1

Caribbean: Potentials Impacts in a Caribbean: Potentials Impacts in a Deteriorating Global EnvironmentDeteriorating Global Environment

(with special emphasis on the Dominican Republic)(with special emphasis on the Dominican Republic)

12 March 200912 March 2009

22

Outline

Global Context Impact on the Caribbean Policy challenges What countries are doing Lessons from previous crises World Bank Support

3

The broad trends….

Caribbean is being hit hard by the global economic crisis

Real sector impacts are translating into job losses and likely social consequences

Region is vulnerable, with limited room for counter-cyclical fiscal policy, limited array of well-targeted safety nets

Responses: Smart spending Remember the poor and vulnerable Crisis as an opportunity

44Source: Bloomberg

The recession is in full swing in the U.S..…

U.S. Economic IndicatorsTotal Employment and YoY variation of Consumer Confidence and Vehicle Sales

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Jan-

07

Feb-

07

Mar

-07

Apr-

07

May

-07

Jun-

07

Jul-0

7

Aug-

07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr-

08

May

-08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

143000

143500

144000

144500

145000

145500

146000

146500

147000

in t

hous

ands

Consumer Confidence

Total employment

Vehicle sales

5

…with sharp declines in growth in the fourth quarter of 2008…

Source: Barclays Capital forecasts

Real GDP Growth in Advanced CountriesQoQ annualized growth (%)

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2004

Q1

2004

Q2

2004

Q3

2004

Q4

2005

Q1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

(E)

Euro area Japan US

6

… and the prospects for 2009 are bleak

Source: WEO (Jan 2009)

2.0

1.1

-1.6

1.6

2.6

1.0

-2.0

0.2

3.0

0.7

-2.8

0.2

2.7

0.6

-1.2

1.6

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Current WEO

2007 08 09 102007 08 09 10 United StatesUnited States

2007 08 09 102007 08 09 10 Euro areaEuro area

2007 08 09 102007 08 09 10 United KingdomUnited Kingdom

Real GDP Growth Rates(percent change)

2007 08 09 102007 08 09 10 CanadaCanada

77

Global crisis is being transmitted to the Caribbean and DR through many channels:

Financial sector Remittances Tourism FDI External demand

8

Financial contagion effectsFinancial contagion effects

9

The Caribbean countries join the massive global selloff of stocks

Source: Jamaica Stock Exchange, Eastern Caribbean Securities Exchange, Trinidad & Tobago Stock Exchange Limited and Barbados Stock Exchange Inc.

Trinidad & Tobago Stock Exchange Market Index

700

800

900

1000

1100

1200

1300

Jamaican Stock Exchange Market Index

70000

75000

80000

85000

90000

95000

100000

105000

110000

115000

120000

Barbados Stock Exchange Market Index

3200

3400

3600

3800

4000

4200

4400

4600

J an-07

Mar May J ul Sep Nov J an-08

Mar May J ul Sep Nov J an-09

10

Borrowing costs have increased sharply

Source: LCSPE Database

Sovereign Spreads EMBI Global

0

200

400

600

800

1000

1200

1400

1600

1800

2000

11/0

2/07

12/0

2/07

01/0

2/08

02/0

2/08

03/0

2/08

04/0

2/08

05/0

2/08

06/0

2/08

07/0

2/08

08/0

2/08

09/0

2/08

10/0

2/08

11/0

2/08

12/0

2/08

01/0

2/09

02/0

2/09

03/0

2/09

Belize DR LAC Jamaica

11

Credit ratings have been downgraded in the region

Source: LCSPE Database

Foreign Currency Ratings

Countrty Agency Change From To Date

Moody's downgrade rating B1 B2 3/4/2009

Fitch downgrade rating B+ B 11/18/2008

S&P downgrade outlook Stable Negative 10/21/2008

S&P downgrade rating B+ B 12/23/2008

Fitch downgrade outlook Positive Stable 9/25/2008

Bahamas S&P downgrade outlook Stable Negative 11/24/2008

Belize Moody's upgrade rating Caa1 B3 2/10/2009

Dominican Rep.

Jamaica

12

Access to credit is declining...

Source: Central Banks and IMF IFS.

