World Bank warns region
NASSAU, Bahamas, Sept 20, CMC – A senior World Bank official has warned Caribbean countries that they need to put their house in order as the United States begins to wind down its “quantitative easing” (QE) stimulus programme that has, among other things, lifted stock prices to record highs, driven interest rates to record lows and put a floor under what had been a reeling housing market.
World Bank Vice-President, Hasan Tuluy, speaking at the International Monetary Fund (IMF) High Level Forum here, said that sooner or later, Washington would begin to tapper quantitative earning resulting in “the inevitable adjustment and rebalancing of the portfolios away from developing countries toward the US.
“If we do not get ready today with strong fundamentals, it will put pressure on exchange rates and international reserves especially for those countries with large current account deficits such as those in the Caribbean,” he said where the average is 11 per cent of gross domestic product (GDP) as compared to 1.7 per cent for Latin America (LAC).
“Already, on a mere statement by the Fed Chairman, yields of sovereign bonds rose by 130 basis points in Belize and 40 basis points in the Dominican Republic.
“When QE ends, these adjustments are unlikely to be temporary. Rather, they will reflect a change in the long-term trend. The prospect of increasing cost of financing and declining tail winds, will make a challenging situation even more so.
“Investors are also likely to become more selective and focus on country fundamentals, rewarding those economies that are successful in implementing credible internal reforms,” Tuluy said.
He told the meeting attended by several Caribbean finance ministers, some of whom are also heads of government, that the region’s macroeconomic stability is significantly challenged from the outside.
He said one of the presenters at the conference indicated that openness is positive, and has brought benefits to the Caribbean by way of foreign investment, increased trade and access to financial markets. “But it has also linked the Caribbean economies to those of the Western world, and more recently to China, making them more vulnerable to global financial and economic turmoil.
“The global financial crisis exposed the fragility of the growth model in some Caribbean countries. When the global financial crisis hit five years ago, Caribbean nations lived through a major economic contraction.”
The World Bank official said Jamaica and the Organisation of Eastern Caribbean States (OECS) for instance, experienced contractions of minus 3.1 and 5.3 per cent respectively in 2009.
He said only a few countries – the Dominican Republic, Guyana, Haiti and Suriname -, were able to get by with a moderate slowdown compared to their pre-crisis growth levels.
Tuluy said declining or negative growth, increasing unemployment and inadequate safety nets reversed some of the hard won social gains as poverty levels increased, noting for example, Jamaica’s poverty level went from 10 per cent in 2006 to 18 per cent in 2010.
“Lack of fiscal space meant that governments were not able to cushion these declines with stimulus programmes; and where they did, they did so at the cost of further worsening primary balances and debt.”