Ewart S Williams: The impact of global events on the Caribbean
economies
Address by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago, at
the ICATT 26th Annual Caribbean Conference, Port-of-Spain, 27 June 2008.
* * *
Thanks for inviting me to participate in this very timely discussion focusing on the growing
complexity of the economic and business environment and the implications for the
economies in the Caribbean.
I often hear accountants refer to the challenges posed by the new benchmarks in their
profession, like the IFRS, for example. These challenges have forced them to continue
upgrading your skills and, to be constantly in search of ways of adapting these standards to
our local situation.
Economists and policymakers are facing similar challenges as we realize that, in the current
global environment, the traditional analyses no longer fit as well as before and the traditional
policy prescriptions don't seem to work as well as they once did.
Several months ago the IMF called the financial turmoil in international markets one of the
largest financial shocks experienced since the second World War and they forecasted
that the crisis would reverberate globally. Almost nine months later, however, there has been
little or almost no contagion to regional financial markets; regional economies have not been
seriously affected by any financing constraint and regional economic growth remains
relatively robust.
A few years ago if I told you that the price of oil would rise to US$140 per barrel without dire
worldwide economic consequences you would have thought me mad. Yet, the global
economy saw the price of a barrel of oil rise from just under US$25 at the start of this decade
to almost US$100 as at the end of 2007 (Chart 1) and in this same period developing
countries registered the highest growth rates in decades. Growth in Latin America for
instance averaged 6 per cent in the period 2002-2006, the highest for any five year period
since the 1970s; in the same period growth in the Caribbean averaged around 5 per cent, an
equally impressive economic performance, by historical standards (Chart 2).
An Economic Review for the first quarter published by the Central Bank of Barbados
suggests that notwithstanding the rapid increase in international oil prices and the US
slowdown, tourism arrivals have continued to be strong (in fact 10 per cent up from last
year). Other countries in the Caribbean, including Jamaica, report similar trends.
Trinidad and Tobago is expected to continue to record robust growth, in part because of its
economic structure that is heavily dependent on energy. However, projections for 2008 are
for only a modest slowdown in the rest of the region. (Charts 3 and 4)
Of course, in most economies, both developed and developing, the rapid increase in
international food and other commodity prices is being reflected in an unwelcomed return
to a high inflation environment. In the Caribbean, for instance, inflation has moved from an
average of around 5 per cent in 2002-2006, to 6.8 per cent in 2007, and is expected to reach
close to double digits in 2008 (Charts 5 and 6).
Some countries are doing worse than others (on the inflation front). In Jamaica, for instance,
headline inflation for the 12-month period ended March 2008 was 20 per cent; here at home,
our latest data show headline inflation at 10 per cent and an IMF mission that just left
Barbados projected a rise in inflation to 9 per cent this year from 4 per cent last year. Inflation
in the ECCU which generally hovered at around 2-3 percent is now around 6.1 per cent
(Chart 6).
Against this background (and allowing for the inflation surge), the question that I
would like to pose is, why are the global economic conditions not putting a greater
damper on the region?
I can point to three main factors:
•
The first, is the on-going shift to a multi-polar world with the reduced reliance
on the United States as the engine of the global economy. In fact, there is an
interesting paradox here... and it is that the US downturn would be a lot steeper
but for the resilience of some of the emerging market and developing
countries. It is the export sector and the depreciation of the US dollar that is
maintaining some momentum in the US economy.
The multi-polar world is relevant to the resilience of the regional economies in
several ways:
1. As you know, many countries in the Caribbean are heavily dependent on
tourism... what has happened in the region over the past few years is that
there has been a geographical diversification in the source of tourist
arrivals - with the US share declining and that of Europe increasing, due in
part to the strengthening of the British pound and the Euro, (Charts 7 and
8). The statistics also suggest that tourism from Trinidad and Tobago to the
rest of the region has increased markedly, helping to offset any global
slowdown.
2. Because of the strength of the export sector in the US, this recession or this
slowdown (however you call it) has not been as costly in terms of
employment (at least not yet) as in previous recessions. And because of
this, there has not been a sharp decline in emigrants remittances as
was previously expected. (These remittances are an important source of
domestic demand and foreign exchange earnings for many Caribbean
countries. I think in Jamaica remittances are the major source of foreign
exchange earnings).
(So this is the global re-balancing effect.)
