One may recall optimistic proclamations made in 2008 that Trinidad and Tobago (T&T) would not be affected by the global financial crisis; however, to date we see evidence that the T&T is by no means insulated from the global financial and economic turmoil. To an extent, the premise that the Caribbean was insulated from the global crisis was somewhat understandable. This is because Caribbean financial markets are typically small, underdeveloped and largely unsophisticated, with tightly regulated commercial banks and generally risk-averse managers; as such US mortgage-backed securities were not dumped in this region. However, we all live in a global village and the financial sector contagion was bound to take a toll on these vulnerable economies!

For the most part, the region weathered the financial crisis quite well in comparison to global counterparts. Banks within the Caribbean tend to transact business with commercial banks in the US and, as a result, were not exposed to most of the liquidity woes of the investment banks. Furthermore, legislated reserve requirements, which are deposit-based, provided regional banks with the necessary cushion for liquidity demands. One exception would be Jamaica where exposures to US investment banks resulted in margin calls on investments. This had the effect of squeezing liquidity in the country’s financial sector. As both the private sector and the government struggled to access US dollars, the Jamaican dollar (JMD) fell precipitously (against the US dollar) by about 13% during the second half of 2008, and the Bank of Jamaica in efforts to address the liquidity issues and stem the JMD decline drew down international reserves by USD600 million.

The problem is that policy makers in the region did not recognize that the financial crisis would have an indirect impact on economies, which caused the run-up to a full scale economic crisis. The financial crisis basically choked-off credit, which started strangling GDP growth through declining industrial production, consumer spending, manufacturing etc. Naturally, the economic crisis followed hard and fast as one by one, major economies fell into recession. Commodity highs unravelled rapidly as speculators recognised the potential for significant losses stemming from the falloff in global demand.

Despite the fact that lower commodity prices have generally led to falling inflation in most economies, the fall in fuel prices does not bode well for Trinidad’s economy as the energy sector accounts for more than 50% of GDP and approximately 90% of exports.

Reality Check

If there are any doubts that the Caribbean is being affected by the global contagion, one has only to look at what is happening with the tourism industry, remittance flows, export revenues, foreign direct investments and by extension, economic growth. Caribbean economies are predominantly dependent on inflows from tourism and remittances. An exception would be Trinidad, which is the world’s largest supplier of methanol, and a producer of urea, ammonia, steel and natural gas. Even Jamaica’s bauxite industry is suffering, with plans to lay off even more workers this year. Notably, the region’s tourism and remittances are fuelled by the US and UK markets, both of which are currently in a recession.

The tourism outlook is gloomy with projections for a 20% downturn in Barbados, which, according to the Vice President of the Barbados Hotel and Tourism Association, would have a detrimental impact on that country’s tourism sector.

Additionally, the Jamaica Hotel and Tourism Association (JHTA) proclaimed that Jamaica is already a whopping 30% off target for the season and higher up the islands, the Atlantis Resorts in the Bahamas have laid off almost 800 workers already. To add insult to injury, the British government announced plans to introduce a new tax, the Air Passenger Duty, as part of a drive to reduce carbon emissions. Under the new law, which is expected to take effect in November 2009, passengers flying within 2,000 miles of London will have to pay incremental taxes on their ticket fare. This will place further strain on tourism revenues as Europeans would opt to vacation closer to home in light of tight economic conditions.

Regional goods being exported are typically made up of products such as sugar, cocoa, citrus, bananas, vegetables, food and beverages. The high elasticity of demand for these goods, together with the fact that the US is one of the major export destinations for the region, does not bode well for the trade balance of these economies. Notably, we see that approximately 37.2% of Jamaica’s exports and 57.5% of Trinidad’s exports are US bound. In particular, Trinidad’s exports comprise mainly industrial supplies such as oil, natural gas, steel and given the dramatic fall in commodity prices, Trinidad should expect to see drastically reduced export earnings.

