The Impact of the Financial Crisis on CARICOM countries By Preeya Mohan1

([email protected]) and Patrick Kent Watson ([email protected]) Sir Arthur Lewis Institute of Social and Economic Studies University of the West Indies St. Augustine Trinidad & Tobago

Tel: (868) 662-6965, Fax: (868) 645-6329

Abstract The current global financial crisis is a reminder of the inherent vulnerabilities faced by CARICOM economies on their road to economic growth and development. The crisis has negatively affected growth and, as data gradually become available, its far-reaching after-effects are becoming more evident. A study of the impact of the crisis on economic growth in the region is needed in the way forward for CARICOM development. As such the aftermath of the crisis on the region requires detailed documentation. This paper seeks to examine the outcome of the crisis on economic growth among CARICOM countries with particular emphasis on international trade and private capital flows from which lessons and productive development policies can be derived.

1

Corresponding author

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1. Introduction The development of the CARICOM region must begin with a comprehensive synopsis of the developmental hurdles faced by the region. In other words the question “where are we now?” must be answered before we know where we need to go. In April 2007 the United States (US) sub-prime mortgage market went belly-up, which triggered a crash in its financial system and marked the beginning of the International Financial Crisis (IFC). The crisis eventually spread to the real sector of the US and, in December 2007, the economy went into a deep recession. In September 2008, contagion effects led to the contamination of international financial markets creating a worldwide calamity. The IFC then became a global economic crisis as, worldwide, real sector effects materialized. Unlike recent crises which started off in emerging and developing economies such as the 1994 Mexico crisis, Thailand and Korea in 1997, Indonesia, Malaysia and Russia in 1998 and Argentina in 2001, this catastrophe originated in the world’s largest economy creating the largest shock to economic growth since the 1930’s, which has since been labeled the “Great Recession”. The result has been a sharp downturn in world gross domestic product (GDP), commencing in the latter half of 2008 to 2009. The recovery however remains highly uncertain. The International Monetary Fund’s (IMF) World Economic Outlook (WEO) Report (October 2010) states that recovery rests on two rebalancing acts, fiscal consolidation and a realignment of international trade which entails increasing net exports in advanced economies and reducing net exports in emerging economies. Furthermore, the global financial system is yet to recover and there exists considerable uncertainty as sovereign and banking vulnerabilities persist which has increased market volatility and reduced investor confidence. Sovereign balance sheets are highly vulnerable to growth shocks, making debt sustainability less certain, prices in stock exchanges have fallen and the risk premiums on corporate bonds have widened, and corporate bond issues have slowed (Global Financial Stability Report October 2010). Nevertheless, in 2010, there has been some recovery with emerging markets particularly, Asia at the forefront and advanced economies lagging behind (table 1). The recovery is however questionable as it was being driven by mammoth fiscal deficits which have since subsided while consumption and investment remains depressed. As the advanced and emerging economies undergo fiscal consolidation and attempt to develop domestic sources of growth coupled with weak financial markets the worst of the crisis may yet 2

to come for the CARICOM region. This paper examines the impact of the financial crisis on economic growth in CARICOM countri countries with particular emphasis on international national trade and financial capital flows as the he transmission channel of the crisis has been on the balance of payment accounts of CARICOM economies. This paper consists sists of six sections including the introduction. The rest of the paper is organized as fol follows: section two examines the transmission mechanisms off the crisi crisis; section three the impact of the crisis on international trade and private capital flows, section four the impact of the crisis on CARICOM’s macro economy, section five provides a global outlook followed by section six which concludes the paper. paper 2. The Transmission Channels of the Crisis The IFC acted as an external shock to CARICOM economies. The financial sector of these economies was spared from direct effects due to tthe lack of development and integration i of the region’s financiall markets into the world system. The real economy, however, was not spared and there has been a plunge inn economic gr growth. owth. The transmission channels of the crisis on CARICOM economies has been a tumble in export xport demand for goods and services, particularly tourism, a dip in commodity prices along with Foreign eign Direct Investment (FDI), portfolio investments,, remittances and official development assistance (ODA). The crisis has impacted the current account and capital account of the balance of payments, the consequence of which are lower employment, shrinking government revenue, curtailed loan demand and balance of payments imbalances. Figure 1 illustrates the transmission mechanism of the IFC on CARICOM economies. Figure 1: Transmission cchannels hannels of the crisis on CARICOM economies

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3. The Impact of the IFC on CARICOM Figure 2 provides a summary of the impact of the IFC on CARICOM showing the percentage change in goods exports, tourism arrivals, the international commodity price index, FDI, remittances, ODA and GDP per capita in 2008 and 2009. The crisis has impacted CARICOM via a fall international trade and capital flows. International financial flows have been more negatively affected by the crisis compared to trade flows. ODA took the largest plunge and fell 74 percentage points in 2009 followed by FDI falling by 44 per cent. The crisis has even challenged the pro-cyclical nature of remittances which fell by 7 per cent. Goods exports were also negatively affected. Export volume declined by 43 per cent. Furthermore, the international commodity price index fell by 40 per cent reducing the value of exports. Tourism arrivals fell significantly less at 6 per cent.

