Caribbean islanders may well remember 2006 as the year of the CSME – an acronym for Caribbean Single Market and Economy. The region’s answer to the European Union and South America’s Mercosur, the CSME will ultimately integrate the finances and economies of 12 signatory countries by allowing labor and goods to move freely from one to another, and by establishing a pan-regional monetary authority for the first time in Caribbean history.

Six nations – Barbados, Belize, Guyana, Jamaica, Suriname and Trinidad & Tobago – became the first full members of CSME on January 1. The agreement is an “important psychological and political step for this region,” says Edwin Carrington, secretary-general of the 15-member Caribbean Community.

Two of the Caribbean’s most important economies – the Dominican Republic and Trinidad – will enjoy very strong growth in 2006, while Jamaica is likely to show signs of recovery, as will Cuba, which is currently thriving on subsidized Venezuelan oil.

On the other hand, Puerto Rico shouldn’t expect growth of more than 2% this year, in the face of legislative paralysis and continuing debate over the island’s political status.

“Trinidad is booming, for sure. It’s a very strong economy, benefiting from high oil and gas prices,” says Franco Uccelli, a fixed-income analyst at Bear Stearns. “Jamaica is doing okay but nonetheless missing some of its key targets, particularly on the fiscal front. But it’s amazingly resilient and able to muddle through. And the Dominican Republic is recovering quite robustly from its crisis, though a number of pending issues remain unresolved.”

Uccelli explains that analysts are looking for more than strong growth indicators and low inflation. “What happens at the macroeconomic level is one thing. But things happen at the micro level that could throw the macro numbers off track.”

Wild Cards
In the Dominican Republic, wild cards include severe problems in the energy sector and continuing fallout from the banking crisis of 2003, which pushed more than a million Dominicans into extreme poverty. The country is still recovering from the bank debacle; nevertheless, in December, ABN Amro successfully launched and priced a $160 million 10-year bond offering for energy conglomerate AES Dominicana SA. This marked the first corporate transaction out of the Dominican Republic since 1997, and the first international bond offering from the country since its 2004 default.

ABN Amro says the offering, rated ‘B-‘ by both Standard & Poor’s and Fitch Ratings, represents “one of the rare opportunities to invest in a high-yield and improving credit in the Dominican Republic.”

Another thing that bodes well for the country is President Leonel Fernández’s August 2004 appointment of Rafael Camilo as superintendent of banking, following the 2003 collapse of financial groups Baninter, Bancredito and Banco Mercantil. (see interview with Camilo, p. 68)

The Dominican Republic is also expected to benefit from its ratification of the DR-CAFTA accord, which is due to take effect July 1.

Kevin Manning, president of the American Chamber of Commerce of the Dominican Republic, says getting the trade agreement passed was the chamber’s most urgent priority for the last three years. “That agreement is extremely important to the economy in that first, it’ll provide consumers with lower-cost materials and higher-quality goods,” he explains. “It will also allow small- and medium-sized companies and producers to expand their markets and diversify. Finally, as revenues increase, the government will have more to spend on health and education. I see this as an extraordinary opportunity to strengthen government institutions and reduce corruption.”

DR-CAFTA isn’t the only deal in town. Trinidad and Costa Rica signed a free-trade agreement aimed at boosting the current $10 million in annual bilateral trade. Under the accord, over 90% of goods will receive immediate duty-free access to each others’ markets, while tariffs on additional products will gradually be reduced to zero over a four-year period.

Things also seem to be looking up for Jamaica, an island of 2.4 million inhabitants long plagued by violence, poverty and low prices for bauxite, sugar and other commodities.

In mid-January, S&P affirmed its ‘B’ long- and short-term sovereign credit ratings on Jamaica, based on Prime Minister P.J. Patterson’s ongoing commitment to fiscal discipline and debt reduction amid external shocks.

“The ratings also reflect expected higher growth prospects, boosted by the strong inflow of foreign direct investment in the tourism and mining sectors,” S&P analyst Olga Kalinina noted in a January 18 report. “The confidence level of domestic businesses and international investors remains strong, reflecting the government’s timely and appropriate policy response to adverse external developments.”

Kalinina added that “transparent dialogue between the government and market participants regarding economic performance and policy direction are important ingredients of Jamaica’s stable investment and political environment.”

Stalled Growth
In the US commonwealth of Puerto Rico, meanwhile, legislative paralysis along with uncertainty over the island’s future political status will translate into growth of no more than 2% this year. “We are not very enthusiastic,” says prominent San Juan economist Heidi Calero. “Construction is at a standstill because of permitting problems. Interest rates are going up but good projects will get financing anyway. The other monkey wrench is what continues to happen between the legislature and the executive branches of government. They don’t seem to be working together.”

Calero expects that a proposed 7% sales tax could raise an additional $800 million in revenue for the cash-strapped commonwealth. Puerto Rico currently has no sales tax, though it does slap an excise tax on goods coming in from the US mainland. The sales tax is one of the main sticking points in the current debate on fiscal reform, which aims among other things to lighten the burden for middle-class taxpayers.

In the midst of all this, a White House report issued December 22 calls on the US Congress to set a date for a plebiscite in which the people of Puerto Rico would be asked whether they want to change the island’s current commonwealth status. If they choose to do so, said the task force, Congress should then set another vote on whether Puerto Rico should become the 51st state or declare independence.

Calero, noting that both S&P and Moody’s Investors Service downgraded Puerto Rico’s bond ratings last year, believes this is one debate Puerto Rico doesn’t need right now. “We don’t have time for this discussion. There are more important things to discuss, like tax reform and the budget,” she insists. “If you want a change in political status – whether it’s statehood or independence – you must have a strong economy. So let’s focus on that.” LF