Caribbean Region


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Caribbean Region

  1. 1. The Global Economic Crisis and Caribbean States: Impact and Response* Andrew S Downes PhD Professor of Economics and Director Sir Arthur Lewis Institute of Social and Economic Studies University of the West Indies, Cave Hill Campus PO Box 64, Barbados *Presented at Commonwealth Secretariat Conference on the Global Economic Crisis and Small States, London, July 6-7, 2009
  2. 2. Structure of Presentation • Nature of the Global Crisis • Impact of the Crisis on the Caribbean • Response of the Caribbean • The Way forward
  3. 3. 1 Nature of the Global Crisis • The proximate roots of the current global economic crisis lie in the collapse in the USA housing (sub-prime mortgage) market in 2007 and the subsequent crash of the financial market. USA went into recession in December 2007. • Contagion effects to other developed countries’ financial markets resulting in a global financial crisis in September 2008. Interconnectedness of large financial institutions internationally—some considered ‘too big to fail’.
  4. 4. • Global financial crisis led to a global economic crisis as the financial market effects spilled over into the real sector (i.e., fall in incomes/wealth and demand for goods/services, decline in employment—job losses). • Several other underlying elements to be considered with the financial/economic crisis – inefficiencies in the market, lack of regulation/supervision, market interconnectedness, greed, etc.
  5. 5. • Unlike recent crises which originated in ‘developing countries’ – Asia, Latin America-- this crisis has originated in the world’s largest economy, USA ,upon which several economies depend (exports, investment, remittances, etc). Major contagion or butterfly effects on other economies. • Caribbean countries have small open developing economies, hence the global economic crisis can be considered as an
  6. 6. • ‘external shock’ which has both direct and indirect effects on Caribbean economies. • USA and other developed economies upon which the Caribbean economies depend have experienced: – Slow down in output: 3.0% in 2006 to 0.8% in 2008 and expected decline in 2009 to -3.8% – Increase in unemployment: up to 9.4% in USA, 7.2% in UK, 8.4% in Canada in 2009 (first quarter)
  7. 7. - increase in fiscal deficit to GDP: from -2.4% in 2006 to -4.6% in 2008 for developed countries. Expected to be -10.4% in 2009. - decrease in world trade volume: from 9.2% in 2006 to 3.3% in 2008. - fall off in net capital flows to emerging and developing economies: from US$202.8b in 2006 to US$109.3b in 2008, with a further decline to – US$190.3 in 2009 (i.e., outflow greater than inflow)
  8. 8. • Given the dependence of the Caribbean economies on the advanced economies, it is expected that the decline in economic activity would have an adverse effect. • Unsophisticated nature of Caribbean financial markets have not resulted in a direct impact from the financial crisis. Impact has been indirect through income/wealth effects.
  9. 9. 2 Impact of the Crisis on Caribbean Economies • The main effects of the global economic crisis on Caribbean economies would be (and is being) felt through: – The fall in export demand (goods and services such as bauxite, tourism and off-shore finance) – A decline in remittances from migrant workers – Reduced foreign direct investment (capital inflows) – Reduced access to financial credit—changes in credit rating – Some depreciation in the exchange rate – Increased unemployment
  10. 10. – Deterioration of the fiscal balance and the balance of payments • The severity of the effects depends on the set of initial conditions, the degree of interconnectedness and the policy responses • Caribbean economies are generally regarded as being vulnerable to external economic shocks and given the size of this shock, one would expect significant large and lasting effects • To date, the impact has been largely moderate but this may be due to lagged responses.