Domestic Credit to the Private Sector

5

10

15

20

25

30

35

40

45

Jan-

07

Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

No

v-07

De

c-07

Jan-

08

Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

No

v-08

De

c-08

An

nu

al %

ch

ang

e

Jamaica OECS GuyanaDominican Republic Trinidad & Tobago BelizeBarbados Bahamas Suriname

DR

17

RemittancesRemittances

18

Remittances are a significant source of income, particularly in Guyana, Jamaica and DR…

Source: IMF-WEO. Note: Data refer to 2007 for all countries except Barbados, which refers to 2006

Remittances, share in GDP

18.8

9.3

6.2 5.94.5 4

2.3 1.4 0.9 0.7 0.5 0.3

20.9

0

5

10

15

20

25

Guy

ana

Jam

aica DR

Sur

inam

e

Bel

ize

Gre

nada

Bar

bado

s

A&

B

Dom

inic

a

St.

Vin

cent

St.

Kitt

s

T&

T

St.

Luc

ia

% o

f G

DP

19

… but remittances have started to decline

Source: Central Banks.

Nov-08

-10.8

Jan-09

-14.9-25

-20

-15

-10

-5

0

5

10

15

20

25

Jan-

07

Mar

May Ju

l

Sep

Nov

Jan-

08

Mar

May Ju

l

Sep

Nov

Jan-

09

An

nu

al c

han

ge

(%)

Dominican Republic

Jamaica

20

TourismTourism

21

Caribbean countries, particularly the OECS, Bahamas and Barbados, rely heavily on tourism

Note: Data refer to average of the two latest available years. Source: IMF - WEO

Tourism, share in GDP3332

29

2523 23

2017 17

12

4 4 3

41

0

5

10

15

20

25

30

35

40

45

% o

f G

DP

22

The crisis is hitting tourism arrivals in the whole region, with negative growth since Oct 2008.…

Source: One Caribbean.org.

T&T, St Vincent and the Grenadines and Guyana have not been included because data is available only until Jul, Aug and May respectively (so impact of crisis is not evident)

-30

-20

-10

0

10

20

30

Jun Jul Aug Sep Oct Nov Dec

An

nu

al c

han

ge

(%)

Antigua y Barbuda Barbados

Belize Dominican Republic

Grenada Guyana

Jamaica St.Lucia

23

Foreign Direct InvestmentForeign Direct Investment

24

FDI ratios are very high in the region but they are expected to decline…

Net FDI, as GDP% 200730.8

15.6

28.1

30.8

25.4

21.1

14.2

16.1

3.8 3.9 3.7

8.7

0

5

10

15

20

25

30

35

A&B Dominica Grenada St. Kitts St. Lucia St. Vincent Guyana Jamaica T&T Suriname DR Belize

Source: Central Banks and IMF. *Prelimanary data or projections.

25

There are indications that FDI is slowing, with tourism projects put on hold… Baha Nar, a US$2.6 billion project in Nassau, which

would have employed 4,400 building workers has been stopped.

Mayaguana, US$1.8 billion resort, in Bahamas on hold

Grenada: Major tourism projects on hold (US$262 m) Jamaica, St. Lucia, Anguilla, Grenada projects halted.

DR, authorities have confirmed a large mining investment for 2009

26

External demand effects - TradeExternal demand effects - Trade

28

In DR, Exports have recently started a sharp contraction

Table 1: Exports by Main Destination (percent) 2006 2007 2008

USA 32 30 23 Haiti 10 6 13 EU 5 15 27 29 China 4 3 3 Japan 2 4 2 Other Countries 37 29 30 Source: LCSPE calculation on CEI-RD data. Note: data include only “national” export flows and excludes exports by the Free Trade Zones.

Evolution of trade (in value)

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* 2007* 2008

valu

e in

US$

National Exports Free Trade Zone Exports

D o m in ic an R e p . M ain e x p o rt s d e s ti n ati o n s (% )

U S A (8 0 )

EU (1 0 )

C A N (1 .5 )

K O R (1 .2 )

M EX (1 .0 4 )

D EU (0 .9 )

JP N (0 .7 8 )

C A F TA 5 (0 .7 7 )

30

Growth is expected to slow in 2009…the outlook is difficult, with risks mainly on the downside…

Source: IMF and Press releases

Real GDP Growth (percentage change)

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

Guy

ana

Jam

aica

OE

CS

aver

age

Bel

ize

Trin

idad

&T

obag

o

Bar

bado

s

Bah

amas

Sur

inam

e

Dom

inic

anR

epub

lic

2007 2008 2009 2010

31

Employment is responsive to growth cycles in the region…

Employment-growth elasticity differs across countries and years

Source: ILO (KILM)

Elasticity of Employment to total GDP

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Bahamas DR Guyana Jamaica Suriname T&T

Ela

stic

ity o

f Em

ploy

men

t

1993-97 1997-01 2001-05

34

Policy ChallengesPolicy Challenges

35

Fiscal challenges

Fiscal deficits remain high in many countries Debt burdens are high Fiscal space is limited Revenues dependent on commodities in some

countries

38

Fiscal space is limited, with high ridigity in expenditures….