Figure 2: The Impact of the IFC on CARICOM, percentage change in international trade and private capital flows, 2008 and 2009. 60 40 20 0 -20

Goods exports

Tourism

CPI

FDI

Remittances

ODA

GDP per capita

-40 -60 -80 2008

2009

Source: Author’s compilation from various sources. 3.1. Trade in goods and services CARICOM main exports destination are the US, the European Union and Canada (WTO trade profiles, March 2010) which are the countries most negatively affected by the crisis. As shown in 4

Table 1, there was a significant fall in demand for CARICOM exports, in 2009; Guyana and Trinidad and Tobago were most negatively affected and experienced a 66 and 51 per cent fall in exports respectively. Other territories experiencing declines were Belize and Barbados of 18 per cent and 14 per cent respectively. Imports for all countries also fell in 2009 but by less compared to exports creating current account imbalances.

Table 1: Percentage change in CARICOM Exports and Imports, 2007, 2008 and 2009. Exports Country Bahamas Barbados Belize ECCU Guyana Haiti Jamaica Suriname Trinidad and Tobago

2007 8.7 5.1 -0.4 5.5 19.3 6.1 10.7 NA 10.7

Imports 2008 2.9 1.7 9.6 28.1 14.4 -6.1 21.5 NA -36.8

2009 NA -13.7 -18.1 4.1 -66.4 NA NA NA -50.6

2007 4.6 4.1 3.6 13.3 20.1 4.5 16.1 NA 12.1

2008 0.5 13.9 22.3 10.6 22.3 30.2 20.9 NA -35

2009 NA -23.4 -20.2 -17.5 -11.7 NA NA NA -27.2

Source: CCMF, Caribbean Economic Performance Report, Dec.2009 and June 2010.

The primary factors accounting for the breakdown in CARICOM trade are as a direct result of the IFC. Firstly, there has been a lower demand for goods and services particularly in industrialized economies that account for a substantial portion of global trade demand. According to Baldwin (November 2009) trade among all nations experienced a “sudden, severe and synchronized collapse”. The fall in trade has been described as the sharpest in recorded history and deepest since the 1930’s. Both North-South and South-South trade were adversely affected. Figure 3a, highlights the collapse in world trade in goods and services which declined by 18 percentage points from 2007 to 2009. In addition, this collapse in trade has even been larger than the downfall in GDP (figure 3a) and is referred to as the “Great Trade Collapse” in the literature. World imports and exports fell by 11 per cent and 10 per cent respectively (figures 3b and 3c). Exports from advanced economies fell by 12 per cent and emerging and developing economies 8 per cent. The decline in imports has been largest for advanced economies which experienced a 12 per cent decline and emerging and developing economies an 8 per cent decline

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in 2009. The major advanced economies and euro area suffered the largest declines in export volume while the Newly Industrialized Asian economies and developing Asia showed the smallest declines (figure 3d). Imports in Central and Eastern Europe fell by 18 per cent, followed by the Western Hemisphere 15 per cent, major advanced economies 13 per cent, euro area 11 per cent, newly industrialized Asian economies 8 per cent, Sub-Saharan Africa 8 per cent, Middle East and North Africa 3 per cent and developing Asia 0.2 per cent (figure 3e). In 2010 there has been some turnaround in international trade although it remains below its precrisis trend and, for countries further affected by a banking crisis, trade remains below pre-crisis levels (IMF’s WEO Report October 2010). International trade is likely to remain depressed in the future. Freund (2009) examined the impact of four global economic contractions on world trade and found that the decline in world trade is five times the complementary fall in world GDP and that while world GDP growth bounces back quickly following a global downturn, world trade takes longer than three years to reach pre-downturn levels.

Figure 3a: Growth in World Trade (goods and services) and GDP, 2005-2011

15 10 5 0 2005

2006

2007

2008

2009

2010

2011

-5 -10 -15 GDP

Trade volume of goods and services

Source: IMF’s WEO database (October 2010).

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b.Growth of import volume of goods and services

c.Growth of export volume of goods and services

15

15

10

10

5

5

0

0 2007

2008

2009

2010

2011

2007

-5

-5

-10

-10

-15

World Advanced economies Emerging and developing economies

Source: IMF’s WEO database (October 2010).

-15

2009

2010

2011

World Advanced economies Emerging and developing economies

Source: IMF’s WEO database (October 2010).

d.Growth of import volume of goods and services 20

20

10

10

0

0

e. Growth of export volume of goods and services

2005 2006 2007 2008 2009 2010 2011

2005 2006 2007 2008 2009 2010 -10

-10

-20

2008

Euro area Major advanced economies (G7) Newly industrialized Asian economies Central and eastern Europe Developing Asia Middle East and North Africa Sub-Saharan Africa Western Hemisphere

Source: IMF’s WEO database (October 2010).

-20

Euro area Major advanced economies (G7) Newly industrialized Asian economies Central and eastern Europe Developing Asia Middle East and North Africa Sub-Saharan Africa Western Hemisphere

Source: IMF’s WEO database (October 2010).

