We Expect The Economic Rebound Will Be Quicker In The Caribbean Than In Other Tourism-Dependent Regions

S&P Global Ratings anticipates that solid economic growth will contribute to more stable ratings over the next year. Since March 1, 2020, we have taken nine negative rating actions on the tourism-dependent sovereigns in the region, including negative outlook revisions and downgrades. The main drivers of these actions were deteriorating per capita incomes; significantly higher deficits and debt levels; and, in some cases, institutional deterioration.

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In our view, despite the challenges associated with new COVID-19 variants, the worst of the economic impact of the pandemic has passed in the region, and tourism has begun to rebound at a faster pace than in other areas of the world. The recent rapid spread of the omicron variant highlights the inherent uncertainties of the pandemic but also the importance and benefits of vaccines. While the risk of new, more severe variants displacing omicron and evading existing immunity cannot be ruled out, our base case assumes that existing vaccines can continue to provide significant protection against severe illness. At the same time, the economic impact of the pandemic on the region has waned and economies are proving more adaptable, as many governments, businesses, and households are tailoring policies to limit the adverse economic impact of recurring COVID-19 waves. Although year-end data are not yet available, the World Travel & Tourism Council reports that it expects travel and tourism increased by 47.3% in 2021 in the Caribbean, versus 30.7% for the global economy. At the same time, the United Nations' World Tourism Organization's latest global data as of December 2021 show that the Caribbean had the lowest drop in tourist arrivals year to date compared with any other region in the world, and was more than 50% stronger than overall global arrival statistics (table 1). The region's economy has benefited from greater traveler confidence, more relaxed restrictions compared with other tourism-dependent regions, and relatively rapid vaccination. Proximity to the U.S., where travel rebounded more quickly than in other developed countries, and dependence on U.S. tourists, has also aided the recovery. In addition, constitutional association with the Kingdom of the Netherlands or the U.K. facilitated strong and early vaccine access, as well as fiscal support, in some cases, which helped accelerate growth in some sovereigns in 2021.

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Looking ahead, although the recovery will be uneven across countries, we expect that the region as a whole will continue to benefit from its proximity to and dependence on the U.S., where we expect strong economic growth in 2022 of 3.9%. Notwithstanding potential downside risks related to new COVID-19 variants and the impact of their spread on travel, we expect the weighted-average real GDP growth rates for the sovereigns listed in chart 1 will be 5.9% in 2022. Sovereigns' vaccination rates, COVID-19 transmission and restrictions, reliance on U.S. tourism, and degree of economic contraction in 2020 will likely contribute to the speed of recovery in 2022.

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Rebounding Economies Will Support Improved Deficits And Debt Metrics, From Weak Levels, Over The Next Two Years

Following significant deterioration in deficits in 2020, and still-weak levels in 2021, governments across the region will benefit from recovered revenues collected from a rebounding tourism sector, both directly and indirectly, as well as economies that are less subject to containment measures. At the same time, those governments that have implemented income support measures will gradually decrease their spending as the need for such support winds down. All eight tourism-dependent Caribbean sovereigns discussed in this article implemented some sort of income support, wage subsidy, or transfer program during the pandemic. The scope of the programs largely depended on the government's fiscal flexibility and the availability of concessionary funding. Aruba and Curacao, for example, which are both constituent members of the Kingdom of the Netherlands, were able to provide payroll subsidy programs whereby employers were compensated, in some cases for 80% of wage costs. This was possible, in part, due to the 0% interest loans the Netherlands provided to these governments. On the other hand, countries like Jamaica benefited from a surge in remittances, which provided an income cushion to some people. In 2020, remittances in Jamaica represented 21% of GDP, compared with 16% in 2019.

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The sizable deficits in the region have led to significant increases in government debt, which we expect will take many years to reverse. Those sovereigns that had greater fiscal flexibility to provide stronger economic packages to their populations, and at the same time were more severely affected by the downturn in tourism and activity restrictions, saw larger increases in their debt burdens. Nevertheless, because these sovereigns also have generally higher credit ratings than those with less fiscal flexibility, and were able to benefit from concessionary, or zero-cost funding and low interest rates, the impact of this increase on the cost of debt is more limited. Looking ahead, the pace of reversing this increase will not only depend on decisions made by governments regarding countercyclical spending as the recovery takes hold, but also on the pace of economic growth.

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Although the effect of the pandemic on external accounts in the region has been much more limited than originally anticipated, we expect external balances will weaken slightly over the forecast horizon. During the pandemic, the high import content of the tourism sector meant that imports shrunk considerably as tourism contracted, which significantly offset the reduction in exports, along with lower energy prices during much of 2020 and early 2021. At the same time, the external support many of these sovereigns received through concessional funding or remittances provided a boost to central banks' foreign exchange reserves. As travelers return, the import content of tourism offerings will translate into an increase in imports, while higher energy prices will also negatively affect these sovereigns' balance of payments because all are energy importers.

