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St. Vincent & the Grenadines (ECCU)– Currency Forecast Report

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St. Vincent & the Grenadines is a member of the Organization of the Eastern Caribbean States and the eight of the nine member states of the OECC have adopted the East Caribbean Dollar as (XCD) as their common currency. Hence the currency of Grenadines & St. Vincent is also the East Caribbean Dollar (XCD). The XCD has been pegged to the United States Dollar (USD) since July 7, 1976 and the pegged exchange rate is 1 USD = 2.70 XCD.
I expect that 1 USD = 2.70 XCD peg will be maintained for the forecasted period up to 2015

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St. Vincent & the Grenadines (ECCU)– Currency Forecast Report

  1. 1. 1|Page St. Vincent & the Grenadines (ECCU)– Currency Forecast Report Forecasts for East Caribbean Dollar (XCD) Currency 2013 2014 2015 USD/ XCD 2.70 2.70 2.70 1. Summary: St. Vincent & the Grenadines is a member of the Organization of the Eastern Caribbean States and the eight of the nine member states of the OECC have adopted the East Caribbean Dollar as (XCD) as their common currency. Hence the currency of Grenadines & St. Vincent is also the East Caribbean Dollar (XCD). The XCD has been pegged to the United States Dollar (USD) since July 7, 1976 and the pegged exchange rate is 1 USD = 2.70 XCD. I expect that 1 USD = 2.70 XCD peg will be maintained for the forecasted period up to 2015. One of the primary objectives of the East Caribbean Central Bank (ECCB) is to maintain the pegged exchange rate. In spite of the major macro headwinds for the OECC members such as the rise in Debt to GDP ratio, rise in oil prices, rising current account deficits, slowdown in tourism and exposure to acute storms in the Caribbean area, I believe that the ECCB has sufficient foreign assets & reserves of 1.1 billion USD to be able to maintain the peg in the near future till 2015. At the end of March 31, 2012 the percentage of foreign reserve assets to demand liabilities was 96.63%. The reserves are much higher than the required mandate of the ECCB Act 1983, that reserves be not less than 60% of notes and coins in circulation, and other demand liabilities. It should be noted that ECCU remains extremely susceptible to natural disasters such as hurricanes which not only destroy infrastructure but also agriculture capacities. Natural disasters are completely uncalled for and major one could surely lead to unforeseen and unpredictable circumstances. It could lead to reduction in tourism the primary component of GDP. However caution should be exercised. The current account deficit remains significantly high year over year. Looking over and beyond 2015, I believe that the macro headwinds especially the Debt to GDP Ratio over 100%, and declining fiscal revenues, which lead to difficulties in servicing debt of member nations, are certainly coming in the way of long run stability of the established peg. Both Antigua & Barbuda and St Lucia countries contributing around 44% of GDP of ECCU region have extremely high levels of debt to GDP ratios. Any fundamental weakness in these countries can lead to revaluation of the peg. With only tourism driving the economy I foresee major challenges ahead. Reductions in tourism will lead to higher unemployment, and restoring fiscal balance and debt to GDP ratio will be major challenges. *References provided in the reference section
