By Scott B. MacDonald
The Covid-19 pandemic has been a major unexpected economic blow for the Caribbean. In 2019 most of the region had enjoyed continued economic expansion and forecasts for 2020 were promising. Covid-19, which arrived in the Caribbean in March, changed that. With the interruption of tourism and severe global downturn, many Caribbean nations have been forced to scramble to keep their economies afloat; and a number are finding themselves squeezed in terms of their ability to repay their international debt obligations. No doubt 2020 will go down as one of the worst years in memory for the Caribbean. The IMF is forecasting a 10.3 percent contraction for tourist dependent economies before a recovery in 2021 of 4.8 percent growth. This has important implications for what the Caribbean is going to look like at the other end of the Covid-19 pandemic.
The Caribbean holds one of the most open set of economies in the world. Most countries are small, import many of their necessities, and depend on foreign demand to pay their way in the world. While the export of gold, oil, natural gas, bauxite and nickel play an important role in a handful of economies (Cuba, Jamaica, Trinidad and Tobago, Guyana and Suriname), the region is highly dependent on tourism. According to the International Monetary Fund, tourism accounts for 50 to 90 percent of GDP and employment for most Caribbean countries and territories.
Among the Caribbean countries most dependent on the flow of airborne tourists and cruise ships are Aruba, Antigua and Barbuda, the Bahamas, Barbados, Belize, and Dominica. Tourism also plays a major role in the Cuban economy, especially with the decline of the sugar industry over the past two decades.
Caribbean leaders took a strong leadership role in dealing with the pandemic, prompted by a perception that the international multilateral system was faltering. Strong global leadership was absent, and key allies, like the United States and United Kingdom, were struggling to deal with their own problems – several Caribbean leaders viewed them as examples of how NOT to tackle the pandemic. The decision to withdraw the U.S. from the World Health Organisation (WHO) by the administration of President Donald Trump only reinforced that perception.
Consequently, most Caribbean countries moved quickly to unilaterally close their borders, introduce quarantine measures, impose social distancing protocols, and worked harder to coordinate regional policies, especially in the procurement of personal protective equipment (PPE). The last was made harder for individual countries due to a traditional reliance on the United States in a time of crisis and the Trump administration’s decision to block distributors from selling PPE overseas – due to shortages at home. While Brazil, Mexico, and Peru have struggled to contain a rise in infections and deaths, the Caribbean has done considerably better.
The Caribbean Community (CARICOM), the regional organisation, was able to procure equipment with the People’s Republic of China and Taiwan actively providing PPEs to the region. The Caribbean Development Bank (CDB) was also active in responding to the crisis, making emergency loans available to seven countries: Antigua and Barbuda, Belize, Dominica, Grenada, St Lucia, St Vincent and the Grenadines, and Suriname. Individually, Caribbean leaders have sought debt relief from private creditors as well as approaching the World Bank and IMF for assistance.
The virus in the Caribbean has not spread in the same fashion as it did in the United States, Italy or the United Kingdom or, for that matter, the major Latin American countries. Among the Caribbean countries, the Dominican Republic, Puerto Rico and Haiti have been the hardest hit by the virus. Some countries are reopening tourist facilities, though this is going to be a slow process—many of the places tourists come from are still grappling with Covid-19 problems (the U.S. looms large in this).
The IMF in June 2020 gave a particularly gloomy outlook for the Caribbean:
With tourism coming to a virtual standstill and key source markets in advanced economies plunging into deeper recession, the region is likely to experience a very sharp and protracted contraction in economic activity. Despite the reopening of borders starting in June for some Caribbean countries, international tourist arrivals are expected to return to pre-crisis levels only gradually over the next three years. In addition, the steep drop in oil prices is hurting commodity exporters through a loss in exports and fiscal revenues. The ongoing hurricane season poses additional risks.
Considering the bleak global outlook (which could be a little overstated), access to international capital markets has evaporated, government finances are, and will be, squeezed for a while, with sovereign ratings for Caribbean countries likely to come under pressure. Another related issue is that the major downturn in advanced economies, especially the United States, raises concerns about the sustainability of the flow of remittances to the Caribbean – primarily from the region’s large diaspora population in North America. Remittances play an important role in a number of Caribbean states. According to the World Bank, personal remittances in 2018 were equal to 32 percent of Haiti’s GDP, 16 percent of GDP of Jamaica’s GDP, and 8.9 percent of GDP of Dominica’s GDP.
The Bahamas has already been hit hard; Moody’s cut the Caribbean country from Baa3 to Ba2, a two notch downgrade that took it from investment grade to junk, making its costs of raising fresh capital more expensive. Moreover, the Bahamas now has a negative economic outlook, meaning that further downgrades could occur.
The downgrade was the result of the Covid-19 crisis, which worsened the country’s fiscal and debt picture. The agency predicted that the Bahamas’ debt burden could hit 85 percent of GDP by June 2021. As for the country’s negative outlook, Moody’s noted: “The negative outlook reflects Moody’s expectations that given the severity of the coronavirus shock, the government credit profile will continue to be exposed to downside risks related to the recovery of the tourist sector.” The Bahamas is now rated Ba2 (negative)/BB (negative). The latter rating is from Standard & Poor’s, which downgraded the Caribbean country in April 2020 from BB+.
Looking ahead, the Caribbean is likely to experience a more difficult time accessing international credit markets. The Covid-19 pandemic has hit the region hard and until there is a marked improvement on the health and economic fronts in key countries, such as the United States, the United Kingdom, Europe, and China, tourism is going to languish. This also means that the rating agencies are likely to keep ratings across the region on a downward trajectory. Aruba’s BBB+ rating with Standard & Poor’s in April was moved to negative as was Fitch’s BB rating. Jamaica’s ratings (B2/B+/B+) are also likely to see more pressure, as are Trinidad and Tobago’s (Ba1/BBB-). Suriname’s ratings have already been downgraded and remain under pressure.
Most Caribbean governments are in emergency mode, as they should be. There is a way out of the crisis, but the region will require external assistance to buffer the worst of the downturn, especially as access to international capital markets becomes more restricted and ratings pressures increase. This means that multilateral institutions need to be more flexible in providing assistance to the region—which they have been in a number of cases – and the United States, Canada and Europe need to step up.
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