-to-deposit ratio fell 5. percentage points y/y to 9.3%, while a combination of a lower weighted average lending (down 1 bps y/y) and deposit (down 6 bps y/y) rates narrowed commercial bank interest rate spreads by bps y/y to 7.5%. Chart 1 Stay-Over Tourist Arrivals (US$/person) ('s) Visitor Expenditure/person - 1-month average (L) 3 Stay-Over Arrivals (R) Jun-13 Dec-13 Jun-1 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Caribbean Tourism Organization, Eastern Caribbean Central Bank and CIBC FirstCaribbean Chart Inflation (y/y; %) Q 13Q 1Q 15Q 16Q 17Q Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean All Items Food Fuel and Light CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

17 Caribbean Market Overview Q 17 1 Trends in banking sector financial stability indicators painted a mixed, but deteriorating picture during the four quarters ended Q3 17. The capital adequacy ratio declined 1. percentage points y/y to 1.% and the non-performing loans to total loans ratio rose from 6.% to 19.3%, but banks annualised return on assets increased from.7% to.9% over the same period. Government Debt The government fiscal surplus rebounded by 18.9% y/y to US$5.1 million during H1 17. The government collected US$. million more (11.3% y/y) in current revenue. Tax revenues increased US$.3 million y/y to US$36.3 million as strong growth in taxes on property (up US$.7 million or 166.% y/y), and taxes on domestic goods and services (up US$.9 million or 37.5% y/y) more than offset a US$1.3 million (8.5% y/y) contraction in taxes on international trade and transactions and virtually no growth in taxes on income and profits. Non-tax revenue declined by US$.1 million y/y to US$5. million, while the government received US$.3 million in grants compared to virtually none one year earlier. Current spending increased US$.6 million y/y to US$3.9 million. Spending on goods and services increased US$. million (.% y/y) and interest payments on a higher debt stock surged US$.9 million (5.8% y/y). However, personal emoluments, and transfers and subsidies declined US$.1 million (.9% y/y) and US$. million (.3% y/y). Capital expenditure and net lending expanded US$1. million y/y to US$1.8 million. The government of Anguilla s resolution of two domestic distressed banks during Q 16 contributed to a 131.8% y/y surge in public debt to US$17.6 million by Q1 17. However, total debt declined.8% relative to the end of 16. Outlook In light of the negative effects of Hurricane Irma on infrastructure in Anguilla during the latter half of 17, the Eastern Caribbean Central Bank (ECCB) now expects that sharp declines in agriculture, livestock and forestry (down 1.% y/y), tourism (down 1.% y/y) and transport, storage and communications (down 1.% y/y) will likely contributed to a 3.5% y/y reduction in real GDP in 17. However, reconstruction post-irma and the associated positive knock-on effects to mining and quarrying, and manufacturing will likely lead to a recovery in real output of 5.9% y/y during 18. Chart 3 Public Sector Debt Outstanding Chart Growth in Key Balances (%) (US$million) Q1 1Q1 15Q1 16Q1 17Q1 Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean 1-1 Loans - Deposits Q3 13Q3 1Q3 15Q3 16Q3 17Q3 Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