  2. 2. 2|Page 2. St. Vincent & Grenadines: An Introduction 1. Geography & Demographics St. Vincent and the Grenadines is a small island in the Caribbean’s. It is located north of Trinidad and Tobago and between the Caribbean Sea and the North Atlantic Ocean As of July 2012 the population the population of the country was 103,537 (CIA World Fact Book) and the median age of the population is 30.7 years. 2. Economy The gross domestic product in 2012 was 720 million in US Dollars. The GDP of St. Vincent & Grenadines comprises about 12-13% of the ECCB region. The economy is primarily driven by agriculture (especially banana production), tourism, and construction activity and remittance inflows. Tourism comprises of around 15% of GDP and the Global Financial Crises of 2008-2009 had a severe impact on the reduction of tourism in the country. St. Vincent & Grenadines has a 68% gross government debt as a % of GDP. *Note: Since I am forecasting the exchange rate, and St. Vincent & Grenadines has adopted the Eastern Caribbean Currency Union, I would like to evaluate the Union as a whole to provide projections. 3. Eastern Caribbean Central Union: Evaluation of XCD 3.1 Eastern Caribbean Central Bank The Eastern Caribbean Central Bank is the monetary authority for a group of eight island economies namely - Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines. The ECCB is responsible for the issuance of an unrestricted single common currency, maintaining a common pool of foreign exchange reserves and deciding on the ECCB’s monetary policy. By maintaining adequate foreign reserves available for consumers and investors the ECCB has been able to maintain a strong and a stable currency. This includes setting limits for government borrowing and the extension of credit to governments and commercial banks by the ECCB. *References provided in the reference section
  3. 3. 3|Page Foreign Reserves Ratio Reserve Rate 2010 2011 2012 Required Reserve Rate 60% 60% 60% Actual Foreign Backing Reserve 93.93% 95.53% 96.63% * Source ECCB Based on the data above, I believe that the ECCB has been doing a fair job in its prime objective of a stable dollar by maintaining adequate reserves. With such high reserve ratios, the ECCB has sufficient reserves in its armory to protect the member states from adverse shocks. More than inflation targeting ECCB’s main focus is the stability of the XCD. ECCU’s stability is dependent on the stability of the East Caribbean Dollar. The savings rate and discount rate has been quite stable and on March 31, 2012 they were 3.0% and 6.5% respectively. 3.2 Key Economic Indicators East Caribbean Currency Union: Main Economic Indicators Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (expected) 2014 (expected) Current Account Deficit (1455.91) (2170.51) (3331.92) (4199.93) (4665.25) (2964.67) (2879.68) (2616.04) (2463.92) Capital Account Surplus 1763.99 2181.87 3602.67 4299.92 4416.30 3504.12 3451.22 3833.70 2579.00 GDP Growth Rate 6.38% 8.71% 10.27% 11.45% 5.22% -4.16% -1.47% 0.79% 1.70% Inflation Rate 2.38% 3.05% 3.65% 3.51% 6.52% 0.77% 3.33% 3.71% - (2644.36) 2644.00 3.40% - 12996.88 (2700.77) 2735.00 4.24% - 13548.09 Fiscal Account (65.07) 81.15 298.72 457.74 223.09 (153.49) (33.74) (9.28) GDP (ECCU) 9237.38 10041.83 11073.13 12341.24 12985.72 12445.29 12262.03 12359.17 12569.12 Fiscal to GDP 0.7044% 0.8081% 2.6977% 3.7090% 1.7180% 1.2333% 0.2752% 0.0751% * Collated Individual from individual files provided by ECCB. The ECCU tends to run current account deficits on year on year basis. There is a high variability in the GDP growth rate as tourism is the highest GDP contributor. The financial crises that plagued U.S & Europe had a clear effect on the GDP growth rate of the ECCU in the years 2008 – 2009. The region is certainly bouncing back as the GDP growth is increasing from years *References provided in the reference section
