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Lingering debt spectres highlight need for change in the Caribbean

Jamaica is getting back on track and could become an unlikely poster child for the IMF. However, elsewhere in the Caribbean the threat of default looms and some countries are not ready to ask for help.

The home of Usain Bolt and Michael Holding may be known for its electric pace on the sports field but with two debt restructurings already this decade, when it comes to economic reforms Jamaica has a more leisurely reputation.

That may be changing. Economists praise the fiscal consolidation and debt reduction made in conjunction with the IMF and Inter-American Development Bank since Jamaica’s last default in 2013. Jamaica was expected to pass in September the fifth review of a four year IMF programme — its longest period of success with the Fund. More than 40 pieces of legislation have been passed, public debt has dropped below 140% of GDP and the current account deficit, which closed 2013 at 9.6% of GDP, is expected to continue to decline towards 7.5% in the next year.

“Jamaica has made significant progress and has done surprisingly well in implementing changes and instilling fiscal discipline as part of the IMF programme,” says Franco Uccelli, executive director for emerging markets research at JP Morgan in New York.

International bond markets rewarded Jamaica accordingly with an $800m 10 year bond in July yielding just 7.625%, a transaction that allowed it to repay debt due in October and replenish reserves.

Yet economists point out that the IMF is hardly popular among the people of the Caribbean. Previous programmes across the region have often had limited success and, indeed, Jamaica’s last IMF programme in 2010 went off-track in under a year. Critics said that the 2010 debt swap only reduced debt payments from 46% to around 43% of public spending and that the austerity programme strangled a recovery.

“I think the IMF has a lot at stake here,” says Uccelli. “If it can work well with authorities, it may be able to use Jamaica as the poster child for future programmes.”

INITIATIVE NEEDED

Belize, St Kitts and Nevis, Antigua and Grenada have also all defaulted since 2010 and Marla Dukharan, group economist at RBC Caribbean in Trinidad, admits “debt defaults and restructures can seem like a recurring decimal in some part of the Caribbean”.

“Recent precedents like Antigua show that there is progress while the IMF is involved but when they leave old patterns and problems can reappear,” says Dukharan. “In Jamaica, however, the economic restructure is quite deep under the present IMF programme.”

Jamaica may therefore play a part in helping the Caribbean lose its reputation as a serial defaulter and Dukharan agrees Jamaica’s programme may make it an “outlier”.

Warren Smith, president of the Caribbean Development Bank (CDB), says the progress achieved in the first year “is, arguably, unprecedented in Jamaica’s history”.

He believes the financial crisis that began in 2008 brought “greater cohesion and consensus among policymakers about the way forward”.

Smith highlights the success of the work of the IMF and CDB in St Kitts and Nevis since 2012. Growth there has accelerated to 3.8%, public debt is down from 180% to 104% and the fiscal balance has swung from a 7.8% deficit into a 12.2% surplus.

However, elsewhere things could get worse before they get better. JP Morgan’s Uccelli points out that, although it is difficult to generalise, many Caribbean nations are struggling with twin deficits. “If we assume that there will be a normalisation in monetary policy that tempers the search for yield, we think the risk of default could increase in certain countries,” says Uccelli.

Dukharan says that “in the Caribbean, you are more likely to see significant policy shift in the context of an IMF programme.”

The Dominican Republic is the one country that observers say has not only complied with the IMF but made strides beyond the multilateral’s initiatives.

“DomRep has certainly been an outlier in the Caribbean and has set itself apart from the rest of the pack in terms of growth and fiscal discipline,” says Uccelli. “The magnitude of the fiscal consolidation we’ve seen is quite impressive and the levels of growth are really enviable for the rest of the region.”

PETROCARIBE PAIN

As the largest and one of the most diversified economies in the Caribbean, Dominican Republic has some inherent advantages. But by rising above the apparently passive attitude to economic planning that afflicts many others in the region, it is best placed to survive another external factor that could hit home particularly hard in coming years: PetroCaribe.

With Venezuela in turmoil, the future of the PetroCaribe energy accord — created in June 2005 to provide subsidised Venezuelan oil to certain Central American and Caribbean states — is in doubt. Few, if any, countries can boast that their quotas are being met.

A Scotiabank report in September said there were “political and fundamental factors affecting the longevity of PetroCaribe, and both are trending toward an eventual dissolution of the energy union”.

The future of the programme is a “million dollar question”, says Uccelli.