18 Caribbean Market Overview Q Antigua and Barbuda Shane Lowe CIBC FirstCaribbean Production, Prices, and Employment Latest available indicators suggest that economic activity remained mixed during the first half of 17 compared to the outcome one year earlier. Growth in total tourist arrivals accelerated to 8.7% y/y from 6.% y/y during Q1 17. The number of cruise ship passengers and yacht passengers improved 1.5% y/y and.3% y/y, but stay-over arrivals contracted 5.% y/y. The number of stay-over arrivals from the USA, Canada, UK, and the Caribbean declined 9.7% y/y, 6.8% y/y,.3% y/y, and 8.5% y/y, but arrivals from all other markets increased 8.5% y/y. However, aggregate visitor spending declined.1% y/y. Finally, in addition to greater tourism activity, the 1.9% y/y rise in the number of cruise ship calls likely contributed positively to output in transportation, storage and communications. Recent indicators point to subdued or negative growth in investment activity during H1 17. Government s capital expenditure declined 69.7% y/y, while the value of imported inedible crude materials excluding fuels, and imported machinery and transport equipment fell 9.1% y/y and 1.9% y/y. Similarly, commercial bank loans for home construction and renovation, and to construction firms declined.8% year-to-date and 3.1% year-to-date. Further, greater domestic exports of food and live animals (up 6.8% y/y) and manufactured goods (up 35.9% y/y) suggest stronger performances in the agriculture and manufacturing sectors for the year to date. Since then, damage sustained in Barbuda during the passage of Hurricane Irma in Q3 17 may slow GDP growth marginally during 17. The inflation rate accelerated to 3.% y/y in June 17 from -.5% y/y one year earlier. Food prices increased.3% y/y, while the prices of housing and utilities, and transportation and communication rose 7.% y/y and.% y/y. Developments in Financial Markets Subdued loan growth and persistent deposit growth continued to increase banks excess liquidity y/y during Q3 17, but financial stability indicators generally improved. Total loans and advances declined.7% y/y, as a.5% y/y fall in corporate loans more than offset a 1.% y/y rise in retail lending. Mortgages and lending to businesses declined 1.3% y/y and 6.7% y/y, but public sector loans and consumer loans increased 3.% y/y and 5.7% y/y. Notwithstanding an 11.8% y/y contraction in non-resident deposits, higher retail (up.7% y/y) and corporate (up 11.8% y/y) balances pushed total deposits 6.% higher y/y. Chart 1 Stay-Over Tourist Arrivals 15 1 (US$/person) Visitor Expenditure/person (L) Stay-Over Arrivals (R) ('s) 5 Jun-13 Dec-13 Jun-1 Dec-1 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean, Caribbean Tourism Organization Chart Inflation (y/y; %) Q 13Q 1Q 15Q 16Q 17Q Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean All Items (L) Food (L) Fuel and Light (R) CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17

19 Caribbean Market Overview Q Over the period, the loan-to-deposit declined from 7.6% to 66.%, and the average lending and deposit rates contracted bps y/y and bps y/y to 8.9% and 1.61%. Capital adequacy and loan quality improved, but banks return on assets fell. The capital adequacy ratio improved. percentage points y/y to 37.7% and the non-performing loans ratio fell from 8.9% to 7.7%. However, annualized return on assets fell from 1.8% to 1.% between Q3 16 and Q3 17. Government Debt Sharp falls in current non-tax and capital revenues reduced the fiscal balance from a US$1.9 million surplus during H1 16 to a US$7.1 million deficit during the same period one year later. Current revenue declined US$1. million y/y to US$1.1 million as a US$1. million (.9% y/y) fall in taxes exacerbated a US$8.8 million (.% y/y) contraction in non-tax receipts likely associated with lower citizenship by investment inflows. Taxes on income and profits, and taxes on international trade and transactions fell US$.6 million (1.1% y/y) and US$.3 million (.9% y/y), but taxes on property and taxes on domestic goods and services expanded US$.7 million (1.8% y/y) and US$.9 million (.8% y/y). Meanwhile, capital revenues plummeted US$1. million y/y to US$3. million. A US$3. million (17.3% y/y) rise in interest payments contributed solely to the US$3. million increase in current expenditure to US$15.3 million. Personal emoluments and spending on goods and services increased US$.5 million y/y and US$.5 million y/y, but transfers and subsidies fell US$.3 million. Capital expenditure and net lending plunged US$16. million y/y to US$7.1 million. During Q1 16, total public sector debt increased 1.% y/y, but fell 1.% year-to-date to US$1.19 billion. Outlook After an expected slowdown in real GDP growth to 3.1% during 17, partially associated with the passage of Hurricane Irma, the ECCB expects real GDP growth to accelerate to 5.8% in 18. The central bank expects that construction growth will likely accelerate in 18 and support growth in other sectors of the economy. Further, the IMF expects that deteriorations in the primary balance will worsen the government s fiscal balance in 17 and again in 18. Chart 3 Public Sector Debt Outstanding (US$million) 1 13Q1 1Q1 15Q1 16Q1 17Q1 Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean Chart Growth in Key Balances (%) Loans Deposits -8 1Q3 13Q3 1Q3 15Q3 16Q3 17Q3 Source: Eastern Caribbean Central Bank and CIBC FirstCaribbean CIBC Capital Markets & CIBC FirstCaribbean International Bank December 17