ON THE RIGHT: Trump factor could be big difference

Dr Dave Seerattan, economist,

Added 22 December 2016

ontheright-new

Should the Caribbean be upbeat about its 2017 economic prospects?

 

The prospects for growth in the Caribbean hinge not only on international developments but also on the inherent structural macroeconomic vulnerabilities in some countries.

Factors such as the growth performance of important trading partners, commodity price trends and competition from non-traditional tourism destinations are likely to have a significant impact on Caribbean economic performance.

Domestic factors such as fiscal and debt sustainability issues, external account weakness and relatively high non-performing loans will also impact on the growth trajectory in the near term depending on how these challenges are addressed.

Many of the challenges facing the global economy in 2015 have continued in 2016 with global growth expected to be 3.1 per cent for this year, rising moderately to 3.4 per cent in 2017.

Expectations are for growth to rebound in 2017 as inventories and business investment recover in spite of uncertainties created by the electoral cycle and a stronger dollar.

The recent victory of Donald Trump in the United States presidential election has created a degree of uncertainty about the monetary policy stance of the US Federal Reserve in the future.

Trump’s trade policy is also likely to increase uncertainty in the short term, with negative implications for many developing countries.

The potential impact of this, however, is only likely to become clear over the long term given the time it will take to renegotiate trade arrangements. In this challenging and uncertain international economic environment, the outlook for the CARICOM region is mixed.

Service-based economies should take this opportunity to accelerate the fiscal consolidation process with a view to improving debt sustainability.

Higher levels of non performing loans in some of these economies are also a major drag on growth. The ongoing upgrade and enhancement of the macro prudential frameworks in the Caribbean are therefore critical to improved growth prospects in the region.

Moreover, although commodity producers may have lower debt burdens, lower commodity prices require a disciplined policy framework to shore up revenues and prevent similar sustainability issues from developing.

The fiscal consolidation that this implies in some cases only requires increasing the efficiency of government expenditure programmes to weed out wastages without compromising the level of services provided to citizens and businesses.

Where appropriate, commodity exporters could allow more exchange rate flexibility to help with the adjustment process.

Nevertheless, it would be prudent to implement most of the adjustment through the fiscal account because this is the main source of the imbalances, rather than letting the exchange rate absorb most of the adjustment.

Moreover, since the exchange rate is a price subject to all kinds of psychological influences and group irrationality, the authorities should as a matter of course exercise caution in this area.

These are necessary but not sufficient conditions for the resumption of strong sustainable growth. It also requires an improvement in the level of international competitiveness which implies a range of actions in connected areas including the improvement of the business environment, increasing labour productivity and improving the quality of public infrastructure.

The region also needs to continue strengthening the legal and regulatory frameworks for financial risk assessment and mitigation to deal with any financial vulnerabilities which can threaten the resumption of sustainable growth in the Caribbean.

 

Dr. Dave Seerattan is officer in charge of the Caribbean Centre For Money & Finance.

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