Caught Between A Rock And A Hard Place: The IMF Reports On The Regional Economic Outlook

The IMF's latest quarterly regional report on Latin America and the Caribbean has just been released (see report). As for the world as a whole, growth is occurring in the region, but it is uneven. Much of the growth in the region depends on external developments, and here we have a cleft stick for tourist dependent countries, like Barbados, which have seen tourism and associated foreign investment suffer (see more on this below). The IMF analysis is clear and speaks much for itself, but a few points are worth highlighting. The press release notes that the outlook for smaller economies remains difficult:

“But within that regional picture, countries with strong ties to global financial markets are likely to stage a more vigorous recovery, helped by their access to ample external financing and by strong prices for their commodity exports. On the other hand, some of the smaller economies will experience more sluggish growth, and some of those will even contract. Accordingly, policy approaches will have to vary considerably to ensure a sustainable recovery across countries.”

In assessing the varied outlook, the IMF comes up with a grouping named 'net commodity importing countries with large tourism sectors'. This group comprises Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. These countries depend primarily on tourism for their current account revenues. In general, they have high external debt burdens but otherwise are not closely integrated with external financial markets. They experienced sizable terms-of-trade losses during 2000–08, given their limited goods exports base and their reliance on imported fuels.

'Growth in the commodity importing tourism intensive countries has been marked down and is expected to perform worse in the current cycle than in previous episodes of global stress. The relevant external conditions are less benign for these countries. Reflecting strong links to weak employment in advanced economies, shocks to tourism have not fully reversed, and elevated commodity import prices are weighing on activity. Moreover, in some of these countries, high levels of debt constrain the room for policy maneuver. Although some countries managed to implement countercyclical fiscal policy in 2009, the payoff in growth was limited, probably reflecting small multipliers. And fiscal stimulus efforts may be short-lived, given financing constraints in forthcoming periods.' This general picture has its clear image in Barbados.

The report adds: 'Policy challenges in the coming years will correspondingly vary across countries. For many of the financially integrated commodity exporters, the challenge will be managing the upswing of the business cycle. A main theme will be the timing and sequence of exit from the macroeconomic stimulus implemented in 2009, and the adjustment to a more benign external environment. In turn, for many of the tourism intensive commodity importers, the sluggish recovery, coupled with high external and fiscal imbalances, will require difficult policy choices.'

Many of these countries are the filling in a sandwich that is hard to stomach: dependent on growth and strong employment in developed countries that should generate tourists, and push the flow of foreign direct investment (FDI, often also in the tourism sector). The report highlight graphically how that situation is looking bad for many of the region's small economies. 'Estimates of tourist arrivals to the tourism intensive commodity importers suggest that the impact of a 1 percent increase in OECD unemployment implies a contemporaneous decline of 4 percent in arrivals, on average (Box 2.6). For the current downturn, the approximate 3 percentage point increase in U.S. unemployment squares with the average 10 percent decline in Caribbean tourism. Longer-term investments in the form of vacation real estate and other forms of tourism fell concomitantly with short-term vacation arrivals, as household wealth declined in the aftermath of the financial crisis. This is particularly costly for the tourism intensive importing countries, as median FDI (in percent of GDP) had tripled, from below 4 percent in 1996 to more than 16 percent of GDP by 2008. The importance can be observed in the concurrent declines in median unemployment in the region, from more than 16 percent in 1996 to single digits in the most recent years. With the onset of the crisis, FDI fell sharply to 10 percent of GDP in 2009. Employment in advanced economies is expected to improve only gradually, with weak prospects for tourism in the coming years.'

The nail is driven home with 'The weak recovery in the tourism intensive, commodity importing countries will pose a great challenge to policymakers, as elevated debt levels and limited access to financing impose difficult policy tradeoffs.'

The recent concerns about debt and financing could indirectly affect the region through market confidence effects or directly via Spanish banks but also due to general concerns about high debt and deficits levels.

It is worth remembering that one of the mainstays of many of the region's small economies has also been one of its constraints. 'Moving toward more flexible exchange rates, where possible, would serve as a cushion against potential future external shocks.' Holding onto fixed exchange rates has become sacrosanct in many territories, but without proposing that this be dropped one need only look at Greece's plight to see what happens when you cannot devalue your currency in light of severe economic problems.

The IMF report also highlights the burden on the region of the still unfolding financial difficulties of the CL Financial Group and the pending Securities and Exchange Commission fraud charge case against Allen Stanford and three of his financial companies fro running fraudulent investment schemes. The Fund, ever the master of understatement comments 'Both experiences point to the need to improve financial regulation and crossborder cooperation.'