Caribbean outlook and challenges

Caribbean: Outlook and Challenges

Nicole Laframboise International Monetary Fund Views expressed are those of the speaker alone and should not be reported as representing the official position of the International Monetary Fund.

OUTLINE 1. Global/ regional outlook and risks 2. Caribbean: macro challenges 3. Policy priorities

 Recall the impact of the “Great Recession”…

World: Real GDP Growth (percent change) 6 5 4 3 2 1 0

-1 2000

2002

2004

2006

2008

2010

2012

2014

Source: World Economic Outlook.

3

ďƒ˜ The recovery was U-shaped, but world growth has been tepid since then‌ Real GDP Growth (percent change) 12 10 8 World

6

Emerging

4 2

0 -2

Advanced

-4 -6 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Economic Outlook.

4

 A pick-up in 2013 in advanced economies…

Advanced Economies: Real GDP (index: 2008Q1 = 100) 110 108 106

US

Japan

Euro area

UK

104 102 100 98 96 94 92 90 2008

2009

2010

2011

2012

2013

2014

Source: World Economic Outlook.

5

‌ is being offset in part by a slowdown in big emerging markets .

Emerging Markets: Real GDP Growth (percent change) 14 Brazil India South Africa

12 10

China Russia

8 6

4 2 0 2010

2011

2012

2013

2014

Source: World Economic Outlook.

6

 Global activity is expected to strengthen moderately  The U.S. economy is improving, as fiscal headwinds ease and house-holds recover further  The euro area is out of recession, but activity remains subdued with financial fragmentation, debt burdens  China’s growth is expected to stabilize at a lower rate, reflecting both cyclical and structural factors  Overall, downside risks remain, though have shifted to new risks…

7

 RISKS: Effects of normalization of US monetary policy on EM sovereigns and corporates…

8

ďƒ˜ New bouts of risk aversion and financial market volatility leading to more outflows‌

Sources: EPFR; and IMF staff calculations.

9

ďƒ˜ For commodity producers, the end -- for now -- of rising demand from China and rising prices.

Commodity Prices (index: March 2004=100) 400 Oil 350

Forecasts

Metals Food

300 250 200 150 100 50 2004

2006

2008

2010

2012

2014

Source: World Economic Outlook.

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ďƒ˜ These developments pose challenges for the Caribbean region, where growth has been subdued...

Caribbean: Real GDP Growth (percent change) 5 4 3 2

Commodity exporters

1

0 -1 -2 -3

Tourism dependent

-4 -5

2008

2009

2010

2011

2012

2013

2014

Source: World Economic Outlook.

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ďƒ˜ Particularly in several tourism based markets‌.

Caribbean: Tourist Arrivals (index: January 2005=100) 150

ECCU and Barbados 1/ Jamaica

Bahamas and Belize Dominican Republic

140 130 120 110 100 90 80 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Caribbean Tourism Organization.

1/ ECCU includes Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

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ďƒ˜ Giving rise to persistent external imbalances Caribbean: Net Foreign Assets (NFA) (percent of GDP)

0 -50 -100 -150 -200

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1986

1984

1982

1980

-250

1988

Caribbean Tourism-based Caribbean Commodity-exporting Caribbean

Sources: International Financial Statistics; World Economic Outlook; External Wealth of Nations Database;and IMF staff calculations.

13

Snapshot: external current account deficits by country Current Account Balance, 2013 (percent of GDP) 15 10 5 0

-5 -10 -15 -20 -25

-30 -35 VCT

GRD

BHS

GUY DMA ATG

LCA

BRB

JAM

KNA

SUR

BLZ

TTO

Source: World Economic Outlook.

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ďƒ˜ Financed less in recent years by FDI. Caribbean: Current Account Financing (average for tourism dependent countries, percent of GDP) 20 15

Capital transfers Public borrowing CA Deficit

FDI Other

10 5 0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-5

Sources: International Financial Statistics; World Economic Outlook; and IMF staff calculations.

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ďƒ˜ High debt and weak growth have strained fiscal positions.

General Government Primary Balance and Gross Debt (% of GDP) Tourism-Dependent Economies Primary balance (right scale)

Commodity Exporters Debt

100

Primary balance (right scale) 4 3

95

Debt

56

4

54

3

2

2

52

90

1

85

0

-1

80 75 70

2008

2010

2012

2014

1 50 0 48 -1

-2

46

-3

44

-4

42

-2 -3 -4 2008

2010

2012

2014

Source: IMF, World Economic Outlook Note: Statistics shown are simple averages for the respective country groups.

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Snapshot: 2013 public debt Debt, 2013 (percent of GDP) 160 140 120 100 80 60 40 20 0 SUR

TTO

BHS

GUY DMA

BLZ

VCT

LCA

BRB

ATG

KNA

GRD

JAM

Source: World Economic Outlook.

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ďƒ˜ In many cases leading to fiscal financing pressures Central Government Financing Needs (% of GDP) Commodity Exporters

Tourism-Dependent Economies

15

30

25 2013

10

2013

2014

2014

20 15

5

10 5

0

KNA

VCT

DMA

BHS

JAM

ATG

BRB

LCA

GRD

TTO

BLZ

SUR

GUY

0

Source: IMF staff estimates.

Note: Data are presented on the government's fiscal year-basis and may not be strictly comparable across countries.

Data for St. Kitts and Nevis refer to the general government. Data for Guyana refer to the nonfinancial public sector.

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ďƒ˜ This has increased the burden on financial systems, some already struggling with high NPL ratios.

Nonperforming Loans (Percent of total loans) Belize

Jamaica

ECCU

25

20

15

10

5

0 2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

Sources: National authorities; and IMF staff calculations. šECCU includes Antigua, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and Grenadines.

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Broad policy Objectives 1. Strengthen fiscal position: lower debt, build buffers 2. Improve competitiveness: lower costs, raise quality 3. People: create employment, safeguard social services, equity

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Policy Recommendations ** 1. Lower public debt levels > Revise/strengthen fiscal frameworks (PFM, rules…) > Lower current expenditure, raise capital spending > Reduce tax expenditures, widen tax base, lower rates 2. Reduce financial sector vulnerabilities > Resolve failed institutions promptly > Beef up framework for resolution, crisis management > Enhance national and cross border supervision 3. Boost potential growth …. ** IMF, CARICOM COMMISSION, GROWTH FORUM, ETC…21

3. Economic Growth  Lower admin costs of doing business: regulation, red tape, customs delays  Strengthen public services, institutions: remove state from the productive sectors, focus on public goods and services  Structural reforms to lower key costs:  Labour – reduce rigidities  Energy and transport: regional approach/solutions  Infrastructure bottlenecks: identify, prioritize 22