Once again, we see how the US is intertwined with the Caribbean as it is a major source of Foreign Direct Investments (FDI) for the region. Because the US is currently in a recession with its major industries in consolidation mode, investor confidence stuck at all time lows, and credit conditions persistently tight; it is unlikely that investors would consider large investment projects as viable in present times.

Across the region, GDP growth has been falling. Estimated growth rates for all of the major economies in the region have shown significant weakness. Annualised GDP growth projections at the close of 2008 for Jamaica, Barbados, and Trinidad and Tobago are 0.5%, 1.5%, and 3.5% respectively. In 2009 these figures are expected to fall further to 0%, 1%, and 1.5%-2% for the respective economies. With inflation cooling, most economies are expected to start cutting interest rates in order to support their faltering economies. It may be some time before Trinidad uses this approach as inflation is still very much a concern; however, Barbados has already declared a 100 basis point cut to its Minimum Savings Rate (MSR), bringing it to 3%, effective 1 February 2009. Jamaica will most likely have no choice but to cut rates by the end of the year in the face of weak economic conditions. Receding growth has become the issue of the day and generally monetary policy is employed by dropping interest rates to stimulate credit and by extension the proponents of growth such as consumer expenditure. However, in some cases, banks are hoarding cash and have simultaneously made the borrowing process more stringent. In light of such deterrents, lowering the policy rate may not have the desired effect.

Nap Time is Over

Caribbean economies tend to be reactive rather than proactive. Only when a crisis unfolds do we seem to shake our sedate demeanour and spring to action in a typical ‘knee-jerk’ manner. Instead of being in a state of denial, the region needs to engage in more thorough strategic planning; this should take into consideration worst-case scenarios and actual plans for them so that any impact would be limited. There is no denying that our economies face challenging times ahead with no road map for the unchartered territory in which the global economy now finds itself. So the question is, what can we do to mitigate the negative factors impacting our region?

Caribbean governments and the private sector, individually and collectively, need to go back to fundamentals. Specifically, the focus needs to shift to measures such as the following:

- Careful consideration of what constitutes appropriate fiscal measures together with prudent and timely implementation. For example, it would have been more appropriate for the government of Trinidad & Tobago to have restrained expenditure over the past 4 years rather than doubling their expenditure. If this was done, the government would have been better positioned to increase expenditure in 2009 to offset the slowdown in the private sector, rather than being forced to cut as it is currently doing.

- Improving operational efficiencies to minimise wastage or redundancies to mitigate the expected decline in revenues.

- Attention should be paid to the inherent vulnerabilities of being overly dependent on a few trade partners for exports. The Caribbean needs to start looking at Central and South America as export markets, sources of tourists, etc.

- Greater focus should be paid to becoming self-sufficient in as many sectors as possible to mitigate external shocks such as the recent commodities bubble. Incentives for agriculture and fisheries should be emphasized.

- Ensure access to multilateral funding, should liquidity concerns arise.

- Crafting strategic plans that include aggressive steps aimed at reducing the region’s high level of exposure to exogenous shocks. Governments must as a matter of routine, use medium and long term development plans as a tool that provides the context for policy formulation. These plans must be reviewed and revised if necessary as conditions change.

- Actively seeking out ways to resolve deterrents to the Caribbean Single Market and Economy (CSME). Given the level of individual country vulnerability, a collaborative effort should strengthen resilience and permit members to leverage each other’s competitive advantages. For example, a country with surplus capital such as Trinidad can invest in another that has viable projects that require funding. United we stand, divided we fall. These are unprecedented times and they call for new and drastic measures to chart a course in unknown territory. It is time to put differences aside and work together for a common good. Global leaders understand the need for international support as their economies are inextricably linked and dependent on each other. The Caribbean would do well to wake up and learn a thing or two on survival.

Article submitted by

Juliana Davis

Analyst

CMMB, Trinidad and Tobago