1. Main Macroeconomic Trends and Risks in the Caribbean Macroeconomic Sustainability Analysis workshop, September 14, 2011

2. Presentation outline Main similarities and differences Sustainability results by sector: –Fiscal and debt, External, Financial, Prices Going forward: –Macro risks –Data –assumptions

3. Two Caribbean ‘clusters’: commodity exporters and others Commodity exporters (Trinidad, Suriname, Guyana) doing better in recent years, but GDP is extremely volatile. ‘Other Caribbean’ (The Bahamas, Barbados and Jamaica) have a structural growth problem, losing ground for 30 years even against the U.S.. ECCU countries are not IDB members 3 Ratio of ECCU 1 Ratio of other Caribbean 2 Ratio of commodity exporters 3

4. Structural challenge: external shocks have a larger impact on small countries such as Caribbean ones. Lack of diversification by trading goods and by trading partner exacerbate external shocks for open economies (see chart). Volatility from shocks can complicate fiscal policy management, particularly for commodity exporters. Countries with fixed exchange rates (all of Caribbean except for TT, JA and GY) absorb shocks through production falls, which exacerbate an already painful required fiscal adjustment. 4

5. Similarities: Overall, the greatest challenges are fiscal, with very little high-quality growth. Jamaica, Barbados and Bahamas are facing major fiscal challenges, amid a somewhat bleak outlook for growth recovery. This could seep into external problems. The financial sectors are in relatively good shape (despite the blow created by the crisis), and inflation is under control. Trinidad and Tobago could face some fiscal problems down the road, but no major current problems. However, the financial sector has problems, which are fiscal contingent liabilities that could affect other Caribbean countries. Guyana has traditionally had large fiscal problems, but growth has helped. Suriname is growing quickly but the economy has some major structural challenges it needs to tackle (fiscal management, Dutch disease, rudimentary private sector) All countries belong to the Mexican cluster, in the sense of being highly dependant on U.S. economy

6. ..so fiscal sustainability was the main issue At various levels of reform; but a culture of ‘big government’ and crowding out of capital expenditures. Jamaica and Barbados struggling to adjust fiscally with limited success, even in an environment with continued access to financing and relatively low interest rates. Bahamas also, but has more room to increase tax revenues (but limited desire to move quickly). Suriname making efforts to clear past debt and begin reforms. Guyana still dependant on grants/concessional loans. All countries have seen tax revenues recover slightly from 2009, and have large current expenditures, particularly civil service worforce and unproductive public enterprises.

7. Rising debt for all non-commodity exporting countries since 1990s

8. ..which will require additional adjustments for Jamaica, Barbados and Guyana, in particular But generally no debt- servicing rollover problems

9. External stability: Open economies. Non- commodity exporters have large current account deficits, but FDI finances an important part. Fixed exchange rates— Trinidad, Jamaica and Guyana are de jure floating but manage it. REER generally in balance.

10. Caribbean countries are predominantly net oil importers (except T&T), with a huge impact on the external balance 10

11. External liquidity indicators not large for non-commodity exporters But many still have capital controls Domestic financial sector is large and liquid (except GY, SU), so indicator cannot be compared to large countries.

12. DSA shows a precarious situation for JA, BA and BH It shows that additional reforms are needed to put primary balance on a downward path. TT also has a high debt, but in net terms (due to petroleum Fund) debt is relatively low. Bahamas an example of what’s to come?

13. Financial stability Supervision has improved in all countries, particularly for insurance following the CLICO debacle. Still certain types of financial institutions (for example, credit unions) outside of supervisory net. Still need progress on in-situ supervision. GY and SU fin systems sufficiently rudimentary that are less affected by international contagion. Greatest risk comes from Trinidad, where FIs are more developed and contagion to the rest of the Caribbean more likely (although little is understood).

14. Financial sector indicators relatively sound. Some stress testing in JA, BH, TT, BA

15. Price stability Small open economies where prices determined mostly by import prices—many semi-dollarized economies. Inflation moves in tandem with U.S.—but major volatility determined by food and fuel component. Exception is Suriname where overheating is a major concern, and after-effects of one-time pollicies (had to delay VAT introduction to contain inflation!)

16. Going forward: main risks identified by economists BA: Fiscal expenditures, maintaining or reducing debt, external balance BH: Need to boost tax revenue for fiscal sustainability, tax administration, diversify exports away. JA: The country is basically not fiscally/debt sustainable right now. External is also critical, especially given the lower disbursements from multilaterals and the possibility of a reversal in private capital flows. Should this happen and the currency devaluate, inflation would also increase and fiscal would worsen even more. Guyana: External, Fiscal, Financial Suriname: Prices, Fiscal, External TT: Financial sector, high dependence on oil and gas revenues for fiscal sustainability and Exchange rate regime.

17. Three challenges for assessments: data, data, and data. Revisions to GDP (BH, JA). No thorough analysis of financial sector, unless there is a recent FSAP we can access. Even so, limited information about regional linkages (which are apparently important) No inflation data in Guyana, delays in Bahamian inflation statistics. Some tendency for ‘data secrecy’ delays even simple requests for macro updates (particularly Suriname).

18. Concluding assessment Caribbean countries are small states with relatively large governments, which will always be vulnerable to outside shocks. 2 groups: commodity exporters growing, and commodity importers have racked up considerable debt recently. Common external macro assumptions needed—will help credibility of process. Entire region vulnerable to global and U.S. eonomic conditions (growth, interest rates) and weather-related shocks

19. Thank you