•
A second factor that has contributed to the insulation of the region from greater
contagion has been the improved strength of the regional financial sector. It is
now certain that banks in the region have not been directly affected by the
subprime crisis, because they have not held any of these assets and because their
lending operations have been based on the growth of deposits rather than on
borrowing from foreign banks. (The credit crunch partly resulted from the fact that
banks were no longer willing to lend to each other because they were worried about
the extent of possible losses from US sub-prime mortgage backed securities. (This
has not been an issue in the region.)
More fundamentally however, since the Jamaican financial crisis of the late 1990's,
the regional banking system has gone through a period of consolidation and
strengthening, reflected in the increase in capital and a sharp reduction in
nonperforming loans (Chart 9). This meant that banks were in a position to continue
lending and supporting domestic activity even in an environment of tight global
liquidity (Chart 10).
•
Another important financial plus for the region is this. Previously, when global
liquidity dried up, Caribbean countries were shut off from international funding and
this impacted productive investment and sometimes forced cutbacks in government
expenditure. What has changed is that, now the regional governments as well as
regional corporations that have been shut out of the global markets have turned to
the Trinidad and Tobago capital market for financing and in that way, have been
able to maintain investment spending (Chart 11).
• A third factor that explains the better resilience of the regional economies is the fact
(perhaps not sufficiently recognized) that macro-economic management has
improved markedly in regional economies over the last several years. This is
reflected in some of the main economic parameters. Fiscal deficits have been
reduced; public debt has declined; and net international reserves have risen sharply.
All these factors have increased the resilience of regional economies. (Charts 12
and 13)
Let me stress that while the direct spillovers from the global financial turmoil to the regional
economies appear to have been contained so far, I am by no means suggesting that the
region will not feel greater effects as time goes by. Borrowing from the new jargon, I do
not believe that the region (as indeed, most developing countries) has de-coupled or will
continue to be relatively un-affected by the global turmoil.
As I noted earlier, growth in the regional economies will be slower than the average for the
past few years, largely because of the financial turmoil and some related factors such as the
soaring international oil prices. Moreover, policy makers throughout the region will concede
that their economies are facing increased uncertainties and major risks. There is no doubt
that a protracted and deep US downturn combined with a slowdown in the EU, will surely
affect tourism and remittances and other regional exports. The impact of this could be
compounded by monetary tightening to address inflationary pressures. In turn, a sharp
regional growth slowdown could threaten the stability of the financial system. So we are not
out of the woods.
What does all this mean for us in terms of economic management? Because of the
uncertainty, countries in the region should:
(i) Further consolidate their fiscal positions. Given Trinidad and Tobago's fortunate
reserve endowment there is a strong case for increasing national savings.
(ii) Continue to reduce their public debt, particularly foreign debt. Our external debt is
pretty low and we should try to keep it that way; and
(iii) Continue to improve its regulatory standards and adopt international best practices
in all areas - in accounting, auditing, transparency etc.
As I said, we are not yet out of the woods.
Chart 1
International Oil and Gas Prices
140 16
14
120
Natural Gas - Henry Hub
12
(right axis)
100
10
80
8
US$/bbl
60
US$/mmbtu
6
40
Oil - WTI
4
(left axis)
20
2
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Chart 2
Real GDP Growth -
Selected Caribbean Economies
EC Currency Union
2008p
2007
Jamaica
2006
2005
Bahamas
Barbados
0 1 2 3 4 5 6 7
per cent
Chart 3
Growth in the Caribbean and
Advanced Economies
6
2006
5
07
08 09
4
2006
cent
2006
3
07
per
07
2
08
09
1
09
08
0
United States Euro Area Caribbean
Chart 4
Recent Changes to Growth Outlook
Current Projections Difference from
January 2008 Projections
2007 2008 2009 2008 2009
World 4.9 3.7 3.8 -0.5 -0.6
Advanced 2.7 1.3 1.3 -0.6 -0.8
Economies
Emerging 7.9 6.7 6.6 -0.2 -0.4
and
Developing
Economies
Caribbean 4.0 3.8 3.8 0.0* n.a.
* Represents the difference from the October 2007 projections.
Chart 5
Headline Inflation -
Selected Caribbean Economies
2000 2001 2002 2003 2004 2005 2006 2007 2008
Bahamas 1.7 2.1 2.1 3.0 1.0 2.0 1.8 2.5 2.6*
Barbados 2.4 2.8 0.2 1.6 1.4 6.1 7.3 4.1 9.0**
ECCU 1.2 2.3 0.7 1.7 2.8 4.1 1.3 6.1 n.a.
