For some Caribbean countries, a window of opportunity may be opening in the bond markets. The Dominican Republic, one of the region’s largest economies, tapped investors in January, issuing a $1 billion, 10-year bond and capitalizing on its recent efforts to put its fiscal house in order. The island nation reopened the bond in late June, adding $500m at a tighter yield.
Jamaica also has piqued investor interest, and Caribbean nations have watched as countries in nearby Central America, such as Guatemala, have sold international debt in recent months.
Trinidad and Tobago could be the next Caribbean country to test the markets. But others face difficult economic challenges with high debt levels that will make it hard to entice investors.
Whether Caribbean economies will be able to tap the markets depends on their ability to convince investors they are taking steps to get their finances in order. The Caribbean remains one of the most indebted regions in the world, with an average debt-to-GDP ratio of around 75%, according to the IMF.
But it also is home to one of the fastest growing economies in the Western Hemisphere – the Dominican Republic.
A boost from the north
The economy in the Dominican Republic grew more than 7% last year, making the country a standout in a region that has grappled with sluggishness. An increase in tourism, as the local currency fell against the dollar, helped the economy. The weaker currency also lifted export revenues.
“The Dominican Republic has a fairly diversified economy, with agricultural and commodities exports also contributing to growth,” says Marla Dukharan, group economist for Caribbean operations at the Royal Bank of Canada (RBC).
More importantly from the perspective of bond buyers, it has made strides in getting its accounts in order, which earned it a ratings upgrade to B+ from Fitch in December.
Investors have also cheered signs of continuity in economic policy after President Danilo Medina was reelected in May. “The recent elections in the Dominican Republic indicate the growth outlook of 4% to 5% a year should remain intact,” Durkhalan says.
Not surprisingly, the Dominican Republic has been the most active issuer of sovereign bonds in the region. Proceeds from its January bond sale were used to bolster reserves and improve the country’s debt profile.
Last year, the Dominican Republic raised funds through a bond sale to pay off more than $4 billion it owed to Venezuela for years of oil shipments under PetroCaribe, the Venezuelan government’s cut-rate oil program for countries in the Caribbean and Central America.
“Emerging market investors look at the medium term, they like structural reforms, and the Dominican Republic has built some positive momentum,” says Nicolas Schlotthauer, a fund manager at DWS.
Reducing government debt is also a priority for Jamaica, which has improved its numbers under an IMF program. The improving numbers led to recent ratings upgrades by Standard & Poor’s (to B with stable outlook) and Moody’s (to Caa2 with a positive outlook), even though the government a debt-to-GDP ratio ended last year at nearly 125%. The IMF expects the number to drop to 117% by the end of next year.
Jamaica tapped international markets a year ago when it raised the $2 billion across 13- and 30-year tenors. The country’s improving creditworthiness has been reflected by a steady decrease in sovereign debt yields as the government implements fiscal adjustments laid out in the IMF program.
“Jamaica has been meeting all the targets set by the IMF,” says Dukharan. “They have a very strong economic oversight committee that basically makes sure that structural reforms are on track.”
Jamaica also took advantage of its bond sale last year to pay down PetroCaribe debt owed to PDVSA, Venezuela’s state-owned oil company.
Like the Dominican Republic, Jamaica has benefited from low global oil prices and a growth in tourism.
If external factors do not deteriorate, Jamaica’s access to the market should continue to improve, Dukharan says. “There has been a lot of interest from investors knowing the IMF is helping to keep things on a suitable path. They are not completely out of the woods, but things have improved.”
Growth remains anemic though, as the economy expanded by 0.8% and is expected to post a modest 1.5% increase this year, according to Scotiabank.
The oil economy
If the drop in oil prices has been a boon for the Dominican Republic and Jamaica, it has had the opposite effect on Trinidad and Tobago. GDP in the oil and gas producing country contracted by 2% last year and is expected to shrink by 1.5% in 2016, according to Scotiabank.
“Trinidad and Tobago faces similar challenges that some issuers in South America or Africa have had to deal with,” says Schlotthauer. “The economy is dependent on gas and oil exports, and as a result the sharp decline in prices has taken a toll.”
Dukharan points out that not only have gas and oil prices slumped, but production has reached record lows. Trinidad and Tobago is also feeling the effects of tax advantages conceded to multinational companies that explore its hydrocarbon reserves.
“The tax framework in the energy sector allows for exploration and production companies to write off capital expenditure incurred in previous years,” she says. “They did some deep water exploration in recent years that represented billions of dollars of capital expenditure in exploration costs, and are writing those costs off against current profits,” she adds.
“So, even if gas and oil prices recover and production goes up again, from a fiscal revenue standpoint, the country still lost billions of dollars in tax revenues from the energy sector.”
Oil tax revenues, the main source of money for the government, are estimated to have fallen to 20% this year from 45% in 2014. The country has also faced currency volatility. Consequently, Trinidad and Tobago’s credit ratings have been under pressure, and Moody’s downgraded it to Baa3 in April.
Officials say the government plans to raise $1 billion in international debt markets later this year.
Analysts agree most of the other Caribbean economies are too small to have realistic chances of tapping international markets in the short term.
In 2013, Barbados tried to place a $500 million, 10-year bond but the effort failed.
“They were not transparent enough about what they were exactly doing with the proceeds of the bonds,” says Dukharan. “Everybody saw the writing on the wall. Barbados has an unsustainable debt load. It is probably the next economy to go through debt restructuring in the region.”
Some countries are trying to join forces to attract investors. The World Bank is working with several smaller Caribbean countries to develop bond markets.
Antoinette Stewart, a researcher at the Kingston-based Sir Arthur Lewis Institute of Social and Economic Studies, notes that a plan has been launched for several national marketplaces to create a common platform where securities from different countries can be traded.
But the Caribbean Stock Exchange project, or CXN, encompassing exchanges in Jamaica, Trinidad and Tobago and Barbados has made little progress since it was formally established in 2011.
Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines have set up a common stock exchange and an asset management company, which could eventually help to develop capital markets in the smallest economies of the region.
Little movement in terms of bond issuances is expected from the private sector in Caribbean economies. In addition to fiscal and economic considerations, Stewart believes that the development of capital markets in the region stumble on cultural and business practices.
“Many companies are family-owned, and, if they need to raise money, they will either borrow from banks or issue stocks,” she says. LF