Caribbean Grapples with Downturn

KINGSTON, Jamaica — With a sunny climate and white beaches, the Caribbean has long offered the world economy what might be described as frosting – from tropical vacations to sugar and fruit. But the rise in commodity prices meant the Caribbean nations were finally receiving their just desserts.

Now the worldwide economic crisis has interrupted the Caribbean’s most robust rate of sustained economic growth since the 1960s. From Antigua to Trinidad & Tobago, nations are grappling with a slump in exports, a decline in tourism, rising fuel costs, higher unemployment and a drop in both foreign direct investment and remittances. And the recovery forecast for next year is expected to be weak.

“Without an International Monetary Fund agreement and without access to balance of payment support, our net international reserves could deplete to $800 million, which could put you down to about six weeks of imports,” Jamaican Finance Minister Audley Shaw recently warned.

Worse, experts say these small economies remain exposed to the ups and downs of global financial forces.

“These countries have limited room to implement policies that could moderate the production and employment effects of the crisis,” said the United Nations’ Economic Commission for Latin America and the Caribbean in a recent report. The report from the Santiago, Chile-based agency predicted the region’s overall economy would shrink by 1.2 percent in 2009 and grow by a scant half a percent in 2010 – the lowest estimated rate in the region

On the bright side, the Caribbean has so far avoided the financial panics that followed past bouts of global economic turbulence. Some countries like Barbados and Trinidad & Tobago built up large foreign currency reserves. Lower inflation has allowed central banks around the region to reduce interest rates.

To ride out the crisis, some financial authorities have turned to international lending agencies for funds to close the financial gaps. Other governments are implementing stimulus plans. Private sector leaders are counting on economic recovery in Europe and the United States to revive tourism.

Trinidad & Tobago, whose oil-driven economy made it one of the star performers in recent years, experienced a 3.3 percent contraction in its gross domestic product in the first quarter as energy production fell by 2 percent and factory output plunged nearly 12 percent.

Trinidad Prime Minister Patrick Manning originally called for citizens to tighten their belts. However, when oil prices began to recover, Manning reversed his position and boosted government spending.

“So many countries around the world are experiencing a shortage of cash,” Manning recently told business leaders. “We have a surplus of cash that is now available to utilize as we seek to increase the level of economic activity.”

However, Central Bank Governor Ewart Williams anticipated a slow recovery of private sector borrowing in Trinidad as consumer and business confidence remains low. Government spending would be limited and invested in large, on-going projects that need to be completed, Williams added.

The severe global recession has battered even the region’s most stalwart economies. In Barbados, the economy shrank by 3 percent in the first half of 2009, and unemployment has increased to 10 percent in the first quarter in 2009, up from 7.9 percent a year earlier.

Compared to other Caribbean destinations, Barbados has been lucky in terms of tourism. The number of international visitors to Barbados fell 8 percent in the first half of the year; however, the Bahamas and islands in the eastern Caribbean have suffered double-digit declines.

Meanwhile, both Jamaica and Cuba have seen a slight increase.

“The total number of visitors to the Caribbean is going down, but Jamaica is faring better than higher-cost destinations like the Bahamas and the Cayman Islands,” said John Issa, founder of SuperClubs, one of the region’s largest hotel chains.
“People are prepared to travel but are looking for a deal,” Issa said.

The Madrid-based United Nations World Tourism Organization forecast a 6 percent drop in Caribbean tourism for all of 2009 and does not anticipate a recovery until after 2010 because of low levels of advance bookings, cuts in airline seat capacity and continued economic uncertainty.

Modest increases in tourism and a robust agricultural sector have not counteracted poor performances in other sectors in Jamaica, the largest market in the 15-member Caribbean Community. Bauxite/alumina exports fell by 50 percent in the first half of the year, while remittances, the country’s largest source of foreign exchange, dropped by 16 percent. Jamaica’s gross domestic product shrank by 4 percent in the first half of the year and little improvement is expected in 2010, prompting the government to begin negotiations with the International Monetary Fund to secure financing for its current account deficits and to bolster its foreign reserves.

The Dominican Republic has followed suit. As the government has seen revenue fall and fiscal accounts slide into deficits, its officials have sought new lending from the World Bank and the Inter-American Development Bank.

“The biggest mistake a government can make in the current situation is to hike taxes because all that does is cut people’s spending capacity,” explained Vicente Bengoa, the Dominican finance minister. To aid the ailing economy, the government has increased spending on housing through a $75 million loan facility being disbursed by the Central Bank. Loans totaling $160 million from the Andean Development Corporation and Colombia’s Bancoldex, the foreign trade bank, will finance the construction of 15,000 houses over the next year.

Few industries in the region have suffered such serious setbacks as construction, which had fueled strong job growth over the past five years. But in the current crisis, the construction sector has declined by 7 percent in the region overall since the start of the year. The ripple effect is manifested in cement sales, which have plummeted 15 percent in the area, including an 18.4 percent drop in Barbados.