issues and prospects for the caribbean region

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Issues and Prospects for the Caribbean Region Kelvin Dalrymple Chief Country Economist Caribbean Development Bank October 20, 2005

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Issues and Prospects for the Caribbean Region. Kelvin Dalrymple Chief Country Economist Caribbean Development Bank October 20, 2005. Outline of Presentation. The region and its development bank Major sectors in the region Major development issues Recent global developments - PowerPoint PPT Presentation

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Page 1: Issues and Prospects for the Caribbean Region

Issues and Prospects for the Caribbean Region

Kelvin Dalrymple Chief Country Economist

Caribbean Development BankOctober 20, 2005

Page 2: Issues and Prospects for the Caribbean Region

2

Outline of Presentation• The region and its development bank• Major sectors in the region• Major development issues• Recent global developments• Recent regional developments• Prospects for the region

Page 3: Issues and Prospects for the Caribbean Region

3

Seventeen Borrowing Member Countries (twelve independent countries)

• Antigua & Barbuda

• The Bahamas

• Barbados

• Belize

• Dominica

• Grenada

• Guyana

• Jamaica

• St. Kitts & Nevis

• St. Lucia

• St. Vincent & the Grenadines

• Trinidad & Tobago

Page 4: Issues and Prospects for the Caribbean Region

4

Seventeen Borrowing Member Countries (five overseas dependent territories of UK)

• Anguilla

• British Virgin Islands

• Cayman Islands

• Montserrat

• Turks and Caicos

Page 5: Issues and Prospects for the Caribbean Region

5

Major Sectors in the Region• Tourism

• Long-stay and cruise• Construction• Agriculture

• Domestic and export • Financial Services

• Domestic and Offshore• Energy

• Natural Gas• Petroleum• Renewable sources, including solar and wind

Page 6: Issues and Prospects for the Caribbean Region

6

Major Development Issues• Poverty• Fiscal & Debt sustainability• Real output concentration and increasing

productive capacity• Vulnerability

• Economic • Social• Natural Hazard

Page 7: Issues and Prospects for the Caribbean Region

7

Poverty• Poverty is still high in the region• Though many middle income countries

poverty since exists at unacceptable levels• Per capita income measurement using GDP is

inadequate • In small islands, population coupled with

relatively high income, gives rise to high per capita income

• The high incomes mask some of the real social problems

• Vulnerability measures come closer to reality

Page 8: Issues and Prospects for the Caribbean Region

8

Percentages below the poverty line

0

10

20

30

40

50

60

70

Page 9: Issues and Prospects for the Caribbean Region

9

Fiscal and Debt Sustainability• Emerging as an issue of critical importance, with

potential to stymie social and economic development

• External and domestic factors have influenced this outcome• Unfavourable terms of trade and erosion of

preferences.• Natural hazards, particularly within the OECS.• Countercyclical fiscal policy, particularly in the post

2000 period.• An increase in commercial borrowings

• Consequently revenue growth has lagged expenditures, resulting in rising deficits, higher levels of indebtedness and more onerous debt service payments

Page 10: Issues and Prospects for the Caribbean Region

10

Overall Fiscal Position 1980-2003

-7

-6

-5

-4

-3

-2

-1

0

% o

f GDP

Years

Region OECS

Page 11: Issues and Prospects for the Caribbean Region

11

Debt Service as % of Revenue

0

5

10

15

20

25

Years

%

Region OECS

Page 12: Issues and Prospects for the Caribbean Region

12

Debt Service as % of Exports of Goods and Services

0

5

10

15

20

25

Years

%

Region OECS

Page 13: Issues and Prospects for the Caribbean Region

13

Fiscal and Debt Sustainability (cont’d)

• Both revenue and expenditure reforms required

• On revenue side, most countries engaging in revenue reform are opting for VAT

• On expenditure side there is a tendency to make the adjustment to capital expenditures

• Greater emphasis needs to be placed on reviewing the role of the state, particularly as it relates to recurrent expenditure

• Greater emphasis on focussing and prioritising of the PSIP

Page 14: Issues and Prospects for the Caribbean Region

14

Productive Capacity• Maintaining balanced real rates of growth

essential to protect past gains and secure further development

• High degree of economic concentration, either in tourism or agriculture

• Noticeable decline in rates of growth since 80s owing to changing trade regime, natural disasters, economic shocks (global slowdown, oil prices, source market disturbances)

Page 15: Issues and Prospects for the Caribbean Region

15

Productive Capacity (cont’d)• Most economies based on tourism which

contributes to as much as 60% of GDP• Within tourism, there is a high concentration in one or

two source markets, namely the US and UK. • Sector is vibrant, with new entrants appearing and old

participants renewing products.• Cruise tourism gaining in importance.