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The crisis has also caused a dwindling of trade credit and finance which has resulted in a fall i international trade (Qalo 2009, WTO/OECD 2009). The cost of trade credit instruments rose astronomically in the latter part of 2008 and, in March 2009, there was an excess demand for credit financing between US$100 billion and US$300 billion on an annual and roll-over basis (WTO/OECD 2009). A fall in countries’ foreign exchange reserves is another cause cited for the fall in trade (Qalo 2009). Another consequence of the crisis has been burgeoning protectionism. Since the start of the crisis, nations have proposed approximately 78 trade measures and, of these, 47 eventually were implemented, the effect of which has been to restrict trade (Gamberoni and Newfarmer 2009). In addition, antidumping initiatives grew by 15 per cent and the imposition of duties grew by 22 per cent from 2007 to 2008 (Gamberoni and Newfarmer 2009).

The fall in CARICOM trade volumes has been further exacerbated by falling commodity prices in 2009. The IFC followed the 2007-2008 commodity price bubble with prices taking a tumble in 2009 (figures 4a and 4b). Fuel prices and metal prices experienced the sharpest rise and also the steepest fall compared to food prices. With global activity slowing, weak demand and rising inventories, prices are expected to remain depressed. In 2010 however, there have been major rebounds in international prices but volatility and downside risks remain high. Figure 4: International commodity prices, 2005-2011 (4a) Energy, Food and Metals (4b) Crude oil, Natural gas, Aluminum, Rice, Banana and Sugar 300

200 180

250

160 140

200

120

150

100 80

100

60 50

40 20

0 2005 2006 2007 2008 2009 2010 2011

0 2005 2006 2007 2008 2009 2010 2011 Energy

Food

Metals

Source: IMF Commodity price database (2010).

Crude Oil Rice Bananas

Natural Gas Sugar Aluminum

Source: IMF Commodity price database (2010).

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3.1.1. Tourism World tourist arrivals took a nose dive in the third quarter of 2008, continuing into 2009, following the IFC (figure 5). Tourism demand in all CARICOM countries was also negatively affected by the crisis. Using data from the Caribbean Tourism Organization, tourist stop-over arrivals fell in all CARICOM nations in 2009, excluding Jamaica and St. Lucia (Table A1 in the appendix). On the other hand, cruise ship passenger arrivals increased in 2009 with the exception of Jamaica (Table A2 in the appendix). European arrivals took the biggest fall followed by the US and Canada (Table A3 in the appendix). The tourism-dependent CARICOM economies have been more painfully affected by the IFC. These economies are smaller and more vulnerable to external shocks. The smaller CARICOM territories are highly dependent on tourism. Tourist arrivals to the region will remain depressed as unemployment in the US, EU and Canada remains high. The IMF calculates that a 3 percentage point increase in US unemployment corresponds approximately to an average 10 per cent decline in Caribbean tourism (IMF’s WEO Report April 2010). The increased taxes implemented in advanced economies to offset public deficits also pose challenges. Tourism receipts were less affected but are expected to fall in 2010 because of the lags involved (UNWTO April 2010). Tourism demand is expected to remain dampened for longer as world unemployment continues to be high. Figure 5: World growth (%) in tourist arrivals, 2005-2009 8 6 4 2 0 2005

2006

2007

2008

2009

-2 -4 -6 -8 Source: UNWTO World Tourism Barometer, 2007, 2008, 2009.

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3.2. International Private Capital Flows The flow of capital like trade was severely affected by the IFC impacting the capital account of the balance of payment. Prior to the IFC net foreign private capital flows especially to developing countries had surged stimulating growth in these economies. However, the onset of the crisis has led to sudden stops and even reversals of these flows.

3.2.1. Foreign Direct Investment FDI plays an increasingly important role in the global economy: flows have increased exponentially since the 1980s. Following the crisis however FDI flows are in decline by huge amounts. The increased uncertainty, lower profits, lack of financing, and unstable prices have lowered FDI. All CARICOM economies experienced a decline in FDI inflows. However, as FDI goes mostly to the natural resource dependent economies Trinidad and Tobago, Jamaica and Guyana were most negatively affected. Multinational companies with ongoing projects in the region are however likely to continue because of the expenditure already spent. Table 2: FDI inflows, $US Million, 2007-2009 Country CARICOM Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica St Kitts and Nevis St Lucia St Vincent and the Grenadines Suriname Trinidad and Tobago

2007 4404 338 746 338 143 47 152 152 75 867 134 272 131 179 830

2008 6854 173 839 286 191 57 144 178 30 1437 178 172 159 209 2801

2009 3838 139 654 290 95 46 79 144 38 1062 139 167 125 151 709

Source: UNCTAD FDI database (2010).