Or should that be a billion dollar question? According to Scotia, PetroCaribe debt reached over $11bn by the end of 2013, equal to 16% of gross debt of the programme’s 13 participants and 8% of their GDP.

“The agreement has fostered a fiscal dependence on Venezuela among members and perpetuated petroleum consumption patterns that are unsustainable in the current era of high oil prices,” says Scotia. “Should the agreement collapse, unsubsidised market prices would amplify public sector and current account deficits in member countries.”

Scotia highlights DomRep as an “excellent” example of how diversification can lower reliance on the agreement. From 2005 to 2013, oil fell from three-quarters of the country’s electricity feedstock to one half, thanks to structural energy reform including building liquefied natural gas import terminals and increasing coal deliveries.

“DomRep will take the cheap money as long as they can get it but they are also thinking in terms of the possible demise of the programme,” says JP Morgan’s Uccelli. “Yet even here, it took the same question being asked several times before they acted.”

Economists lament that other members of PetroCaribe have not taken advantage of the savings to build more efficient and sustainable energy systems.

“Countries would be much worse off without PetroCaribe, both fiscally and externally,” says RBC’s Dukharan. “Even the prime minister of Dominica once said that there are countries in the region who are using the funds from PetroCaribe to pay public sector salaries and honour their debts.”

It is therefore a source of frustration for economists that most PetroCaribe members have not shown the discipline required to take advantage of their gift from the late Hugo Chávez and retool the energy supply — in particular given the high cost of energy and vulnerability to oil price shocks that stifle the competitiveness of the region.

The competitiveness problem is “at the root of our difficulty in achieving the high rates of economic growth which we need to be able to provide the standard of living to which our people aspire”, says CDB’s Smith.

“Our region, however, is not energy poor and needs to take advantage of evolving renewable energy technologies whose prices have been falling and which can bring about a transformation in the energy landscape,” he says. “A successful energy efficiency programme, incorporating appropriate tax incentives, could lead to reduced household expenditure on electricity and other forms of energy, thereby increasing disposable incomes.”

The power generation systems in the region are generally old and usually state-owned and subsidised. These subsidies are often a factor in the region’s high levels of public debt.

“There have been some moves towards private sector participation but it is not as widespread as it should be,” says Dukharan.

FIXING THE EAST

In Barbados, prime minister Freundel Stuart has pledged that the island nation would produce 29% of its energy from renewables by the end of the next decade. With Atlantic winds and the region’s year round sunshine, Barbados and the members of the Organisation of eastern Caribbean States (OECS) should be particularly suited to take advantage of renewable energy investment.

Yet most nations in the eastern Caribb-ean are either in recession, restructuring their debt or IMF programme, or just emerging from one of these, according to Dukharan. “These nations have been [stuck with] very low growth and I expect this to persist for some time.”

Another characteristic of these islands’ economies is hindering their competitiveness: the eastern Caribbean dollar (used in OECS) and the Barbadian dollar are pegged to the US dollar.

This may have aided stability during the financial crisis but these tourism-driven economies are now struggling to compete — especially given the eastern Caribbean’s tourism product is geared toward Europeans who are suffering hits to their own income and who have sunshine options far closer to home.

“On one hand, the tourism infrastructure is weaker and European tourists have more options than American tourists who flock to Jamaica, the Cayman Islands, the Bahamas or Aruba,” says Dukharan. “But it is also a question of cost. Price competitiveness is weak in the eastern Caribbean, due partly to the fixed currency but also due to higher input costs for energy and labour, for example.”

In Barbados, for example, where growth has averaged 0.3% for the last three years, rapidly deteriorating fiscal indicators and external imbalances led to a three notch downgrade — to B3 — from Moody’s in June 2014. As recently as December 2012 Barbados was investment grade with Moody’s.

With devaluation apparently not an option politically in Barbados, the island is instead undertaking an internal devaluation, which involves a programme of austerity and workforce cuts to shrink labour costs. The idea is that the economy contracts, consumption and imports fall, foreign reserves stabilise and the country’s tourism product eventually becomes more competitive.

However, after the first year of the programme, the deficit came out at 12.4% versus a target of 9%.

Some still believe that an IMF programme would be the way forward for Barbados.

Again, the burden of example may rest on Jamaica. “Maybe if Barbados can see that the programme works in Jamaica, it would generate an incentive,” says Uccelli. “Until now, Barbados has been quite proud and therefore reluctant to ask for foreign help.”

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