Walter Molano | Caribbean: Duck and Cover
Published:Thursday | June 7, 2018 | 12:00 AM
The past four years were a dream come true for most of the Caribbean Basin. The economic recovery in Europe and the US translated into a tourism boom for the islands.
Interminable lines choke the customs desks at Montego Bay. Urban revitalisation has transformed skylines of Santo Domingo and Kingston. The Dominican Republic was the fastest-growing economy of Latin America for the three last consecutive years, averaging seven per cent, year-on-year GDP growth.
Besides the revival of tourism, one of the reasons for the region's recovery was the collapse in oil prices in 2014. The Caribbean imports almost all of its energy needs.
Earlier this year, oil was discovered offshore in Jamaica. However, there is no clue as to how much oil lays under the ground or how long until it is extracted.
Trinidad, which is known as a regional oil producer, is really a natural gas producer. Petrotrin is nothing more than an ageing refinery that processes the 75,000 barrels of oil per day that is produced domestically. It is such little oil that the country must import oil to satisfy domestic demand.
This leaves the Caribbean Basin highly exposed to international oil prices. The slump in oil prices during the last few years were a godsend, but the upward trend in energy prices could leave the countries scrambling for cover.
Investors are well aware of the improvement in macroeconomic conditions. Bond spreads have tightened dramatically. The spread on the Jamaica '39s tightened 500 basis points since 2014. The same can be said for most of the other islands.
The Dominican Republic bonds have also performed well. The exception has been Trinidad and Tobago, as well as Barbados. Sitting off the Venezuelan coast, most people believe that Trinidad would have benefited from the rally in oil prices.
However, the bulk of Trinidad's hydrocarbon production is in the form of natural gas. This is the reason why National Gas Company of Trinidad and Tobago (NGCTT) is the country's crown jewel. It is a major exporter of liquified natural gas (LNG), as well as a host of natural gas products, such as ammonia and methanol.
High levels of corruption
Unfortunately, global natural gas prices remain depressed, despite the rally in oil prices. Natural gas is a by-product of the fracking process, and it has become extremely abundant with the increase in US shale activity. So much natural gas is being produced in the US that much of it is being flared, in spite of valiant efforts to export it.
At the same time, high levels of corruption and decrepit plant facilities at Petrotrin have become a strain on the government's purse. Next August, the company faces an $850-million amortisation, and the government will most likely be left on the hook.
The losses generated at Petrotrin, along with a bloated public sector, are the reasons why the country's fiscal deficit remains north of 10 per cent of GDP. Last month, Standard & Poors placed the country on negative outlook. With Trinidad's credit rating at BBB+, it is getting closer to the single BB realm.
This is a sad tale for a country which was once the highest-rated sovereign below the Rio Grande. It is too bad that Trinidad was not able to benefit from the revival in oil prices. This year, the economy will grow an anaemic 1.8 per cent year-on-year, after suffering a recession of 3.2 per cent year-on-year in 2017 and a contraction of six per cent in 2016.
Moreover, the recovery of the tourism business across most of the Caribbean did not have much of an impact. The island of Trinidad is more of an industrial-based economy. However, the island of Tobago is better positioned. Lush rainforests and pristine beaches make it into a tropical paradise. Yet, Tobago's tourism infrastructure is at the boutique level, and the island lacks any of the large-scale hotels that generate so much revenue in Jamaica, Dominican Republic and Nassau.
Another interesting island is Barbados. However, it only has a few small bond issues. The problem is that the country's fixed exchange rate regime has produced a large competitiveness problem, as well as a stubborn deficit on the current account.
Furthermore, a refusal to accede to the International Monetary Fund (IMF) assistance eliminates an opportunity for the country to turn itself around. Most Caribbean investors believe that a debt restructuring is inevitable.
Given that most of the debt is locally denominated, a Jamaican-style restructuring would probably work well. In the case of Jamaica, local banks agreed to extend bond maturities, as well as to accept lower coupon payments, in exchange for no haircut on principal.
The restructuring gave the Jamaican economy a new lease on life, and today it is the rising star of the region. There seems to a deep-seated resistance to doing the same in Barbados, but it would be wise to do so before oil prices go any higher and the economy begins to slump.
Therefore, the past four years have been boom times for the Caribbean Basin, but the steady increase in oil prices will bring the party to an end.
- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.
EDITOR'S NOTE: Last weekend, Barbados Prime Minister Mia Mottley announced that her new government would suspend payments due to domestic and external creditors and that domestic creditors would also be asked to roll over principal maturity until a restructuring agreement is reached.
She also announced that the new government would engage the IMF to assist with the country's economic recovery.