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

2. 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

3. 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

4. 4 Seventeen Borrowing Member Countries (five overseas dependent territories of UK) Anguilla British Virgin Islands Cayman Islands Montserrat Turks and Caicos

5. 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

6. 6 Major Development Issues Poverty Fiscal & Debt sustainability Real output concentration and increasing productive capacity Vulnerability Economic Social Natural Hazard

7. 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

8. 8 Percentages below the poverty line

9. 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

10. 10 Overall Fiscal Position 1980-2003

11. 11 Debt Service as % of Revenue

12. 12 Debt Service as % of Exports of Goods and Services

13. 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

14. 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)

15. 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

16. 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.

17. 17 Average Growth Rates 1980-2004

18. 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

19. 19 Hurricane Damage 1995-2004 HazardYearMagnitudeEstimated Cost Countries Affected Hurricanes Iris/Marilyn/Luis 1995Iris (Category 3/4) Marilyn (Category 1) Luis (Category 3) US $700 mnAnguilla, Antigua & Barbuda, Dominica, Montserrat, St. Kitts & Nevis Hurricane Georges 1998Category 3US $ 450 mn (exc. Dominica) Antigua & Barbuda Dominica, St. Kitts-Nevis Hurricane Floyd1999Category 4US $ 274 mnThe Bahamas Hurricane Lenny1999Category 4/5Anguilla, Antigua & Barbuda, Dominica, Grenada, St. Kitts-Nevis, St. Lucia, St. Vincent & the Grenadines Tropical Storm Earl 2004St. Vincent & Grenadines, Grenada Hurricanes Charley, Frances Ivan, Jeanne 2004Charley Frances (Category 4),Ivan (Category 5) Jeanne (Category4) USD 4.5 bnThe Bahamas, Cayman Islands, Grenada, Jamaica, St. Lucia, St. Vincent & the Grenadines, Trinidad & Tobago

20. 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

21. 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.

22. 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.

23. 23 Growth rates in 2004

24. 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.

25. 25 …so what does the future hold for CARICOM economies?

26. 26 Projected GDP Growth Rates (%)

27. 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

28. 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

29. 29 Debt stock situation in the BMCs

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. For more information, please contact CDB e-mail: dalrymk@caribank.org website: www.caribank.org Thank you for your attention!