By Byron Shoulton, Chief Economist, Foreign Credit Insurance Association (FCIA)
The slump in travel caused by the Covid-19 pandemic has hit the tourism sector hard in several Central American and Caribbean countries. A slump in remittances [by immigrants working and sending money back home to support families and small businesses], has also negatively impacted some countries, but in many cases observers are baffled by the strong inflows that have resumed, sometimes at record levels. Remittances are vital in several countries. They act as a partial offset to weak domestic economic activity which have caused rising joblessness and weakened consumer spending in the region since the outbreak of the pandemic.
Even when the U.S. unemployment rate hit 14.7% in April at the height of the pandemic, and the World Bank predicted global remittances would tank about 20%, many immigrants sent more money home to Central America, the Caribbean & Mexico than ever before. In March, remittances hit their highest level since record keeping began in 1995, spiking 36% to $4 billion. The latest projections by Moody’s concludes that the overall decrease in remittances to the region will be a modest 4% this year. Approximately 75% of remittances arriving in Central America, the Caribbean & Mexico are from the U.S. Mexico is the region’s largest recipient with nearly $40 billion remitted last year.
Moody’s reported that workers from the region living in the U.S. are vulnerable to Covid-19 exposure due to holding frontline jobs or being furloughed from factory jobs or as construction day laborers. This implies the likelihood of some downward pressure on remittances when unemployment spiked in the U.S. However, dips in remittances have mostly recovered over recent months.
Post-pandemic, the likelihood of shifting global supply chains should benefit the region. One possible positive outcome of Covid-19, amid efforts to reorient global manufacturing supply chains away from China, could create opportunities within the Americas. The region’s close proximity to the North American market as well as preferential trade access are important and attractive benefits to consider.
The economy is heavily dependent on tourism activity, bauxite mining, remittances and trade for foreign exchange earnings. Combined, these contribute to job creation, consumer spending and overall economic growth. Sharp contractions in tourism activity and remittance inflows this year will undermine Jamaica’s services and secondary income surpluses, widening the current-account deficit substantially [to 6.7% of GDP from 2.1% in 2019]. The current-account is expected to narrow modestly to 5% in 2021.
Tourism accounts for the majority of Jamaica’s services trade surplus, which was 10.7% of GDP in 2019. Tourism activity deteriorated during the first-half 2020 primarily because of Covid-19 travel restrictions and lockdowns. While Jamaica reopened to foreign travel on June 15, it is expected that activity in the tourism sector will remain weak over the remainder of 2020. We expect the continued global spread of Covid-19 and stringent protocols on foreign travel, including random testing upon arrival, will limit tourism demand.
In tracking remittance inflows from Jamaican nationals living abroad, there has been a decline of approximately 10%-15% during the first half of 2020 compared to previous years. But observers report that the lines for receiving inflows at MoneyGram and Western Union outlets on the island, are the longest ever. There continues to be solid inflows from nationals living in the U.S., Canada and the UK.
An IMF Rapid Financing Instrument plus a cushion of international reserves [$3.9 billion] will mitigate the risk to Jamaica’s external account stability posed by its high external debt. The country’s international reserves are equivalent to 175.2% of short-term external debt; or 7.9 months of imports. A comfortable cushion.
Maintaining investor friendly policies, a positive relationship with the IMF and other international lending institutions; and having a decent track record servicing foreign debt, have served Jamaica well in tough times. A more favorable country profile which emerged over the last three years, projected prospects of an economic rebound prior to the onset of Covid-19. The country managed the pandemic well at first, with strict lockdown policies, resulting in low caseloads and few deaths. This however, hurt the economy: loss of tourism activity over five months. Arrivals in July were a meagre 16% of arrivals the same time a year ago. The result is a serious loss of revenue, a spike in joblessness and weakened demand. It forced local authorities to reopen the tourism sector earlier than may have been prudent. Immediately, cases of Covid-19 spiked and have continued to move higher over the last two months.
With over 800 new cases reported in the last week of August, and with a population of 3 million, Jamaica has reported more than 2,096 cases and 34 deaths since the start of the epidemic. However, there is a consensus that the pandemic is now getting ahead of the authorities. The Ministry of Health now projects that based on modelling, up to 1.5 million Jamaicans may contract Covid-19.
There is rising pressure on the Jamaican government to revise and impose stricter rules on tourists and foreign travel to reduce the risks of more Covid-19 infections. If implemented, it is unclear how negative the expected effects of tighter rules will be on visitor arrivals. Solid travel guidelines and their implementation will be key in keeping the country safe during the upcoming tourism season. The outlook for renewed job creation and economic growth remains uncertain in 2021.