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3.2.2. Remittances Remittances are a major source of funds for numerous households throughout the CARICOM region, particularly Guyana, Jamaica and Haiti where these flows contribute 25 per cent, 15 per cent and 20 per cent to GDP. Remittances are expected to increase during times of economic hardship unlike FDI flows. However, the ‘counter-cyclical’ nature of these flows has been challenged by the crisis. The crisis originated in advanced economies which are the prime source of these flows. Workers in the US, Canada and Euro area are remitting smaller amounts, and less frequently, as migrants have suffered reduced incomes and loss of jobs. Higher international prices and a depreciating US dollar have also reduced the real value of remittance flows. The contraction of these flows is harmful to growth as studies show that remittances have the power to raise standards of living not only at the household level but at a national level as well. Table 2: Remittances inflows, $US Million, 2007-2009

CARICOM Antigua and Barbuda Barbados Belize Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobago

2007 4323 24 141 75 26 55 283 1222 2144 40 31 33

2008 4400 26 168 78 26 55 278 1370 2180 44 31 31

2009 4111 24 161 80 23 54 266 1376 1924 41 28 30

140 109

2 109

2 103

Source: World Bank’s WDI (2010).

3.2.3. Official Development Assistance Like remittance flows ODA flows has traditionally been pro cyclical. However, given the magnitude of the slowdown in growth in advanced economies, these flows are likely to be reduced in the future. The consequence of a fall in ODA will be most felt by Haiti which was

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endured a catastrophic earthquake in the beginning of 2010 and is most dependent CARICOM nation on ODA. Table three provides information on ODA to CARICOM countries.

Table 3: Total Net bilateral aid flow from donor countries, $US Million, 2006-2008

CARICOM Antigua and Barbuda Barbados Belize Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobago

2006 656 3 -1 7 15 8 64 446 32 6 2 4

2007 909 4 13 13 18 6 57 532 23 5 12 62

2008 1084 3 4 17 19 11 95 674 70 43 15 23

58 11

146 180

99 116

Source: World Bank’s WDI (2010).

4. The Impact of the IFC on the CARICOM Macroeconomy 4.1. Impact of the crisis on economic growth Most countries of the world experienced a slowdown in growth following the crisis. The change in the rate of growth is calculated for country groupings (Table 4) and individual CARICOM economies (Table 5) for 2007 to 2010 using the IMF’s WEO Report (October 2010). The change is computed by taking the absolute difference in the value of the real GDP growth rates between 2007 and 2010. This method avoids calculating large declines in growth for countries that had low growth rates prior to the crisis in 2007 (Goldstein and Xie 2009). The downturn was severe and global in nature as all country groupings were negatively affected in 2008, 2009 and 2010 (estimate) subsequent to the crisis (table 4). The full impact of the crisis occurred in 2009 which recorded the largest decline in growth. World real GDP growth declined from 5.2 per cent in 2007 to negative 0.6 per cent in 2009, a fall in the growth rate of 5.8 per cent. The decline is expected to slow in 2010 with a growth rate of 4.2 per cent.

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The growth of real GDP of advanced economies and emerging and developing economies in 2009 was negative 3.2 per cent and 2.4 per cent respectively. In the advanced economy grouping the euro area was most negatively affected with negative growth of 4.1 per cent in 2009 followed by Canada, the US and newly industrialized Asian economies. Looking at emerging and developing economies, Central and eastern Europe were most negatively affected with a fall in economic growth of 3.7 per cent followed by the Western Hemisphere, Sub-Saharan Africa, the middle East and north Africa and developing Asia. This demonstrates that the decline developing economies has been larger than advanced economies but these economies have been recovering steadily. This is reasonable given that, prior to the crisis, emerging and developing economies were experiencing more robust growth. The recovery of advanced economies has been sluggish. Developing Asia has been most successful at riding out the crisis. The IMF World Economic Outlook Report (April 2010) forecast positive growth for all regions in 2010.

The IMF does not give real GDP growth for a CARICOM grouping, but the average growth rate of all CARICOM members was calculated. The region experienced a decline in average growth of negative 6.7 per cent and negative 2 per cent from 2007 to 2009 and 2007 to 2010, a fall in the growth rate of 11 per cent and 6.3 per cent. In comparing CARICOM’s real GD growth with the major country groupings, the region has had higher growth than advanced economies but lower than emerging and developing economies and the world economy. CARICOM has had better growth than the euro area and comparable growth to the US and Canada but lower than newly industrialized Asia. In the emerging and developing economies category the region has only performed better than central and eastern Europe. Hence, CARICOM’s performance through the crisis is expected to be better than that of advanced economies but lagging behind all other developing regions. Examining individual CARICOM countries, economic growth was negatively affected in all territories. All countries had positive growth prior to the crisis. Though, historically, all CARICOM economies have faced greater declines in growth, the fall in growth initiated by the crisis is noteworthy as it occurred concurrently across all countries. Tourism-dependent economies were most negatively affected experiencing colossal contractions in growth between 5 to 12.7 per cent over the period 2007 to 2009. Three of these countries entered a recession in 2008-2009: The Bahamas, Barbados and Jamaica (Caribbean Economic Performance Report 13

