Investors opting for the Caribbean region and its various bond offerings as economic growth recovers should beware of the risks involved. For many countries these can still be quite extreme.
Risk has generally risen in the Caribbean region this year, according to economists and other experts taking part in Euromoney’s Country Risk Survey. This comes despite better tourism prospects and lower oil prices, and continues a longer-term trend of the region’s gap to Latin America steadily worsening.
Experts have downgraded several countries along the Atlantic curve. They include two of the safer prospects, Trinidad and Tobago (lying 47th out of 186 countries on ECR’s global risk scale), and Barbados (87th) – along with Grenada, Jamaica, and St Vincent & the Grenadines.
Haiti, which with Cuba (now being welcomed in from the cold by the US) remains one of the Caribbean’s most acute credit risks, has also been downgraded since 2014.
It is one of eight regional sovereigns in ECR’s lowest category, tier 5, containing the world’s highest default risks. Only five are spared, with just three in tier 3 and two in tier 4 (see table). The region has had nine defaults in the past 12 years including a restructuring in Grenada only last month.
Bermuda is nonetheless riding high at 44th in the rankings (a similar credit to Peru and Spain), and has been upgraded slightly since last year to a total score of 58.7 out of a maximum 100 points.
The country has experienced mixed fortunes to date, with its economic-GNP outlook and government finances scores shaved because of GDP contracting in 2014 for a sixth consecutive year –resulting in voters losing some trust in the government’s ability to manage the economy, the Profiles of Bermuda annual survey claims.
ECR experts nonetheless expect the economy to turn around in 2015-16 and have had their faith in banking sector, currency and government stability restored.
Bermuda’s scores for capital repatriation risks, information access/transparency, the “soft” infrastructure and labour relations – which are among 15 indicators contributing to the total risk score – have also been raised.
The Bahamas, another offshore centre awarded an investment rating (of Baa2) by Moody’s, is another that has been upgraded, climbing into tier 3, commensurate with a BB+ to A- credit grade.
RBC Caribbean, a firm taking part in Euromoney’s survey, expects 1.8% real GDP growth, low inflation and notably a public debt burden in the Bahamas that is less than half the ratio to GDP in Barbados, and around a third of Jamaica’s.
Mixed fortunes for Barbados
It should be remembered that not one of the Caribbean sovereigns figures in ECR’s tier 1 or tier 2, commensurate with a strong A- rating or higher.
Trinidad & Tobago (ranking 47th) and Barbados (87th) are comparatively safe options, but their scores have also slid since the end of last year.
Winston Moore, senior lecturer at the University of the West Indies, commenting on Barbados, says: “Economic activity in the first quarter of 2015 was above that of 2014.”
As such its economic risk indicators have improved.
He adds: “However, further emphasis on enhancing government efficiency is needed to bring the fiscal deficit in line with medium-term debt targets”, while scores for several of the surveyed political indicators have been marked down.
IMF analysis suggests that an average primary surplus of 4% of GDP would be needed to bring the debt-to-GDP ratio down to 91% by 2020.
Storm clouds still shrouding Jamaica
Other credits, such as the Dominican Republic, and Antigua and Barbuda, have been treading water, but the score of Jamaica, rated B- by Fitch and Standard & Poor’s (and Caa3 by Moody’s), has slipped to 34.2 points from a possible 100 in the survey.
Its economic prospects have counter-intuitively improved, with growth slowly rising to 2% this year, and inflation coming down on the back of falling oil prices.
With Jamaica's primary fiscal surplus maintained, and foreign currency reserves rising, the IMF has heaped plaudits on the Jamaican government, not least in its bid to maintain business and investor confidence as it continues to engage with an Extended Fund Facility programme.
However, at 13% unemployment remains uncomfortably high. The country has a long way to go, moreover, in reducing a public debt burden eqivalent to some 140% of GDP, which is still among the highest in the world. The interest payments are depriving the country of much-needed infrastructure spending.
All bar one of Jamaica’s 15 risk indicators score less than half the 10 points allotted. Economic and political stability, in addition to structural risks, are all acutely high.
Risk experts have, moreover, downgraded Jamaica’s bank stability this year as they await the effects of the new Banking Services Act, amid concerns notably surrounding the National People’s Cooperative Bank tottering on the edge of bankruptcy, and bailed out by the Development Bank under the weight of its non-performing loans.
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