Experts are more confident about the prospects for many offshore Atlantic frontier markets poised for post-pandemic growth but are also wary of Covid-19, debts and other risks
Caribbean economies have had to weather the storm of lost tourism income during the coronavirus pandemic
Euromoney has conducted a special risk survey of the Caribbean to establish whether the improvement in scores shown in its regular quarterly survey has continued and to look into some of the key issues facing the region’s investors.
In the first quarter of 2021 the Caribbean region stood out, along with Australia and the CIS, for its improving risks, with the Bahamas, Barbados, Jamaica and Dominican Republic among the countries upgraded.
This survey update shows Jamaica (ranking 53rd on Euromoney’s global risk table of 174 countries) and Trinidad & Tobago (59th) weakening a little following their large upgrades earlier in the year.
The caution is to be expected with Covid-19 still a worry. Trinidad & Tobago, for one, has declared a state of emergency as it battles against a third wave.
However, the risk scores for Barbados (56th), Costa Rica (58th), Dominican Republic (63rd) and St Lucia (74th) have all improved again.
Take commodity producer and holiday destination Dominican Republic. Many of the survey’s experts put this easing of risks down to the vigorous economic recovery expected this year.
According to the IMF, the sharp downturn experienced in 2020 will reverse, with real GDP growing by 5.5% in 2021 and 5% in 2022.
This is exaggerated of course by the low base, but it also reflects the business-friendly government and mass vaccination campaign, according to survey contributor Odalis Francisco Marte, deputy director of the Central American Monetary Council.
“I also see a private sector responding positively to the economic stimulus and willing to invest, while the free zone industry is totally recovered and the tourism sector is gradually recovering as mass vaccination in North America is motivating people to travel abroad again.”
However, Marte and the other experts polled are acutely aware of the risks of investing in the region, which their mid-table global rankings highlight.
A few of the countries are showing trend improvements over five and 10-year time horizons, including Dominican Republic, Jamaica and St Lucia, but almost all of the offshore Atlantic borrowers are in tier-three or tier-four in Euromoney’s five-tier categorization, which signals there are some considerable risks to consider when investing in the region. Highest risks Cuba and Haiti are in tier-five.
It has been a particularly tough year given the closure of borders and abrupt halt to tourism. The sector accounts for approximately 14% of the region’s combined GDP, bringing in up to $60 billion in foreign exchange in a normal year. Last year the economy contracted by up to 13% in real terms.
“On most islands tourism came to a sudden stop, with negative implications for employment and foreign exchange earnings, and most countries have had to depend on foreign borrowings”, says survey expert Winston Moore, a senior lecturer at the University of the West Indies.
Macro fiscal weaknesses were widespread before the pandemic struck and the entire region is of course acutely vulnerable to climate change, being at risk of extreme hurricanes.
“Barbados, which is currently in an IMF-led structural adjustment programme, has adjusted its targets for growth due to the negative effects of the pandemic on the local economy,” Moore adds.
In terms of fiscal matters, tax revenue has fallen in this latest crisis and government spending has had to rise to protect vulnerable groups, worsening what was already a crippling debt problem, flagged recently in an article by the Inter-American Development Bank.
Despite this, analysts point out that recovering economies will help tax revenue to recover, government spending will be brought under control and, as Marte and Moore both point out, many countries still have multilateral creditor support and access to international capital markets.
Nevertheless, investors must always bear in mind myriad other risks contributing to investor profiles. While few of the experts could assess what the change of government in the US would mean for the region, with no benefits from president Joe Biden’s plans to forge closer relations accruing just yet, many cited other issues to take into account.
These include the speed with which infrastructure projects are undertaken and completed. One expert mentioned the monetary policy regime in Dominican Republic, which has been successful until now, but “needs calibrating, in terms of design and implementation”. Another noted the institutional risks requiring more development.
It should also be borne in mind the region is quite diverse, a fact underlined by the difference in risk scores, with around 35 points separating Bermuda, the safest country, and Cuba, the riskiest.
Investors need to navigate these risks with vigilance. Fortunately, however, some of the countries are now over the worst and poised to offer lower risk returns.