June, 2010). Grenada endured the most significant decline with contractions of 12.7 percent. Among commodity exporters, Suriname experienced a decline of 2.7 per cent and Trinidad and Tobago 8.1 per cent. Countries which are heavily reliant on remittances which include Guyana, Haiti and Jamaica though experiencing a fall in growth, growth remained positive but sluggish with declines of 3.7, 0.4 and 4.3 per cent respectively. The most modest declines were recorded by Haiti followed by Belize. It must, however, be noted that Haiti’s growth is expected to decline by 8.5 per cent in 2010 as a result of the devastating earthquake that struck in early 2010. The IMF forecasts that the tourism dependent countries along with Haiti will continue to experience negative growth in 2010 with all CARICOM countries subsequently having positive growth in 2011 (table 5). Table 4: Economic Growth by Country Group, 2007-2010 Country Group

2007

2008

2009

2010 (proj)

20072008 (change)

20072009 (change)

20072010 (change)

2

World

5.2

3.0

-0.6

4.2

-2.2

-5.8

-1

Advanced economies3 US Canada Euro area4 Newly industrialized Asian economies5 Emerging & Developing Economies

2.8 2.1 2.5 2.8

0.4 0.4 0.4 0.6

-3.2 -2.4 -2.6 -4.1

2.3 3.1 3.1 1.0

-2.4 -1.7 -2.1 -2.2

-6 -4.5 -5.1 -6.9

-0.5 1.0 0.6 -1.8

5.8

1.8

-0.9

5.2

-4

-6.7

-0.6

8.3

6.1

2.4

6.3

-5.9 -9.2

-2 -2.7

5.5 10.6

3.0 7.9

-3.7 6.6

2.8 8.7

-4

-1.9

Central and eastern Europe6 Developing Asia

-2.2

-2.5 -2.7

2

Real GDP growth decline calculated as the absolute value of the difference in real GDP growth rates between 2007 and 2009 and 2007 and 2010 (estimate) where the IMF’s April 2010 forecasts are employed for estimated 2010 growth. 3 Includes: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States. 4 Includes: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovak Republic, Slovenia, and Spain. 5 Includes: Hong Kong SAR, Korea, Singapore, and Taiwan Province of China. 6 Includes: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, Former Yugoslav Republic of Macedonia, Montenegro, Poland, Romania, Serbia, and Turkey.

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Sub-Saharan Africa Middle East and north Africa Western Hemisphere7

6.9

5.5

2.1

4.7

-1.4

5.6 5.8

5.1 4.3

2.4 -1.8

4.5 4.0

-0.5 -1.5

-4.8 -3.2

-2.2 -1.1

-7.6

-1.8

Source: IMF, WEO database and own calculation.

Table 5: Economic growth in CARICOM economies, 2007-2010 200720072009 2008 (change) (change)

20072010 (change)

-0.02 -4.11 -0.5 -0.5 1.0 1.4 0.8 4.4 -8.5 -0.3 -1.0 1.1

-2.4 -3.2 2.6 0.2 -2.8 -5 -2.5 -2.4 0.2 -1.7

-5.7 -8.7 -2.3 -3.3 -12.7 -3.7 -0.4 -4.3 -9.9 -7.6

-1.2 -3.9 -0.2 -1.6 -4.2 -2.6 -11.8 -1.8 -5.4 -1.3

0.5 4.0 2.1

-4.7 1.9 -2.3

-6.6 -2.7 -8.1

-3.6 -1.2 -2.5

Country

2007

2008

2009

2010 (proj)

CARICOM8 Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobago

4.02 6.50 0.7 3.4 1.2 3.0 5.0 7.0 3.3 1.5 4.4 2.4

1.72 1.75 -1.7 0.2 3.8 3.2 2.2 2.0 0.8 -0.9 4.6 0.7

-2.60 -8.89 -5.0 -5.3 -1.1 -0.3 -7.7 3.3 2.9 -2.8 -5.5 -5.2

4.1 5.2 4.6

-0.6 6.0 2.3

-2.5 2.5 -3.5

Source: IMF, WEO database and own calculation.

4.2.Unemployment As a direct consequence of the slow-down in growth, unemployment figures have climbed. Moreover, while growth has increased slightly for most countries in 2010 unemployment continues to increase. The implications of this on standards of living, poverty and inequality are catastrophic. Indeed one of the biggest hurdles left behind by the crisis is the huge levels of unemployment it has created. In all advanced economies the unemployment rate has increased following the crisis and is forecasted to reaching double digits in 2010 and 2011 in the euro area. 7

Includes: Antigua and Barbuda, Argentina, The Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. 8 Real GDP growth calculated as average for all CARICOM member states.

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For CARICOM countries where data are available (Barbados, Belize, Trinidad and Tobago) unemployment increased in all cases from 2007 to 2009 by as much as 4 percentage points (figure 6). Furthermore an increasing incidence of extended job search has taken place in the region (CCMF’s Caribbean Economic Performance Report 2009). Figure 6: Unemployment b. Unemployment in selected a. Unemployment in Advanced Economies CARICOM Economies

12

14

10

12

8

10

6

Barbados

8

4

Belize

6 2 4

0 2007

2008

2009

2010

2011

US Canada Euro area Newly industrialized Asian economies Source: IMF’s WEO April 2010.

