Caribbean Market Overview

Dear valued clients,

Please find attached the latest edition of the Caribbean Market Overview. We hope you find this publication useful, and as always, we look forward to your feedback. We encourage you to contact your relationship manager if you have any queries.

Caribbean Economic Overview

Summary: The Caribbean economic recovery continues to be slow and uneven, but stronger economic performance in the USA and UK and low energy prices have contributed to a modest improvement in economic performance thus far in 2015. While the pace of growth in stay-over tourist arrivals slowed during H1 2015, more tourists have so far visited the Caribbean this year as compared to 2014. All markets except Antigua and Barbuda, Belize, and Dominica recorded a higher number of tourist arrivals with the largest percentage increases coming from markets located in the Southern Caribbean – Aruba, Barbados, and Trinidad and Tobago. However, domestic demand remained sluggish, as weak mortgage growth and cuts to capital expenditure in some markets limited expansions in construction activity to only half of the markets covered over the review period. Finally, preliminary indicators suggest that real economic value-added expanded in all markets except Antigua and Barbuda, Curacao, Dominica, St. Vincent and the Grenadines, and Trinidad and Tobago, and unemployment, while generally lower, remains elevated.

The IMF expects the US and UK economies to expand by 2.6% and 2.5% during 2015 while average crude oil prices should remain below US$60 per barrel over the next three years. Altas Union Economics’ growth forecasts for both countries stand at 2.5% for 2015. These developments bode well for continued recovery of tourism-dependent economies as unemployment in advanced economies falls, real incomes rise, and more tourists visit the Caribbean. In contrast, lower energy prices will continue to constrain output in commodity-producing markets, reducing foreign exchange inflows and placing downward pressure on fiscal revenues. As a result, during 2015, economic growth in Caribbean tourism-dependent economies (2.3%) will likely exceed that in commodity-producers (2.0%) for the first time in over five years. Consumer price inflation should remain low, and unemployment is likely to continue on its downward trend in most markets. However, weak loan demand and the persistent rise in deposits will continue to push excess liquidity higher. Thus, central bank accommodative monetary policy will continue to drive deposit rates lower and improve bank profitability.

Caribbean Market Review

Summary: Sovereign bonds widened on US fears but continued to outperform their LATAM counterparts driven by better economic performance and outlook for the Caribbean region. Still, we are waiting to see the full growth and fiscal effects of lower energy prices. The ongoing recovery in the USA and UK in addition to embryonic European recovery continued to drive a strong bounceback in tourism, with only Bermuda still lagging. We remain constructive on Caribbean bonds. We expect continued fiscal adjustment and consolidation of the recent fiscal improvement. Barbados continues to improve and is finally seeing strong recovery in tourism. The Bahamas continues to put in decent growth numbers but faces lower tourism growth than otherwise due to the Chapter 11 bankruptcy of the Baha Mar resort project. Jamaica and the Dominican Republic continue to consolidate strong fiscal gains although the PetroCaribe refinancing in Jamaica put supply pressure on the bonds. Although Barbados lost some ground relative to its peers due to some technical selling, we continue to like holding Barbados bonds, especially BARBAD ‘22s. Jamaica continues to perform, keeping on track with its IMF program. Our positive expectations have proven correct but we do not see major obstacles to continued good performance despite the US Federal Reserve inching closer to tightening. Hence, we would recommend buying ARUBA 4 5/8 09/14/23s, BAHAMA 6.95 11/20/29s, BARBAD 7 08/04/22s, BERMUD 5.603 07/20/20, BERMUD 4.854 02/06/24s, CAYMAN 5.95 11/24/19, and JAMAN 7 5/8 10/17/25. Costa Rica’s fundamentals, although improved somewhat, remain weak but we think we are getting closer to an improvement in COSTAR as the government starts talks with congress for the approval of the much awaited value-added tax (VAT) and income tax bills.