Source: National Statistics and IMF

Fixed expenditure (Wages, Interests and Pensions when available) as a share of Total Revenue - 2007

7670

61 6054 51 49

38

0

10

20

30

40

50

60

70

80

Jamaica Antigua yBarbuda

St. Vincent St. Kitts St. Lucia Dominica Grenada Guyana

41

In DR, the currency depreciated, and NIR have declined….

Source: Central Banks, IFS and LCSPE Database.

Jamaica

1500

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

NIR

in U

S$

Milli

ons

50

55

60

65

70

75

80

85

JD$/

US

$

NIR Exchange Rate

Guyana

0

50

100

150

200

250

300

350

400N

IR in

US

$ M

illion

s

175

185

195

205

215

225

235

245

255

265

275

G$/

US

$

NIR Exchange Rate

Trinidad and Tobago

0

2,000

4,000

6,000

8,000

10,000

NIR

in U

S$

Milli

ons

0

1

2

3

4

5

6

7

TT

$/U

S$

NIR Exchange Rate

Dominican Republic

0

500

1,000

1,500

2,000

2,500

3,000

NIR

in U

S$

Milli

ons

30

31

32

33

34

35

36

DR

$/U

S$

NIR Exchange Rate

42

…finally some good news: inflation pressures easing due to slowdown in commodity prices

Source: IMF IFS.

0

5

10

15

20

25

2007

M01

2007

M03

2007

M05

2007

M07

2007

M09

2007

M11

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

2009

M01

An

nu

al c

han

ge

(%)

Bahamas Barbados DR Jamaica T&T Guyana

-1

1

3

5

7

9

11

13

15

2007

M01

2007

M03

2007

M05

2007

M07

2007

M09

2007

M11

2008

M01

2008

M03

2008

M05

2008

M07

2008

M09

2008

M11

An

nu

al c

ha

ng

e (

%)

Belize Dominica St. Kitts St. Lucia St. Vincent

43

What are Governments Doing?What are Governments Doing?

44

Policy responses to the crisis

Source: ECLAC, “The reactions of Latin American and Caribbean governments to the international crisis: an overview of policy measures up to 30 January 2009”.

Measures by countryMonetary and

financial policyFiscal policy

Exchange-rate and external trade policy

Sectoral policies

Employment and social

policies

Jamaica x x x x xDominican Republic xHaiti x xBahamas x xBarbados x x xBelize x xGuyana xAntigua & Barbuda x xDominica x x xGrenada x x xSt. Kitts & Nevis x x xSt. Lucia x xSt. Vincent & the Grenadines x x

45

Some Thoughts on What Governments Can Do?

Avoid irreversible damage, that is actions that prevent Malnutrition Withdrawing children from schools Basic and preventive health interruptions

Smart spending/stimulate without destroying Crisis as an opportunity

Leverage crisis to build consensus around key policy reforms

focus on medium and longer term recovery path target elimination of inefficiencies in both public and

private sectors

46

Smart spending/stimulate without destroying

Government could: Leverage existing programs (e.g. expand existing safety nets) Focus subsidies (e.g energy subsidies in DR) Improve expenditure procedures and fiscal transparency in order to

ensure that increased public spending is well targeted Where there is fiscal room, accelerate existing public investment

projects and maintanance spending but avoid starting large new projects

increase the scope of automatic stabilizers. eg. make taxes progressive

Governments should avoid Subsidies to specific industries Increases in minimum wages Increases in public wages or increases in public employment

47

World Bank Support Financing – crisis response

Financing to scale up well-targeted safety net programs from ongoing (e.g. Jamaica $40 million PATH project) or new projects

Budget support based on policy programs (pipeline: DR, Grenada?) that are aimed at maintaining macrostability while protecting the poor

Medium term response – AAA, TA, lending for Strengthened social protection systems Improved competitiveness and growth Strengthened governance and public financial management

48

Thank youThank you