2. Introduction The book discusses how the Caribbean Islands were affected by the economic crisis and turmoil Due to the fact that the Caribbean Island economies are small and open they were heavily affected by the economic crisis How their economies will change will depend on many things that will be discussed further on The second section will brief us about the 7 most developed countries (MDC’s) of the Caribbean Islands
3. Section 1: Regional Analysis 1. The Gloomy World Economy During 2008 the economic crisis began in USA and spread on to Europe and the rest of the world As for the emerging and developing countries their economies would not fall but grow 3.3% less than they used to by 2009 The federal reserve cut the reference interest rate from 1% to a band between 0% and 0.25%, the lowest ever
4. 1. The Gloomy World Economy Continued A solution might be deflation but deflation may have devastating effects on the economy: Prices decline Profit margins are wiped out which freezes investment Output diminishes Increasing unemployment Reduces domestic demands
5. Continuation In the USA prices decreased by 1.7% In the USA approximately 2.6 million jobs were lost (Unemployment rate reached 7.2%) The USA begins to use many stimulus packages to save its economy varying from 700 billion US dollars to 850 billion US dollars (5-6% of GDP)
6. Continued There are 2 issues that the USA government need to tackle urgently, to stop forecloses of defaulted mortgage-financed housing, To solve the weakness in the banking system (some major banks are being bankrupt and need to be nationalized so that they receive help from the government The economic crisis had a negative effect on international commodity prices (oil 147$/barrel); this is bad for the Caribbean Islands which are abundant in hydrocarbons
7. Continued in Caribbean Islands Although food prices have declined with the global economy the impact on domestic food inflation has not been felt in the Caribbean Islands The problem is not that food prices have not declined but that they have continued to incline 3 things explain this: 1) the lag between payments and the actual delivery and reception of food. 2) foodstuff that can be stored for a while, they were imported at higher prices than those imported recently. 3) There might be market imperfections in the local food commercialization where importers have market power in the imperfections in the context of monopolistic or oligopolistic structures in the market place
8. II. Internal Vulnerability and Growth Prospects in the Caribbean All countries in the Caribbean Islands have suffered twin deficits (fiscal and current account) except for Suriname and Trinidad and Tobago MDC countries have had small fiscal deficits while the ECCU countrieshave had larger fiscal deficits Current account deficit is the excess of expenditure over income of the public and private sectors combined
9. Public Debt Fiscal and current account deficit are both indicators of external vulnerability Other useful indicators are public debt stock and the level of internal reserves Most Caribbean countries exhibited levels of public debt that are well above any definition of sustainability (this level is 40% of the GDP) Within the MCD’s the a few countries showed public debt levels below this figure The ECCU countries only Anguilla and Montserrat had sustainable debt levels A large number of countries had debt levels over 70% and over 100% of their GDP
10. International Reserves In the Caribbean Islands International Reserves are more abundant in Trinidad and Tobago followed by Guyana and Barbados International Reserves are less significant in (Refer to page 10) (Refer to page 11 for table) Inflation rates have been higher in the US then in the Caribbean's, this is because there is bilateral exchange rate and appreciation of the Caribbean currencies with the corresponding loss of competitiveness of local producers relative to imports from the USA
11. Economic Activity in the Caribbean As in other countries and regions, in 2009 growth forecasts point to a further slowdown of economic activity in the Caribbean as compared to 2007-2008 As in previous years among MDC’s economic growth was led by countries abundant in natural resources Economies of countries of the MDC grew at a rate of 1.8 while ECCU’s countries economies grew by 1.4 %
12. III. Channels of Transmission of the Global Economic Crisis to Caribbean Economies The impact of the Caribbean economies on the ongoing recession in the developed countries would materialize through four main channels: Trade Tourism Remittances FDI
13. Trade The relative vulnerability of Caribbean countries is through the trade channel will depend on and not limited to the importance that developed countries have as destiny markets for regional exports This is so because the more advanced economies are currently in recession and whose prospects for 2009 are gloomier On the other hand countries with more diversified export markets are likely to suffer less because although the developing world would experience a market slowdown during 2009 it would not see its GDP dip (Refer to table pg 16)
14. High Prices Although in some commodities current prices are above what they were in 2007 this may not remain the same as the likely aggravation of the economic crisis would reduce world demand further forcing prices to go down
15. Tourism The impact of the global economic crisis would be acutely felt is the tourism sector, which is the major activity in most Caribbean countries The tourism sector in the Caribbean would experience a substantial reduction in demand from its main source of markets in 2009 Countries relatively more vulnerable are the ones with a higher share of visitors coming from developed countries (Reference to pg21)
16. Remittances Due to the economic recession and the collapse of real estate prices the construction sector which employs a large number of immigrants has been hit hard The rise of unemployment and under-employment coupled with the negative wealth effect on immigrant home owners would translate into less or no money to remit The rural population would be affected the most, they are the poorest and the standard of living will decrease
