Speech

Global and Regional Challenges to Caribbean Economic Development - 2016 High Level Caribbean Forum on Shifting Tides: Challenges and Opportunities

November 2, 2016

Introduction

Honorable Prime Ministers, Ministers, Central Bank Governors, friends and colleagues, good morning. On behalf of the International Monetary Fund, I am honored and pleased to welcome you to the 2016 High Level Caribbean Forum.

Before I begin, please allow me to express my heartfelt condolences to the victims of Hurricane Matthew, particularly in Haiti, where so many people have lost their lives and damage has been extensive.

I would also like to express my gratitude to Prime Minister Rowley and the government of Trinidad and Tobago for your warm hospitality and for co-hosting this forum.

This forum and the four previous ones have now become an annual tradition. This is a testament of the Fund’s commitment to working with you in addressing the challenges that stand in the way of securing strong, inclusive and sustainable growth in the Caribbean.

Yesterday, I had an opportunity to learn more about your beautiful country by visiting the University of the West Indies, where I was touched by the spirit of innovation and inspiration seeking new opportunities. I saw deep cultural and historical roots in the hand crafting of steel pans for musicians and local production of the finest quality cocoa.

All of these give me much confidence speaking with you this morning and engaging with you today at this conference—my first as IMF Deputy Managing Director—setting the stage for this high-level forum on challenges and opportunities ahead of us.

This is the second time that we have met for the High Level Forum in Trinidad and Tobago. When we met last time in Trinidad in September 2012, the focus was on policies to address low growth and high debt in the Caribbean. Since then countries in the region have made progress on those issues and on other important issues we had covered in all the subsequent high-level forums. But I am sure you will agree that more work remains to be done.

This is particularly so given the important shifts in global trends and in the regional landscape. “Shifting Tides” is this Forum’s main theme. So in my remarks in the next few minutes, I would like to elaborate on what the challenges and opportunities are as the result of the "shifting tides".

I will address them first from a global perspective, and then focus on issues unique to the region. I will conclude by reiterating the IMF’s commitment to working with you to best respond to these challenges and reap the opportunities.

Global Challenges

First, global challenges.

Most of us agree that the global outlook continues to be shaped by a subdued recovery from the Global Financial Crisis and weak trade. 2016 is proving to be another year of lackluster growth.

In the World Economic Outlook released early October, we projected global growth at 3.1 percent this year, with risks weighted to the downside. We observed three key trends that have influenced the near-term outlook at the global level:

First, the trend decline since 2011 in commodity prices appears to have bottomed out. Going forward, however, we expect these prices to remain at low levels and volatile. This is a much different situation then when we were here four years ago.

Second, the U.S. recovery has been softer than previously expected—although there has been a further uptick in activity, more recently. Meanwhile, uncertainty has risen in Europe as countries there move to overcome the difficulties of economic recovery and managing the process of Brexit.

Third, global financial conditions have eased and global financial regulations tightened. In particular, interest rates in advanced economies are expected to remain low. At the same time, efforts to strengthen measures of anti-money laundering and countering financing of terrorism—also known as AML/CFT—have intensified.

What do these shifting global trends mean for the Caribbean economies?

First, low and volatile commodity prices.

On the downside, oil exporting countries like Suriname and Trinidad and Tobago have been hit hard. Trinidad’s economy is under pressure despite some savings during the good times. This makes the task even harder for the Government to rebalance policies in response to the low energy prices—particularly the fiscal stance.

On the positive side, low oil prices have benefited most other countries in the region because they import oil and fuel. Many of these countries have seen their external positions improve significantly. For example, Jamaica has eliminated much of its double-digit current account deficit in just a couple of years. And Guyana is experiencing its first external surplus in decades.

However, cheap oil today does not eliminate the need to improve the efficiency of domestic power utilities throughout the region. As highlighted in the last two Caribbean Fora, there is still a need to reduce reliance on government subsidies, and to expand the use of renewable energy.

Second, what are the implications of the slower recovery in the US and European economies?

This means the pickup in tourist arrivals in the last two years could reverse in most tourism-dependent economies in the Caribbean.

We project the Euro Area to grow by only 1.7 percent this year and 1.5 percent in 2017. Likewise, the United Kingdom, a major source of tourist arrivals in the Caribbean, is projected to grow by a modest 1 percent next year. But there are significant risks around this projection since the impact of Brexit remains unclear. That said, recent data showing higher-than-expected third quarter growth rates in both the U.K. and the U.S. could provide room for optimism.

Third, on the financial and monetary side. Here, there is perhaps a silver lining: slower growth has delayed the normalization of monetary policy in the advanced economies. This has enabled continued easy financial conditions for the rest of the world. Low world interest rates help reduce the debt servicing costs for Caribbean countries struggling with high debt.

That said, globally interconnected markets—which have benefited the Caribbean—pose new challenges as global regulations tighten.

Last week, I participated in a conference in Antigua and Barbuda on the impact on Caribbean banks of the withdrawal of correspondent banking relationships. These withdrawals reflect primarily the judgment of global banks about the costs and benefits of operating in developing countries in Asia, Africa, Middle East, and of course, in the Caribbean region.

This is partly in response to well-intended international efforts aimed at eliminating money laundering and terrorist financing.

Regardless, the withdrawal of correspondent banking relationships presents clear and imminent challenges to the Caribbean. Several banks across the region have lost all or some of their correspondent banking relationships. International banks have stopped providing some services and have dropped clients that they consider to be “high risk”.

