The Caribbean’s Counterintuitive Crest
In contrast to the rest of the MSCI universe, Caribbean frontier components Jamaica and Trinidad and Tobago enjoyed 25 percent gains in 2011 as sovereign and financial sector debt collapses were avoided. They swooned briefly late in the year on surprise opposition party election victory and a reported coup attempt in the respective locations. The regional stock exchanges including Barbados now feature cross-listing and trading after lengthy preparation with development institution technical assistance. Jamaica’s National Commercial Bank pioneered a joint move. External bonds are tracked separately in a sub-index of JP Morgan’s EMBI to facilitate investment in these instruments.
Jamaica’s capitalization is the largest at $7 billion, and in response to the 2008-09 crisis it entered a 3-year $1.5 billion IMF program and completed a $10 billion local bond exchange to contain the 125 percent of GDP public debt ratio. The deal emphasized maturity extension with nominal net present value reduction for domestic banks that held the overwhelming portion of the paper. With fears that never materialized that the repo market would freeze or recapitalization would be needed, a backstop balance sheet and liquidity facility was arranged. Emerging market analysts cited it as a possible voluntary restructuring model for Greece before the situation there spun out of control. Benchmark yields fell to single digits and the Jamaican dollar firmed against its US counterpart The ruling Labor Party’s popularity benefited from successful emergency handling that carried through until mid-2011, when a combination of backlashes against austerity and security crackdowns to fight drug gangs resulted in the prime minister’s resignation.
His replacement kept the Finance Minister and pledged to honor outstanding obligations, but the IMF arrangement veered off track as the debt load increased. The ruling party was soundly-defeated in late December elections which concentrated on stubborn crime and unemployment. The estimated 6.5 percent and 1.5 percent of GDP fiscal deficit and primary surplus will miss targets. Progress lags on government payroll cuts, tax and pension changes, and state enterprise privatization in strategic industries like aluminum. Tourism, which accounts for one-fifth of the economy, was up but growth was just 1 percent on headline inflation at 7.5 percent. International reserves are stuck around $2 billion despite higher remittances with oil import costs and lackluster foreign direct inflows. In view of these difficulties S&P lowered its outlook to negative on the B-minus rating at the end of October.
Trinidad and Tobago in comparison is an energy exporter and investment-grade sovereign but poor non-hydrocarbon performance shrank 2011 output. Stocks rebounded from the bankruptcy of the CL Financial Group with reported contingent liabilities at 10 percent of GDP. Official rescue along with infrastructure and social spending eliminated previous fiscal surpluses, and regulators had to scramble to resolve claims for the complex conglomerate with its diversified operations and cross-border network. An insurance subsidiary in Barbados is still under pressure, which kept its stock market flat. The IMF, in an annual review, warned of danger there under the exchange rate peg with public debt over 100 percent of GDP and languishing visitor and offshore center earnings.
The bigger islands seek to skirt the fate of their tiny neighbors in the Eastern Caribbean Currency Union, with a shared monetary unit and central bank predating the Eurozone. Its members, including Dominica and Grenada several years ago and St. Kitts and Nevis last July, defaulted and subsequently negotiated fresh arrangements with private, bilateral and multilateral creditors. In the St. Kitts case commercial holders were only spared write-downs on local Treasury bills. These examples may show the EU that a single currency zone can survive such trauma, and Jamaica which has government debt-GDP only matched by Greece and Lebanon in non-advanced economies could soon follow this routine regional restructuring path ending an exceptional equity market streak.