Trinidad and Tobago

2 0 2007

2008

2009

Source: Individual Central Banks.

4.3. Inflation The IFC was preceded by an international commodity price shock in 2004, which translated to high inflation rates worldwide, especially in emerging and developing economies. Subsequent to the IFC, these inflationary pressures have dipped analogous to the decline in economic activity. Prices have fallen significantly owing to falling prices in all major commodity groupings and lower domestic demand in the major country groupings. Across all the major country groups, inflation measured by the annual per cent change in the end of period consumer prices fell over the 2008-2009 period. CARICOM’s inflation has been higher than that of advanced economies (figures 7a and 7b). When compared to their developing and emerging market counterparts the result has been mixed. 16

CARICOM’s inflation has been lower than the Middle East, Africa and the Western Hemisphere but higher than central and eastern Europe and developing Asia. CARICOM’s declined in inflation has been faster than advanced economies and farther than developing and emerging economies. The IFC has helped reduce CARICOM’s inflation. Its post inflation is less than 4 per cent which is still higher than advanced economies which will have implications for the region’s international competitiveness. Figure 7: Inflation in CARICOM and other economies a. Advanced Economies

b. Developing Economies

8

20

6

15

4

10

2

5 0

0 2005 2006 2007 2008 2009 2010 2011 -2

US Canada Euro area Newly industrialized Asian economies CARICOM

2005 2006 2007 2008 2009 2010 2011 Africa Central and eastern Europe Developing Asia Middle East Western Hemisphere CARICOM

Source: IMF, WEO database and own calculation.

4.4. Public Finance The global financial crisis resulted in a worsening of the fiscal balance across all countries. Advanced economies and the bigger emerging developing economies have been pursuing a strategy of massive fiscal spending in an effort to avoid an economic calamity. The fiscal balance of all CARICOM states has deteriorated since the financial crisis. In the CARICOM region governments do not have as much cash to spend on mega bail outs and as an outcome of the fall in economic activity government revenue has fallen in 2009 and is predicted by the IMF to remain below post-crisis levels in 2010 and 2011 (figure 8). Prior to the crisis all countries ran budget deficits with the exception of Suriname and Trinidad and Tobago. In 2009, budgets 17

deficits increased in all countries as Suriname and Trinidad and Tobago also slipped into budget deficits. This has increased government debt in all CARICOM countries. Figure 8: Public sector balance as per cent of GDP, 2007-2010 a. Advanced Economies

b. CARICOM Economies

5

10

0

0 2007

2008

2009

2010

2011

2007

-5

-10

-10

-20

-15

US Canada Euro area Newly industrialized Asian economies

Source: IMF, WEO database.

2008

2009

2010

2011

Bahamas Barbados Belize ECCU Guyana Jamaica Suriname Trinidad and Tobago

Source: IMF, WEO database.

4.5. Banking and Finance The financial sector of CARICOM countries were not directly affected by the crisis as CARICOM households, firms and governments do not have significant investments in the US and other advanced economies and local commercial banks have refrained from securitization and derivative activity. The “exposures of CARICOM commercial banks are reported to be negligible and potential losses of other financial institutions for which reports have been published are quite small, in relation to their overall asset portfolio in the aftermath of the financial crisis” (CCMF, Caribbean Economic Performance Report, December 2008). The Caribbean Economic Performance Report (December 2008) further articulated that Insurance companies did incur small losses and there may have been significant losses in the values of pension funds as a result of investments abroad.

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The falling output, as well as a decline in employment, government revenue, FDI and foreign portfolio investment and increased pressures on the exchange rates have impacted on the financial sector of CARICOM countries. The main risk facing the financial systems in the region is credit risk stemming from depressed economic conditions. There has also been increased risk aversion which had led to slower credit, falling financial asset prices and lower interest rates (CCMF, Caribbean Economic Performance Report, December 2009). The January 2009 collapse of the Trinidad and Tobago based CL Financial Group and the collapse of the Stanford Financial Group in Antigua and Barbuda have compounded the increased risk aversion. Both experiences point to the need to improve regional regulation and cross-border cooperation. The fiscal expense of dealing with these collapses is still indeterminate. Higher exposure and high debt levels in several countries in the rest of the Caribbean pose significant challenges in dealing with the problems created by the CL’s insurance subsidiaries, the Colonial Life Insurance Company (CLICO) and the British American Insurance Company (BAICO). In addition, the crisis has brought with it an increase in regulation costs for CARICOM countries with Offshore Financial Centers. These countries are required to comply with increasingly tighter international standards (spearheaded by the G20) in fiscal/tax and financial regulatory areas (IMF, World Economic Outlook, 2010). This represents an additional cost and applies mainly to the eastern Caribbean countries which have already had significant reductions in growth from lower tourism demand. 4.6. External Accounts CARICOM economies recorded a widespread deterioration in their external accounts. Preceding the crisis all countries apart from Suriname and Trinidad and Tobago had current account deficits (table A5). Following the crisis these deficits have grown in size with Suriname also slipping into a deficit. Trinidad and Tobago retained its surplus despite the fact that it dwindled. This has contributed to higher debt levels. Foreign Direct Investment (FDI), portfolio investment and reserves have also been negatively affected. The global recession largely manifested itself in terms of a collapse in commodity prices and a fall in tourism demand in most countries. The fall in non agriculture commodity prices was more severe than the fall out in agriculture prices (figure). Regional exports struggled in 2009, as exports declined in most territories, except for