• International business sector contributing significantly to high standard of living but being challenged by more developed economies

• Few countries have the scale and resources to be competitive in agriculture and manufacturing

Page 16: Issues and Prospects for the Caribbean Region

16

Productive Capacity (cont’d)• Services remain best hope for Region.• Need not be limited to holiday travel but can

also capitalise on provision of health and education services.

• Countries have been trying to improve productive capacity .• Tourism product development since some economies

are considered to be mature destinations. • Improvements in the regulatory and legislative

framework may be beneficial to international business sector over medium to long term.

• Emphasis on lowering unit costs to try to realise productivity gains.

• Ensuring that tourist/investors receive value for money.

Page 17: Issues and Prospects for the Caribbean Region

17

Average Growth Rates 1980-2004

0

1

2

3

4

5

6

7

%

80-85 86-90 91-95 96-00 01-04yrs

Region OECS

Page 18: Issues and Prospects for the Caribbean Region

18

Vulnerability• Economic

• 15 BMCs in the top third of the world’s most vulnerable countries (Crowards 1999)

• Small domestic market and high degree of openness.• Limited Diversification• Inability to take advantage of economies of scale.• Inability to influence prices.• Most economies based on tourism which contributes to as

much as 60% of GDP. • High dependence on trade taxes• Limited institutional capacity

• Social• Encompasses not only the poor, but those on the margin.• Social exclusion

• Natural Hazards• Region is extremely vulnerable to natural hazards as

highlighted in 2004. However, pattern of destruction has been well documented over the years

Page 19: Issues and Prospects for the Caribbean Region

19

Hurricane Damage 1995-2004Hazard Year Magnitude Estimated

Cost Countries Affected

Hurricanes Iris/Marilyn/Luis

1995 Iris (Category 3/4)Marilyn (Category 1)Luis (Category 3)

US $700 mn Anguilla, Antigua & Barbuda, Dominica, Montserrat, St. Kitts & Nevis

Hurricane Georges

1998 Category 3 US $ 450 mn (exc. Dominica)

Antigua & BarbudaDominica, St. Kitts-Nevis

Hurricane Floyd 1999 Category 4 US $ 274 mn The Bahamas Hurricane Lenny 1999 Category 4/5 Anguilla, Antigua &

Barbuda, Dominica, Grenada, St. Kitts-Nevis, St. Lucia, St. Vincent & the Grenadines

Tropical Storm Earl

2004 St. Vincent & Grenadines, Grenada

Hurricanes Charley, Frances Ivan, Jeanne

2004 Charley Frances (Category 4),Ivan (Category 5)Jeanne (Category4)

USD 4.5 bn The Bahamas, Cayman Islands, Grenada, Jamaica, St. Lucia, St. Vincent & the Grenadines, Trinidad & Tobago

Page 20: Issues and Prospects for the Caribbean Region

20

Natural Hazard Management (cont’d)

• Greater emphasis needed on natural hazard management

• At the broader level, this will require greater focus on• Institutional preparedness• Mitigation, to ensure that buildings and other

infrastructure are adequately protected• Post-disaster response to rebuild social and

economic infrastructure to allow for rapid return to economic activity

Page 21: Issues and Prospects for the Caribbean Region

21

Recent Global Environment• Over the past two years, global growth has

accelerated and become more broad-based.• Higher private consumption and business

investment were principal drivers of growth. • Inflationary pressures have been increasing owing

to rising demand and higher oil prices. • Consequently, monetary stimuli are being

gradually removed. • The rise in demand has, however, exacerbated

current account imbalances particularly in the US.• Public finances remained a concern with rising

deficits notably in the US and Eurozone.

Page 22: Issues and Prospects for the Caribbean Region

22

Recent Regional Developments• Region generally performed well in 2004,

notwithstanding the spate of natural disasters such as hurricanes Charley, Frances, Ivan and Jeanne.

• Total losses from the 2004 hurricane season estimated at more than US4.5 bn

• Most economies were able to take advantage of rising global demand.• As a result, tourism was the main driver of growth.• Supported by construction, which was largely

tourism-based, and to a lesser extent, financial services, agriculture and manufacturing.

Page 23: Issues and Prospects for the Caribbean Region

23

Growth rates in 2004

-4

-2

0

2

4

6

8

10

12

14

%

Countries

Page 24: Issues and Prospects for the Caribbean Region

24

Recent Regional Developments Cont’d• Available information for 2005 points to positive

but slightly slower rates of growth in tandem with the moderate slowdown in the global economy. • Tourism and construction (particularly hotel-related) still

continue to drive many economies.• The outturn for agriculture appears to have decreased

mainly due to adverse weather conditions. • Inflationary pressures have increased in the past

two years, with more governments being forced to pass on increases to the consumer.