  4. 4. 4|Page 2012 -2014. ECCU was running a BOP surplus from 2009 to 2012 but in 2012 the BOP has started to adjust and moving towards no overall surplus or deficit. 3.3 Debt to GDP Ratio of ECCU Member Nations ECCU Members ( 2012) Anguilla Antigua & Berbuda Dominica Grenada Montserrat St. Kitts & Nevis Saint Lucia St Vincent & Grendaines Public Debt % of GDP Gross Govt Debt % of GDP 130.00% 78.00% 97.76% 72.26% 105.38% 200 % 77% 144.91% 78.69% 90.00% 68.30% * Availability of data limited Public Debt and Government remains one of the prime concerns for the ECCU. In 2008 the debt to GDP ratio was 89.5% while in 2007 it was 92.6%. In 2008 both Grenada and St. Kitts and Nevis had debt levels exceeding 100%. The Debt situation is only getting worse in the Caribbean region as indicated by the data from year 2012. Most countries in the region are edging towards debt levels higher than 100%. In ECCU the ratio between debt service and current fiscal revenue is as high as 25%. This situation is primarily alarming. 3.4 GDP Contribution by each member GDP Contribution by ECCU Members ECCU Members Anguilla Antigua & Barbuda Dominica Grenada Montserrat St. Kitts & Nevis Saint Lucia St Vincent & Grenadines % of GDP 5.1007% 21.7109% 8.7098% 14.1964% 1.0884% 13.7748% 22.5198% 12.8991% Antigua & Barbuda and St Lucia together contribute 44% of the GDP of the ECCU region. They hold a significant key to the sustainability of the XCD. Any weakness in their economies or failure to pay debts can lead to problems in maintaining the peg. *References provided in the reference section
  5. 5. 5|Page Conclusion To reiterate what has been captured in the summary, in the short run I expect that the peg to the USD will be maintained. The exchange rate 1 USD = 2.70 XCD will be maintained to 2015. Primary risks at this point remain of a completely unpredictable and massive natural disaster hits the Caribbean islands or the disintegration of EURO and a massive downward spiral. In the long run I certainly see debt to GDP ratios, and dependency primarily on tourism a major issue. *References provided in the reference section
  6. 6. 6|Page References: 1. GDP Estimates for the ECCU 2000-2014’. "Eastern Caribbean Central Bank Statistics." Eastern Caribbean Central Bank. N.p., n.d. Web. 17 Mar. 2013. <http://www.eccb-centralbank.org/Statistics/index.asp>." 2. "What is the East Caribbean dollar (XCD)? | GoCurrency.com." Currency Converter Calculator and Foreign Money Exchange Rates | GoCurrency.com. N.p., n.d. Web. 17 Mar. 2013. http://www.gocurrency.com/countries/east_caribbean 3. "Eastern Caribbean Central Bank Statistics." Eastern Caribbean Central Bank. N.p., n.d. Web. 17 Mar. 2013. <http://www.eccb-centralbank.org/Statistics/index.asp>. 4. The Fundamentals Of Forex Fundamentals." Investopedia - Educating the world about finance. N.p., n.d. Web. 17 Mar. 2013. http://www.investopedia.com/articles/trading/04/031704.asp#axzz2MjZW0iH0 5. ‘Balance of Payments Estimates and Projections for 1990-2014’. "Eastern Caribbean Central Bank Statistics." Eastern Caribbean Central Bank. N.p., n.d. Web. 17 Mar. 2013. <http://www.eccb-centralbank.org/Statistics/index.asp>. 6. ‘Consumer Price Index’. "Eastern Caribbean Central Bank Statistics." Eastern Caribbean Central Bank. N.p., n.d. Web. 17 Mar. 2013. <http://www.eccbcentralbank.org/Statistics/index.asp>. 7. ‘Central Government Fiscal Accounts’. "Eastern Caribbean Central Bank Statistics." Eastern Caribbean Central Bank. N.p., n.d. Web. 17 Mar. 2013. <http://www.eccb- centralbank.org/Statistics/index.asp>. 8. "Countries of the Eastern Caribbean Currency Union." Preliminary Overview of the Economies of Latin America and the Caribbean ▪. N.p., n.d. Web. 5 Mar. 2013. www.cepal.org/publicaciones/xml/2/45452/ECCU.pdf 9. "Comparing Debt Ratios - WSJ.com." The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal Wsj.com. N.p., n.d. Web. 17 Mar. 2013. http://online.wsj.com/article/SB10001424052748703789104576272891515344726.html *References provided in the reference section
  7. 7. 7|Page 10. "The World FactBook." Central Intelligence Agency. N.p., n.d. Web. 4 Mar. 2013. <https://www.cia.gov/library/publications/the-world-factbook/geos/av.html>. 11. "BMI EAST Carribean Curreny Forecasts."Emerging markets forecast, emerging markets analysis - Business Monitor International - Emerging Markets Monitor. N.p., n.d. Web. 5 Mar. 2013. http://www.emergingmarketsmonitor.com *References provided in the reference section

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