  11. 11. • Decline in Real Output – IMF estimates indicate a decline in real GDP from an average growth rate of 5.5% in 2006 to 1.7% in 2008 and an expected rate of -0.9 in 2009 (i.e., English- speaking Caribbean countries) – Tourist arrivals have declined in the major tourist destinations: Bahamas, Barbados, St Lucia. Jamaica has recorded a slight increase in stay-overs – There has been a decline in private sector construction activity
  12. 12. • Unemployment – After a steady decline in unemployment to under 10 percent in the Bahamas, Barbados, Jamaica and T&T in 2007, unemployment rose in 2008 and is expected to rise further in 2009 – Barbados: 7.4% in 2007 but 8.1% in 2008, 8.4% in 2009 (1st) – Bahamas: 7.9% in 2007 but 8.7% in 2008,9.2% in February 2009 in Grand Bahama – Belize: 12.1% in 2007 but 8.2% in 2008 – Jamaica: 9.9% in 2007 but 10.3% in 2008 – T&T: 5.6% in 2007 but 4.9% in 2008, forecast to be 8-10% in 2009
  13. 13. • Remittances – Net remittances to Jamaica declined from US$174.1m in December 2007 to US $161.8m in 2008. The net remittances for the first quarter of 2009 are much lower than in 2007 and 2008 • Fiscal Balance – An increase in the fiscal deficit as a % of GDP between 2007 and 2008: • Barbados: 2.5% to 5.9% • Jamaica: 4.3% to 5.5% • T&T: 0.5% to 7.7%
  14. 14. – But slight declines in other Caribbean states – Further deterioration expected in 2009 with the use of countercyclical policy measures • External Balance – Increase in external current account deficit as a % of GDP in almost all the countries between 2007 and 2008. Example: • Barbados: from 6.9% to 10.4% • Guyana: from 21.5% to 25.6% • Jamaica: from 15.9% to 21.9%
  15. 15. – Some deterioration in external capital account as a % of GDP in Barbados, Belize but improvement in Jamaica, Guyana – Gross International Reserves at the Central Banks were still strong in 2008 compared with 2007 – Import cover ratio ranged between 2 months (Bahamas) and 11 months (T&T) – Deterioration in the exchange rate in Jamaica from J$69 for US$1 in 2007 to J$73 for US$1 in 2008 – No major changes in the debt service ratio and the external debt to GDP ratio over the 2007-8 period
  16. 16. – Slight decline in foreign direct investment in the Bahamas (hotel plant, second homes market), but slight increases in Jamaica, T&T • Inflation – Increase in average inflation rates over the 2007-8 period: range of 2.3% (Belize) to 14% (Guyana) in 2007 and a range of 4.5% (Bahamas) to 22% (Jamaica) in 2008 – Increases in inflation rate due to increase in oil prices up to mid-2008
  17. 17. • Financial Failure – Collapse of CL Financial, a conglomerate based in T&T with interest in insurance, financial services, manufacturing, etc. Bailout provided by the T&T government with supporting assistance from the Government of Barbados – Collapse of Stanford Group saw a bailout of the Bank of Antigua by the government
  18. 18. • Summary – Jamaica and the Bahamas have experienced significant shocks – especially in tourism, bauxite – Other Caribbean countries have suffered milder effects to date. They are in a wait-and-see mode – Credit agencies have downgraded Caribbean economies although some are still in the investment grade – Some policy measures have been put in place – Greater effects expected in 2009
  19. 19. 3 Response of Caribbean States • Several policy measures have been adopted by Caribbean states especially in an effort to reduce the impact of the crisis on unemployment: fiscal policies, monetary/financial policies, sectoral policies, social policies, multilateral financing • Fiscal policies: expenditure on social programs and social infrastructure, reduction in taxes to reduce cost of living, provision of subsidies. Larger counter- cyclical measures to save jobs
  20. 20. • Monetary/Financial Policies: liquidity injections in national currency (i.e., issue of treasury bills, notes and debentures); reduction in interest rates (except Jamaica); regional liquidity support fund in the OECS to support countries affected by CL Financial collapse • Sectoral Policies: initiatives to boost agricultural production to market tourism; to promote SME; to boost manufacturing exports; restructuring of the bauxite industry in Jamaica; increase in housing construction
  21. 21. • Social Policies: increase in minimum wage; provision of training, establishing unemployment assistance fund (Bahamas), broadening the scope of special social programs (PATH in Jamaica), boost in social welfare; use of National Insurance Fund in Barbados for training---UI already in Barbados. • Multilateral Financing: increase in Caribbean Development Bank assistance (policy-based loans/grants, economic infrastructure, education and lines of credit to financial institutions), support from the EU for Jamaica, Belize, Guyana: IMF funding for St Vincent ($5.7m), St Kitts ($3.4m) and Grenada ($6.8m)
  22. 22. • Summary Policy response has been expansionary fiscal and monetary policies to keep employment at high levels, fiscal support for key sectors, boosting the social protection system/safety net and sourcing external funds when appropriate
  23. 23. 4 The Way Forward • Still a high degree of uncertainty on duration and depth of global recession – small signs of recovery in USA • Main effects to be felt in 2009 (lagged effect on the Caribbean states – evidence from business cycle analysis) • Adoption of Just-in-Time (JIT) approach to policy making given uncertainty • Existence of inertia of confidence with possible hysteresis effects • Rethinking of macroeconomics—rise of behavioural economics
  24. 24. • Regional efforts have been suggested by a Regional Task Force – agricultural expansion, tourism marketing, monitoring and dialogue – medium term measures • Strengthening regulation and supervision at the national and regional levels )e.g., deposit insurance schemes) • Regional approach to IFIs with respect to the additional funding provided by the G20 to IMF, World Bank. Also identification of funds in various agreements which have not been used
  25. 25. • Need to manage fiscal deficit (i.e., pull back from high ratios to GDP), expand exports to deal with external debt service or possible renegotiation of debt payment • Need to re-examine graduation criteria from international financial institutions ( eg World Bank) • Strengthen social programs to have built-in stabilisers (e.g., unemployment insurance) • Monitoring the recovery process to take advantage of any opportunities • Strengthening of regional economic integration— strategic development planning