It poses a challenge for banks and companies in many small economies that need to participate in the global payments system. It is hurting some of the most vulnerable members of society who depend on remittances from relatives overseas. In Belize, for instance, the problem has reached systemic proportions with bank assets equivalent to almost half of GDP being affected.

One key reason for this trend is that some of the affected countries have gaps in their regulatory and supervisory frameworks. And countries in the region have stepped up efforts to reduce the gaps. The IMF is working with national authorities and regional and global organizations to provide technical assistance to strengthen these frameworks.

We believe a durable solution to this issue requires dialogue between countries, regulators and banks, and increased information exchange. This can help clarify regulatory expectations, build trust, facilitate capacity building, and share best practices.

Regional Challenges

Now I would like to turn to regional challenges that are less related to trends in the global economy, but derive more from sources specific to the region.

Hurricane Matthew has reminded us yet again of the importance of preparation and mitigation in dealing with natural disasters. We have observed that climate change will only make these catastrophic events more frequent and intense. Indeed, storms are only one part of a profound problem with serious implications for the Caribbean. Recurrent droughts and rising sea levels will also affect your agriculture, fisheries, coastlines, and biodiversity.

Recent IMF studies have discussed a policy framework for enhancing resilience to natural disasters in small states. They include two key areas. First, in addition to disaster response and reconstruction, a greater focus on risk reduction and preparedness is critical to foster sustained growth. Avenues to finance such prevention policies—including possibly through fiscal buffers, contingent financing plans, and risk transfer arrangements—need to be further explored.

Second, fixing the banking system. Financial sectors in some Caribbean countries remain burdened by poor asset quality, low profitability, and insufficient capital. In this regard, the ECCU countries have taken important steps to enhance banking sector resilience. This has involved banking legislation and the resolution of three insolvent banks. Further reforms are required, including strengthening supervision and increasing the capital of indigenous banks.

Another important new shift that we will discuss later today is the impact of the rapprochement between the U.S. and Cuba. There are concerns that this otherwise encouraging development will cause U.S. tourism to flow to Cuba at the expense of other Caribbean destinations. But the region has shown its resilience on this front before—when the Dominican Republic emerged as a tourist destination. It can be done again.

The discussion this afternoon will discuss how this challenge can be converted into an opportunity for the rest of the Caribbean in the short- and medium-term. The big question is how to be prepared for the opening of Cuba to improve existing Caribbean destinations and strengthen competitiveness.

Policy Responses

Some of these challenges are new, while others have been around for a long time. So, it is important to take stock of some of the key policy responses as well.

For example, the competitiveness challenges highlighted at the 2012 Forum—including enhancing labor productivity and reducing energy costs—remain relevant today. That is not to say that progress has not been made, but more work is needed. Many countries have made renewable energy and reduced energy costs key parts of their growth strategies. They are implementing potentially far-reaching energy reforms. Further boosting energy efficiency, as well as improving labor productivity, remain essential for fostering competition and growth in the Caribbean.

Another key takeaway from the Forum four years ago was that fiscal adjustment can be difficult to sustain amid weak economic growth. This certainly remains the case today.

The good news is that there are some clear success stories to share. Jamaica, Grenada, and St. Kitts and Nevis have achieved important results reducing their fiscal and external vulnerabilities over the last few years. Trinidad and Tobago is pursuing the same goals now.

But the problem remains pervasive. The current global financial environment with low interest rates provides a window of opportunity to (1) pursue adjustment, (2) undertake liability management to lower financing costs, and (3) reduce debts to safer levels.

That said, fiscal and broader macroeconomic stability are necessary, but not sufficient, conditions for growth. Additional country-specific structural reforms have to go hand-in-hand to reap the growth dividend.

The incremental nature of the progress made on boosting growth, diversification, competitiveness, energy efficiency, financial sector vulnerabilities, fiscal adjustment, and other recurring themes from past Caribbean Forums speaks mainly to the complexity of these problems. Their solution will require a sustained policy effort.

Additional challenges include Brexit-related risks and further spread of the Zika virus—both of which could affect tourism. Developments in Venezuela could carry important effects for members of the PetroCaribe agreement.

Conclusion

In conclusion, I would like to reiterate that the IMF is deeply committed to its work with the Caribbean countries.

We are committed to supporting policy reforms, and reconstruction efforts. Tides may shift, seas may rise, but the Fund’s unwavering commitment to the region will remain unchanged.

Our work continues in the Caribbean by providing policy advice, technical assistance and training, and by providing financing.

Whatever new challenges arise, we will work together with you to find solutions. For example, Jamaica has just announced a staff-level agreement for a successor arrangement to its Fund-supported program. It will focus on growth and job creation by tackling key structural bottlenecks including public safety. Jamaica’s creation of an Economic Growth Council headed by private sector leaders—some of whom are here today—is an example of private and public sector cooperation.

Similar lessons can be found in Fund-supported programs in Grenada and St. Kitts and Nevis.

Finally, I would like to add a personal note. As I begin my term as Deputy Managing Director, I plan to build on the work of the Fund's management, particularly my predecessor, Min Zhu, in continuing raising the profile of the Fund’s engagement with the Caribbean. I am committed to strengthening our engagement and working in cooperation. I am sure we will have productive and fruitful discussions during the rest of the day. I look forward to visiting you again in the near future.

Thank you