The Caribbean: Looking For A Way Out

With tourism struggling and fiscal troubles looming, Central America and the Caribbean see commodities and tech as economic lifelines.

Difficult times persist for the Central American and Caribbean economies, as tourism is not expected to start its recovery before the second half of this year, if then; and in the interim, more countries sink into fiscal crisis. Multilateral institutions continue to call for the region to reform its regulatory and tax regimes as a means of attracting foreign investment.Yet, presently, governments’ most urgent concern is getting access to Covid-19 vaccines.

“The Caribbean countries have complex and structural vulnerability caused by their dependence on tourism,” says Daniel Titelman, director of the economic development division at the UN’s Economic Commission for Latin America and the Caribbean (ECLAC), “and Central America was caught by the pandemic when it already had a high level of indebtedness.”

Both regions “are engaged in a race between access to the vaccine and the second wave of Covid-19,” says Eric Parrado, chief economist at the Inter-American Development Bank (IADB). The IADB sees an opening for diversification in the Caribbean, especially aimed at new sectors like call centers and digital services linked to demand in North America and Europe. For US manufacturing companies, the prospect of accessing suppliers closer than Asia is attractive. “But these countries will have to provide incentives and engage in structural reforms,” Parrado warns.

Following a 7.9% drop in regional GDP in 2020, the Caribbean economy should grow 4.2% this year, by ECLAC’s estimate; while the World Bank projects a 4.5% recovery from a negative 7.7% 2020 performance. In Panama, one of the brightest Central American economies in recent years, GDP dropped between 8% and 11% in 2020 due to slumps in construction, manufacturing, domestic consumption, transportation and tourism. These sectors collectively account for 53% of the country’s GDP, according to Samuel Moreno, director of Panama’s National Institute of Statistics and Census.

The 2020 crash “will not be compensated this year by the movement of the [Panama] Canal, ports and agriculture, despite the fact that they can give oxygen to our economy,” Moreno says. “We’ll prioritize social subsidies and attracting foreign investment in logistics, ports, mining, livestock, fishing and the agricultural sector while trying to prevent tax evasion.”

At Risk of Default

El Salvador and Costa Rica are in greater trouble. The former is at risk of default while the latter is hoping a $1.75 billion, three-year agreement with the International Monetary Fund will be approved this month to forestall further fiscal deterioration, says Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial.

“The Costa Rican economy collapsed in 2020,” says Marshik, “but it can improve its GDP with the greater external demand for medical and agricultural goods.”

The Caribbean zone endured a loss of 500 million tourists in 2020, accounting, in some countries, for almost 100% of the business. In the Dominican Republic—where tourism is typically responsible for 28% of GDP, drives the agricultural sector and has a huge impact on tax income—the shrinking economy was bolstered to some extent by a record $7 billion in remittances from Dominicans abroad. The same level of injection is expected this year. Financial services and medical supply manufacturing are also expected to reach a 4.5% growth rate, says Antonio Ciriaco Cruz, vice dean of the Faculty of Economics of the Autonomous University of Santo Domingo.

However, the government will have to scramble to find money to cover the expanded social assistance and aid to some sectors of the economy that the crisis demands. “The strict fiscal scenario opens the debate on reforms to raise the tax burden, nowadays only 14% of the GDP; and to better deal with our public debt, which reaches 70% of the GDP,” says Cruz.

The economies likely to recover most quickly are those supported by commodities exports and those receiving investments in digital platforms, e-commerce and applications, like Jamaica, Costa Rica and the Dominican Republic, says Cruz. These investments can give the Caribbean and Central America the resilience they need to meet their external and domestic challenges, says Cruz.

“They can also use part of the gains resulting from these investments to build countercyclical funds, such as Chile and Guyana are doing,” he says, making them more resilient in the face of the economic crises and natural disasters that often damage the regions.

Where uncertainty prevails, Cruz warns, is in the so-called fiscal paradises such as Panama, the Bahamas, Barbados, and Dominica. Statistics on capital flows in these countries are opaque, and the hit to GDP from the pandemic affects their ability to tackle poverty and social inequality. Some new IT investment is providing a counterbalance.

However, “the problem is that all the capital movements to and from these countries have not been translated into better living conditions for their local population,” says Cruz. “The richest people continue to live in their old metropolises, which benefit most from the Caribbean financial system. The rest are economically vulnerable and dependent on industries such as the tourism that have no prospect of total recovery in 2021.”