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the ECCU where it actually increased by 4.1 per cent for the year largely on account of its performances in the first and second quarter. The most dramatic declines in exports were registered by Guyana where they fell by 66.4 per cent and in Trinidad and Tobago where exports halved (50.6 per cent). 5. The Global Outlook While there has been some recovery from the crisis in 2010 significant uncertainties prevail. The main economic indicators for major country groupings from the IMF’s WEO Report (October 2010) are summarized in table 6. From the table global economic activity is forecasted to grow by 4.8 per cent in 2010 and 4.2 per cent in 2011. For advanced economies growth is projected at 2.7 and 2.2 per cent, respectively with Euro area slowing considerably more and for emerging. Growth for the newly Industrialized Asian economies will slow by almost half in 2011 compared to 2010. Developing economies, growth will expand at rates of 7.1 and 6.4 per cent, in 2010 and 2011 respectively. Unemployment is expected to remain persistently high. Current account imbalances between advanced and emerging and developing economies are predicted to persist. Inflation is projected to remain low generally with slightly higher rates in the emerging and developing economies. The report further states the downside risk remains and recovery rests on two rebalancing acts, fiscal consolidation and current account imbalances. Furthermore, the global financial system is yet to recover and there exists considerable uncertainty as significant sovereign and banking vulnerabilities exist. These balance sheets are highly vulnerable to growth shocks, making debt sustainability less certain, prices in stock exchanges have fallen and the risk premiums on corporate bonds have widened, and corporate bond issues have slowed (Global Financial Stability Report October 2010). As the recovery progresses the momentum gained from fiscal stimulus is slowing and growth must now be determined by private investment and household consumption.

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Table 6: Selected Indicators, World Economic Outlook Report, 2009, 2010 and 2011 (percentage change unless otherwise stated). Country/Region Real GDP

World Advanced US Euro Area Japan UK Canada Other Advanced NIAE12 Emerging and Developing

2009 -0.6 –3.2 –2.6 -4.1 -5.2 -4.9 -2.5 -1.2 -0.9 2.4

201011 4.8 2.7 2.6 1.7 2.8 1.7 3.1 5.4 7.8 7.1

2011 4.2 2.2 2.3 1.5 1.5 2.0 2.7 3.7 4.5 6.4

Consumer Prices9

Unemployment

2009 2.4 0.1 –0.3 0.3 -1.4 2.1 0.3 1.5 1.3 5.2

2009 NA 8 9.3 9.4 5.1 7.5 8.3 5.0 4.3 NA

2010 3.7 1.4 1.4 1.6 -1.0 3.1 1.8 2.4 2.6 6.2

Current Account Balance10 2011 2009 2010 2011 3.0 NA NA NA 1.3 –0.3 –0.3 –0.1 1.0 –2.7 –3.2 -2.6 1.5 -0.6 0.2 0.5 -0.3 2.8 3.1 2.3 2.5 -1.1 -2.2 -2.0 2.0 -2.8 -2.8 -2.7 2.5 4.8 5.0 4.9 2.7 8.5 7.1 6.9 4.7 1.8 2.1 2.2

2010 NA 8.3 9.7 10.1 5.1 7.9 8.0 4.8 3.8 NA

Source: IMF’s WEO (October 2010).

In examining international trade, the last quarter in 2009 showed a rebound in international merchandise exports. However as the global recovery begins to slow, the growth in merchandise exports has receded. In volume terms, global exports have been growing at an annual rate of 20 per cent during the first quarter of 2010 (World Bank’s Global Economic Prospects, June 2010). Figure 9 shows that developing countries had annual gains of 26 per cent, and high income economies 17 per cent in the first quarter of 2010. Looking at tourist arrivals, in 2009, international tourist arrivals declined by 4.2 per cent and tourism receipts declined by 5.7 per cent (UNWTO, World Tourism Barometer October, 2009). In 2010 the outlook is favorable and the latest data available for 140 countries at the end of August shows that world tourism arrivals increased by 7 per cent with an 8 per cent increase for emerging economies and a 6 per cent increase for advanced economies. The UNWTO forecasts international tourist arrivals to grow by 3 to 4 per cent in 2010.