17. FDI and External Financing The accelerated deterioration of global finance markets during the 2nd half of 2008 and the subsequent economic recession in developed countries have changed drastically the perspectives of developing countries regarding access to foreign credit and productive investment The high levels of uncertainty and the persistent bad news in the economy have caused foreign investors and creditors to fear investing which has resulted in a credit crunch Despite many steps taken to overcome this credit crunch it is still ongoing (pg 25)
18. FDI/ Caribbean With banks more reluctant to grant credit to multinational cooperation's the Caribbean's would experience a reduction in FDI inflows during 2009 As regards financial capita there are 3 countries that have experienced net outflows, Trinidad and Tobago, Anguilla, and Dominica (Pg 26/continue you with book)
19. IV. The Financial Sector in the Caribbean Countries The burst of the real estate bubble and the subsequent sub-prime mortgage crisis (US) brought a number of bankruptcies and many bailouts in the US So far this has been very moderate in the Caribbean financial sector Banks in the region had low exposure to US mortgage backed securities Credit expansion was mostly financed by domestic deposits rather than by foreign credit lines
20. Caribbean Stock Markets It seems that the main effect of the global finance turmoil effect was on the Caribbean stock markets Not only on the level of the stock prices but also on their volatility due to increased investor uncertainty The global financial turmoil brought urgent need for the Caribbean authorities and business to take action and to upgrade regulatory frameworks through out the region
21. V. Measures Implemented to Tackle the Global Crisis in Caribbean Countries The form and extent of the measures and policies that are being implemented by Caribbean governments depends on a number of factors Countries that have benefited from commodity booms that allowed them to accumulate fiscal savings and international reserves are in a good position A number of countries are already over-leveraged because of high and unsustainable dept-to-GDP ratios and debt servicing costs
22. Continuation The extent of financial deepening, financial market sophistication and the capacity to carry out two-pronged strategy based on complementary monetary policy and fiscal policy The balance of payments constraint that is accentuated in small economies such as the Caribbean, where it is necessary to earn foreign exchange to import vital inputs
23. VI. Cyclicality of Fiscal Policies in the Caribbean The standard thesis is that fiscal policy tends to be a-cyclical or counter cyclical in developed countries and pro cyclical in undeveloped countries While fiscal policy would tend to smooth the business cycle in developed countries it would amplify it in undeveloped countries A vital consideration in the Caribbean region is that pro-cyclical fiscal policies reinforce economic insecurity and vulnerability of the poor In the Caribbean regions most countries exhibit a cyclical fiscal policies. The exception are Guyana, Trinidad and Tobago, St. Kitts, and Nevis
24. A. Bahamas The Bahaman economy has decelerated from 2.8% in 2007 to 1.5% in 2008, and this is due to the slowdown of the United States economy Tourism and construction demand have softened FDI flows have also lessened The government have engaged in some fiscal stimulus to maintain growth and employment, therefore the fiscal stance has somewhat deteriorated The slowdown on the US growth during 2009 will do the same to the Bahamas as the USA is the Bahamas major market
25. B. Barbados During 2008 Barbados’s economies growth grew 3.2% in 2007 to a 0.7% Key sectors like tourism and sugar production face challenges Inflation grew 8% The current amount deficit increased to become 9.5% of the GDP The impact of the global recession will translate into slower rates of activity for key economic sectors
26. C. Belize The economy is expected to grow 3.8% in 2008 which is good compared to the 1.3% in 2007 The effects of Hurricane Dean in 2007 resulted in higher production of oil and some agriculture commodities, especially fishing They are burdened by debt and have a tight fiscal position due to the financial crisis The likely fallout in export demand and tourism will worsen their economy
27. D. Easter Caribbean Currency Union (ECCU) The ECCU economy looks positive in 2008 However during 2009 the economy will look miserable due to the global crisis will begin to affect the region, especially tourism, which have been the main spur of growth in the last several years The global increase of food and oil prices led to a worsening of the external current account The economies of the ECCU are burdened with high numbers of public debt
28. E. Guyana Guyana faced any difficulties during 2008 due to the global recession GDP is still growing but 3.1% instead of 5.4% in 2007 The significant increase in external debt is a problem, so is the deficits in the current account Falling export prices Guyana will have to struggle for significant economic expansion in 2009
29. F. Jamaica Jamaica is very vulnerable to external shocks as it depends on food, oil imports, tourism, commodity export sectors, significant weight of workers’ remittances GDP decline 0.5% during 2008 Inflation reached 16.9% by the end of 2009 Fear of further deterioration of terms of trade
30. G. Suriname Suriname’s economy grew In 2008, especially the 1st quarter Real GDP growth rate is expected to reach 5% Its credit continued expanding It is expected that the current account surplus will decrease as a % of GDP Its Fiscal position remains stable (increased indirect taxes and increased revenue from minerals) Commodity prices and inflation are the challenges it will have to face