Jamaica 8.2 6.9 7.0 10.1 13.5 15.1 8.5 9.3 20.0*
Trinidad and 3.6 3.2 4.3 3.0 5.6 7.2 9.1 7.6 10.0***
Tobago
*March 2008.
** IMF projection - 2008.
*** May 2008.
Chart 6
Food Price
InflationSelected Caribbean Economies
2000 2001 2002 2003 2004 2005 2006 2007 2008
Bahamas 1.6 2.1 2.1 3.0 1.4 1.7 4.7 3.0 3.8*
Barbados 2.5 5.2 n.a. 2.7 4.5 7.0 7.9 7.0 7.2**
ECCU n.a. n.a. -0.7 1.2 3.9 6.3 0.5 7.2 n.a.
Jamaica n.a. 3.2 6.6 9.1 14.3 19.3 5.3 21.2 30.2*
Trinidad & Tobago 8.3 14.0 10.2 18.4 20.6 22.6 23.5 17.5 21.8***
*March 2008.
** January 2008.
*** May 2008.
BIS Review 99/2008
Chart 7
Tourist Arrivals
Annual Growth Rates in Tourist Arrivals
/per cent/
2004 2005 2006 2007 Jan-Mar08/
Jan-Mar07
Bahamas 1.5 4.4 -1.5 -4.6 0.5
Barbados 3.8 -0.7 2.7 2.1 11.1
ECCU 29.3 -6.4 1.8 11.2 7.2
Jamaica 4.8 4.5 13.5 1.3 13.3
Trinidad 8.2 4.0 -1.2 -4.0 0.7
and
Tobago
Chart 8
Tourist Arrivals by Main Market
Tourist Arrivals by Main Market -
Barbados, Jamaica and Trinidad and Tobago
/per cent/
2006 2007
United States 56.9 53.7
Europe 21.9 23.1
Canada 9.2 10.8
Other 11.2 12.4
Chart 9
A Well Capitalized Banking System
Financial Soundness Indicators- 2007
Capital NPLs/ Return on
Adequacy Assets
Total Loans
Bahamas* 33.9 4.2 4.0
Barbados** 10.8 2.9 2.3
ECCU 19.2 6.1 2.6
Jamaica 14.5 2.0 3.9
Trinidad and 19.1 1.1 2.7
Tobago
* Based on end-2006 data.
** Preliminary data as of September 2007.
Chart 10
Credit Expansion
Contributions to Private Sector Credit Growth (in per cent), 2005-2007
Total of which: contributions from
Private
Private Net Foreign Net Other
Sector
Deposits Liabilities Liabilities
Credit
to Public
Growth
Sector
Bahamas 13.8 9.0 0.2 -0.5 4.8
Barbados 13.2 20.0 1.4 -1.5 -6.7
ECCU 16.5 13.9 0.6 -2.6 4.6
Jamaica 24.2 21.3 -1.4 -5.9 10.2
Trinidad 22.1 24.8 -5.3 -2.3 4.9
and Tobago
Regional Bond Placements
Bond Placements
(US$Mn)
Sovereign Other Total
2000 -30.0 30.0
2001 39.6 166.7 206.3
2002 -70.1 70.1
2003 177.8 368.2 546.0
2004 230.4 196.9 427.3
2005 93.0 171.2 264.2
2006 5.0 215.8 220.8
2007 11.0 241.0 252.0
Chart 12
Overall Fiscal Balance
(per cent of GDP)
2000 2001 2002 2003 2004 2005 2006 2007
Bahamas -0.2 -2.4 -3.3 -5.0 -4.7 -3.8 -1.9 n.a.
Barbados -1.5 -3.6 -6.3 -3.1 -4.2-2.2 1.5 -2.5
ECCU -4.5 -7.3 -9.0 -5.0 -3.6 2.2 -4.9 4.0
Jamaica -0.2 -5.6 -7.9 -7.8 -4.5 -4.3 -4.3 n.a.
Trinidad and 1.6 -0.1 0.3 2.7 2.7 6.6 5.7 3.3
Tobago
Total Debt/GDP Ratio (%)
2000 2001 2002 2003 2004 2005 2006 2007
Bahamas 40.2 40.4 43.6 57.4 47.5 42.4 49.7 n.a.
Barbados 63.2 72.6 79.8 75.2 75.3 79.1 76.6 76.1
ECCU 101.7 112.4 124.9 129.3 141.8 126.9 124.1 121.6
Jamaica 98.2 130.3 137.1 151.1 140.7 134.9 148.9 140.0
Trinidad 54.4 54.1 58.3 49.9 44.6 37.6 30.5 28.3
and
Tobago