• Monetary stimuli are being removed gradually to curb domestic demand, and also to narrow the differential between US and domestic rates.

Page 25: Issues and Prospects for the Caribbean Region

25

…so what does the future hold for CARICOM economies?

Page 26: Issues and Prospects for the Caribbean Region

26

Projected GDP Growth Rates (%)

0

1

2

3

4

5

6

7

% change in GDP

US EuroArea

Japan LAC F. SovietUnion

Country/Area

20052006

Page 27: Issues and Prospects for the Caribbean Region

27

Prospects for the Region• The outlook for the Region over the medium

term is favourable. • Positive trends in tourism expected to

continue over the medium term, particularly with Cricket World Cup in 2007

• Financial services have largely stabilised, and further growth is expected

Page 28: Issues and Prospects for the Caribbean Region

28

Prospects for the Region (cont’d)• The CARICOM Single Market and Economy

(CSME) provides opportunities to reap benefits from economies of scale in all areas

• Untapped potential in the region in provision of goods and services

• Main downside risks stem from adverse developments in the global economy and natural disasters

• Sound development policies, particularly with respect to public finances are critical at this juncture

Page 29: Issues and Prospects for the Caribbean Region

29

Debt stock situation in the BMCs

0

50

100

150

200

250Debt/GDP 1997Debt/GDP 2003Debt/GDP 2004-07

Page 30: Issues and Prospects for the Caribbean Region

30

Growth is expected to continue…• Continuation of the trend in construction

activity, with further growth projected in 2005, as both public and private sector investment activity continues• Rebuilding countries ravaged by Hurricanes Charley,

Ivan, Jeanne of 2004• Construction in anticipation of the 2007

Cricket World Cup – public sector (roads and other infrastructure), commercial (hotels, stadia and other amenities) as well as private (upgrades to private dwellings)

• Tourism, finance and energy sectors will expand while agriculture will be uneven in growth

Page 31: Issues and Prospects for the Caribbean Region

31

…however there are downside risks

• The main downside risks to regional growth are from a slowdown in the international economy• Escalating geopolitical tensions e.g. war on terror• Deterioration in macroeconomic fundamentals

• Rising oil prices• Rising price of oil which increases the cost of living in

major oil consuming countries as well as increases international travel and transportation

• Rising oil prices could slow growth in the Region, and increase the cost of production and reducing the competitiveness of regional goods and services

• Rising debt levels of the Region’s economies – can be reduced by increasing the growth levels

Page 32: Issues and Prospects for the Caribbean Region

32

Prospects for CARICOM Single Market and Economy (CSME)

• The acceleration of regional integration, through the CSME, presents opportunities for the Region over the medium-term

• Efficiency and productivity gains through the more effective sourcing and utilisation of inputs

• Competition in already established markets, need to carve out niches in an increasingly competitive environment

Page 33: Issues and Prospects for the Caribbean Region

33

Natural Hazard Vulnerability• The threat of natural disasters also cannot be

overlooked, in light of the damage and destruction caused by hurricanes and earthquakes in 2004

• Must prepare because the ability of a single event, in a few hours, can to eliminate decades of growth and development

• This can be well managed and investment can be secured by being proactive

Page 34: Issues and Prospects for the Caribbean Region

34

The unfinished agenda…• Environmental sustainability

• Growth sectorally in tourism, agriculture will be enhanced by a sound policy on the environment

• Enhanced livelihood opportunity for residents that reduce poverty

• Standards• High building standards• High service quality

• Productivity and competitiveness• Keys issues affecting the use of labour and the future

viability of key sectors• Niche marketing

• Search for the few areas where there is a competitive and comparative advantage and exploit them

• Trade Liberalisation• Negotiations ongoing in three theatres - WTO, EU, FTAA

Page 35: Issues and Prospects for the Caribbean Region

35

The Region is good for investment…

• On balance, things are headed in the right direction

• The world economy is expanding• Growth in investment will not be even• Areas of focus will vary from island/ country• New sectors are emerging which require

financing• Risks can and must be managed • The Cricket World Cup (CWC) 2007 is a great

opportunity.• Legacy benefits from CWC 2007 are also

expected to be very good

Page 36: Issues and Prospects for the Caribbean Region

36

The message is …• The outlook for the Region is still positive • The global recovery is expected to continue,

although at a slightly slower pace• The Region continues to have significant

levels of underutilised resources: natural, financial, labour and entrepreneurial

• The Region needs to• find ways of bringing these resources together• to identify greater market opportunities• to engage in sustainable production for the global

market

Page 37: Issues and Prospects for the Caribbean Region

For more information, please contact CDB

e-mail:[email protected]

website: www.caribank.org

Thank you for your attention!