9

Movements in consumer prices are shown as annual averages. Per cent of GDP. 11 2010 and 2011 are IMF projections. 12 Newly Industrialized Asian Economies 10

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2011 NA 8.2 9.6 10.0 5.0 7.4 7.5 4.7 3.7 NA

In terms of commodity prices the latest data and forecast given by the WB’s Global Economic Prospects (June 2010) projects energy prices to increase by 25.1 percent in 2010, while nonenergy commodity prices are expected to rise by 16.8 per cent. Prices are however, expected to remain well below their historic 2008 levels. As the recovery continues and growth stabilizes energy and non-energy prices are projected to decline by 4.5 per cent and 4 percent, respectively, in 2011 and another 1.0 per cent and 5.4 per cent in 2012.

In 2010 net private capital flows to developing countries are expected to improve in line with global recovery but they are not expected to reach pre-crisis levels in the medium term. According to the WB’s Global Economic Prospects (June 2010) debt flows may be constrained by increasing risk aversion because of uncertainties over sovereign debt sustainability, tighter regulations and increased competition for funding. Private capital flows to developing countries are forecasted to recover from $454 billion in 2009 to $771 billion by 2012, still far below the $1.2 trillion in 2007 (UNTAD’s WIR 2010).

The global outlook for remittance flows given by the World Bank (April 2010) states that remittance flows remained somewhat resilient in 2009 and are forecasted to recover in 2010 and 2011. Remittance flows to developing countries are expected to increase by 6.2 per cent in 2010 and 7.1 per cent in 2011. Figure 9: Global Outlook for 2010 and 2011 30 20 10 0 -10

Goods exports

Tourism arrivals

CPI

FDI

Remittances

GDP

-20 -30 -40 2009

2010

2011

Source: Author’s compilation from various sources.

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6. Conclusion The IFC has negatively affected international trade and financial flows of CARICOM countries resulting in a fall in economic growth. International financial flows have been more severely affected particularly ODA followed by FDI. Remittances have been less negatively affected though there was a decrease. In terms of international trade exports of goods and services were more negatively affected than imports. However, merchandise exports fell more than services exports which includes primarily tourism. Nevertheless, when looking at the impact of the crisis on growth tourism dependent were most negatively impacted followed by remittance dependent economies and least negatively impacted were economies than export goods. Tourism dependent economies face great uncertainties as their recovery rests solely on activity in the tourism sector. The remittance dependent economies are also most dependent on ODA which has an unfavorable outlook. The remaining economies which are export merchandisers face a gloomy outlook as the recent spike in international commodity prices in 2010 are unlikely to continue into 2011. Moreover, world exports are predicted to decease in 2011. The FDI outlook in 2011 is also likely to fall as international firms wrap up ongoing investments. References Caribbean Centre for Money and Finance, 2009, Caribbean Economic Performance Report. Inter-American Development Bank, 2009, Remittances in Times of Financial Instability (Washington, March). International Monetary Fund, 2010, World Economic Outlook Report (Washington, April).

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Appendix Table A1: Tourist (stop-over) arrivals, (percentage change) Destination Antigua & Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica St. Lucia St. Kitts & Nevis St. Vincent & Grenadines Suriname Trinidad & Tobago

2007 3.2 -4.6 1.8 1.8 -8.8 9.0 15.9 1.3 -5.0 -7.4 -8.0 5.5 -1.7

2008 1.5 -4.3 -0.9 -2.6 2.6 -4.1 1.0 3.9 2.9 -13.6 -6.2 -8.1 -4.2

2009 -11.8 -9.3 -8.7 -5.2 -12.1 -12.5 6.2 3.6 -5.8

2010 (Sept) -1.7 3.2 4.1 2.8 7.6 -7.9 7.1 4.1 14.3

-10.3

-2.3

-5.5

-6.4

Source: Caribbean Tourism Organization

Table A2: Cruise Passenger Arrivals (percentage change) Destination Antigua & Barbuda * Bahamas Barbados p Belize Dominica Grenada p Jamaica St. Lucia St. Kitts & Nevis St. Vincent & Grenadines Trinidad & Tobago

2007 42.7 -3.5 14.3 -4.8 -6.6 23.6 -11.8 69.7 23 35.8 -10.4

2008 -13.7 -3.7 -3.1 -4.3 30.7 8.3 -7.7 1.5

2009 22.7 13.8 6.4 18.1 37.8 16.1 -15.3 12.8

2010 (Sept) -17.5 14.4 -2.0 20.2 3.8 -6.2 -12.1 1.4

-19.5 -42.6

28.2 145.8

-30.5 -14.2

Source: Caribbean Tourism Organization.

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Table A3: Tourist Arrivals by main markets, 2009 (percentage change) Destination Antigua & Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica St. Lucia St. Vincent & the Grenadines Trinidad & Tobago

U.S. -2.3 -9.2 -7.2 -5.5 -13.2 -3.3 12.1 1.9 -9.1 -16.2 2.1

Canada -1.8 -6.9 11.2 -2.8 -24.6 -0.7 6.7 22.9 8.7 -0.9 -12.9

Europe -15.3 -16.0 -12.3 -13.6 -17.4 -19.0 -10.4 -2.8 -10.4 -14.4 -8.1

Other -21.3 -5.9 -11.8 1.3 -8.8 -12.4 -1.5 -4.5 0.6 -4.9 -12.3

Source: Caribbean Tourism Organization.

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