THE CARIBBEAN ECONOMY experienced a difficult year in 2015, on the back of difficulties in the global economy. Global economic growth fell from 3.4 per cent in 2014 to 3.1 per cent. The main reason was the slowdown in China, which, along with other events, kept commodity prices low, impacting exporters of those products. Growth in the United States (US), United Kingdom (UK) and Canada was revised down during the year, with only the US showing higher growth in 2014.
Being small economies, Caribbean countries were not immune from these effects. The commodity producing countries saw sharp falls in growth. On the other hand, for those economies reliant on tourism, it was a relatively good year. As well as heavy reliance on overseas markets, 2015 demonstrated other characteristics of the region, such as vulnerability. Natural disasters in Dominica and Bahamas caused significant damage, and set back economic growth.
Weather events (particularly drought) also affected agricultural production. The reliance of the region on correspondent banking relationships with overseas banks was brought into focus, as the number of correspondent banking relationships fell, threatening some borrowing member countries’ financial systems and real economies. Caribbean Development Bank’s (CDB) borrowing member countries have started to recover from the great recession, recording positive growth every year since 2011. However, growth has consistently lagged behind the rest of the world.
Since 2009, borrowing member countries have grown on average 1.2 per cent per year, compared to 3.7 per cent globally, 1.8 per cent in advanced economies, and 3.3 per cent in other small island developing states.
Clearly, the region’s vulnerability has had an adverse impact on sustainable growth; and this needs to be addressed. However, vulnerability does not explain the difference in the growth rates with other small island developing states, some of which face similar vulnerabilities. A major explanatory factor is low productivity, and with it lack of competitiveness, in the region.
Productivity rates need to improve, because of its positive correlation with economic growth. The World Bank’s annual Doing Business Survey identifies some key measures that could help improve productivity. In the 2016 report, only two borrowing member countries (Jamaica and The Bahamas) are ranked higher than last year; and only Jamaica and St Lucia are in the top half of 182 countries assessed. The survey is quite clear why borrowing member countries rank where they do, taking into account metrics such as time and cost to start a business; ease of getting construction permits; ease of trading across borders; ease of paying taxes; getting electricity; registering property, among other metrics that potentially affect productivity.
CDB’s 2016 research programme will help address some of these issues, by looking at measures to help micro, small and medium enterprises, and easing the cost and time associated with importing and exporting through improvements in port operations.
The recovery remains fragile. Economic growth in 2015 did not keep up with 2014 growth, and forecasts for 2016 are subject to significant uncertainty.
Consideration of the outlook for such small open economies must include what is happening elsewhere in the world. A number of interlinked developments have caused the International Monetary Fund (IMF) and more recently the Organisation for Economic Cooperation and Development to recently downgrade their global growth forecasts for 2016.
These developments including the slowdown in China, persistently low commodity prices and their implications for producers and consumers, and the likelihood and timing of tighter monetary policy in the US.
There may also be some uncertainty in the UK and the Eurozone, as citizens of the former vote in a referendum on whether to stay in the European Union.
The IMFÂ is also more pessimistic about some emerging markets, like Brazil and Venezuela, which borrowing member countries have been targeting to diversify their markets.
Additional concerns for the region are the Zika virus and further reduction in correspondent banking relationships. Zika is potentially a concern for tourists and for residents alike, in both the short and longer terms.
The Caribbean Tourism Organisation expects stay over arrivals to increase between 4.5 per cent and 5.5 per cent in 2016, on the back of a seven per cent increase in 2015.
Correspondent banking relationships play a key role in the global and regional financial eco-system, facilitating payments of remittances, invoices and other cross border transactions, including credit card payments by tourists.
A recent World Bank survey sound that the Caribbean seems to be the region most affected by the decline in correspondent banking relationships. This could significantly affect the region’s population and businesses. In addition, consideration must be given to the perennial risks of natural disasters and other weather related challenges, such as those witnessed in Dominica and The Bahamas in 2015.
Given the substantial downside risks, CDB is currently projecting growth in all of its borrowing member countries in 2016 with the exceptions of Trinidad and Tobago and Suriname. Average regional growth is expected to be just 0.3 per cent.
Taken from the Caribbean Development Bank’s recently-released 2015 economic review and 2016 forecast report.