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Supportive Institutional Structures, Or The Lack Thereof, Will Remain A Determining Factor In Ratings And Resiliency

Status as a Kingdom of the Netherlands member, British overseas territory, multilateral lending institution program participant, or a sovereign that lacks substantial external support structures, will continue to determine vaccine access, level of concessional funding, and ability to provide countercyclical support. In turn, these factors will affect the speed of economic recovery and fiscal and debt sustainability. Of the eight English- or Dutch-speaking tourism-dependent sovereigns in the region rated by S&P Global Ratings, three are British overseas territories, two are constituent members of the Kingdom of the Netherlands, and two are either recent graduates, or current program participants of International Monetary Fund (IMF)-supported programs. As constituent members of the Kingdom of the Netherlands, Aruba and Curacao benefited from strong and early access to vaccines starting in February 2021, for example, which aided their ability to re-open their economies and the pace of tourism recovery in 2021. Likewise, British overseas territories also received vaccine support from the U.K., which accelerated their growth in 2021. These sovereigns now have higher vaccination rates than others in the region, and even some of the tourist source markets, lowering the risk of future movement restrictions.

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We expect most of those sovereigns that were able to access significant grants or concessionary, low-cost funding during the pandemic will continue to receive support in 2022, which will limit the impact of higher debt burdens on their creditworthiness. Both Curacao and Aruba, for example, have benefited from mutual aid and assistance from the Netherlands since the start of the pandemic in March 2020. The Netherlands has provided liquidity support in the form of zero-interest bullet loans for more than $1 billion to the two countries, as well as offering medical support and food aid. This is in addition to the arrangement that Curacao has with the Netherlands, predating the pandemic, under which the Netherlands subscribes to Curacao's debt issuances at the same interest rate at which the Netherlands issues debt.

Those sovereigns that have strong relationships with multilateral funding institutions will also likely benefit from continued access to ample concessionary funding over the next year. For example, Barbados entered into an extended fund facility program with the IMF starting in October 2018, and has since received $425 million in financing over six successful reviews in the program, in addition to about $750 million from the Inter-American Development Bank, the World Bank, Caribbean Development Bank, and the Development Bank of Latin America. In addition, as a somewhat recent graduate of a substantial IMF-supported program, and shortly after the onset of the pandemic in 2020, Jamaica obtained $520 million via the IMF's rapid financing instruments (RFI), as a precaution to support balance-of-payments needs. Unlike previous IMF support, the RFI funds are granted without policy conditions. Although we understand that it could be reallocated to budgetary support, to date, the money remains with the Bank of Jamaica to support the country's foreign exchange reserves.

Government Management Of The Economic And Fiscal Recovery Is An Important Component Of Our Rating Outlook Triggers

A key issue for our rating outlook triggers in the region over the next two years will be how these sovereigns manage the economic recovery, including how they use and manage the revenues collected from a rebounding tourism sector, which will have implications for deficits and debt sustainability. Following multiple negative rating actions over the past two years, seven out of eight sovereign ratings in the region now have stable outlooks, while one has a negative outlook (table 3). Nevertheless, a common thread in almost all of the ratings' downside and upside scenarios is the ability, or lack thereof, of the respective government to narrow deficits and contribute to a stabilized or lower debt burden, following two years of sizable deficits caused by the pandemic. Although this will, in part, depend on the evolution of the pandemic and the pace of the economic recovery, government fiscal policy and expenditure management will also play a crucial role.

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Related Research

• Global Sovereign Rating Trends 2022: Despite Stabilization, The Pandemic Threatens The Recovery, Jan. 27, 2022
• Global Credit Outlook 2022: Aftershocks, Future Shocks, And Transitions, Nov. 30, 2021
• Barbados, Nov. 25, 2021
• Research Update: The Commonwealth of The Bahamas Ratings Lowered to ‘B+’ From ‘BB-‘ On Continued Deficits, High Debt, Nov. 12, 2021
• Research Update: Jamacia Outlook Revised To Stable From Negative; ‘B+’ Long-Term And ‘B’ Short-Term Ratings Affirmed, Oct. 4, 2021
• Research Update: Turks And Caicos Islands ‘BBB+/A-2’ Sovereign Credit Ratings Affirmed; Outlook Remains Stable, May 26, 2021
• Bermuda, April 28, 2021
• Research Update: Montserrat Sovereign Credit Ratings Affirmed At ‘BBB-/A-3’; Outlook Stable, April 13, 2021
• Research Update: Aruba Long-Term Ratings Lowered to ‘BBB’ from ‘BBB+’ On Weaker Economy And Higher Debt; Outlook Stable, March 15, 2021
• Curacao, Feb. 16, 2021