The country held early general elections on September 3rd, resulting in a landslide victory for the incumbent Jamaica Labor Party (JLP) which retained power with a significant bump in the number of parliamentary seats it controls. The ruling JLP won 49 of 63 seats in parliament against the opposition Peoples National Party (PNP) which held on to 14 seats. Rating agencies interpret the results as signaling continuity in economic and fiscal policies. Nonetheless, Jamaica will continue to face challenges. The central bank is forecasting economic (GDP) contraction of 7%-10% this year, despite a $520 million loan from the IMF approved in May.
The election outcome is considered a major rebuke to the PNP which will now have to regroup, select new leadership and examine closely why the electorate turned so overwhelmingly against the 82-year old party, founded by Norman Washington Manley, Jamaica’s pre-independence Premier, one of the fathers of Jamaican independence from Great Britain. The PNP and the JLP have been political rivals since before Jamaica’s independence in 1962. In the last general election in 2016, the JLP won a narrow 33-30 advantage in parliament. The U.S. government welcomed the recent election results. It appears that appealing to millennials and fielding younger female candidates formed an integral part of the JLP’s winning strategy.
Economic stimulus measures will be a must for growth to resume in 2021. However, as the new government of Prime Minister Andrew Holness is sworn in for a third term, preoccupation remains on health prevention measures to combat Covid-19. Meanwhile, tourism remains depressed. Remittances dipped slightly during the first-half of 2020 but have remained mostly steady. Jamaica’s recovery will predictably be in tandem with U.S. and global economic recovery.
The country is heavily dependent on tourism and trade for jobs, foreign exchange earnings and growth. The economy will contract by 3.5% in 2020. Known as a favorite destination for U.S., British and European vacationers, the economy has struggled to recover from a downturn in recent years. High debt servicing costs has been a particular burden as well as high fiscal deficits.
The tourism sector contracted by 16.2% during the first-half of 2020, driven by Covid-19 travel restrictions and business closures. Although Barbados no longer mandates a two-week quarantine for travelers from the U.S., UK and Europe, tourism activity remains weak. Recessions in the U.S. and UK, which account for two-thirds of Barbados’ tourist arrivals, will inhibit tourism demand until the Covid-19 pandemic is under control. Fresh spikes in Covid-19 infections will likely prolong consumers’ fear of international travel. A delayed recovery in Barbados’ tourism industry will diminish revenues, while public spending edges higher to combat the impact of the pandemic on the economy.
The country’s fiscal deficit is projected to expand to 4.9% of GDP this fiscal year from a surplus of 2.3% in 2019/20 reflecting the negative outlook for the pace of any economic rebound. Over the next several quarters the expectation is for private consumption to recover slowly. Public health restrictions on service sector (tourism) activity greatly undermined employment. Some 3%-4% of the population filed unemployment claims. Quarantine measures help limit private consumption while the global recession reduced demand for Barbadian exports.
An increase in public spending will limit the scale of the recession. The government extended the duration of unemployment benefits from 13 to 22 weeks. A stimulus program was announced in April to assist households, provided a boost to the economy. A Tourism Loan Facility was established to assist hotels [and related businesses] impacted by the downturn in tourist activity.
Despite a dim outlook for the prospect of a quick recovery worldwide, which will hurt any rebound in tourism, lending from the IMF, the InterAmerican Development Bank and other international financial institutions is expected to cushion the impact of Covid-19 on Barbados’ fiscal outlook. At the same time, a slowdown in global growth will erode export demand. Although Barbados lifted restrictions on manufacturing, food production and distribution in May, export demand remain subdued.
Tourism in the DR was hit hard since the early days of Covid-19, and the country has experienced a gradual decline in visitors as the pandemic took root in the U.S. Over the coming quarters, the widening fiscal deficit and rising debt load could create a political dilemma for the incoming government. Due to stimulus efforts the country’s budget balance is expected to widen to 4% of GDP in 2020, up from 2.3%. The DR’s external debt is projected to rise to 54.2% of GDP, from 43% in 2019. While there are advocates for narrowing the deficits, public opposition to decreased social spending during a period of high unemployment, is very strong. Covid-19 registered some 23,000 active cases so far, while the economy is forecast to contract by 4.7% in 2020.
Elections were held in August. The new President, Luis Abinader is expected to mostly maintain business-friendly policies pursued by the former Medina Administration. A smooth transition of power to the Partido Revolucionario Moderna (PRM) from the ruling PLD [Patido de la Liberacion Dominicana], is indicative of continued political stability which will aid continuity in economic policy. The transition ends 16 years of political control by the PLD. Abinader, a trained economist, has never before held elected office. He has deep ties to the Dominican business community through family holdings in the hotel, hospitality, tourism sector. Combating the effects of Covid-19 will require increased public spending to cope with rising case numbers and to offset the economic fallout of the pandemic on households.
The new Abinader administration is expected to advance pro-business and maintain investor- friendly policies pursued by the former Medina government. The new government must face the challenge of defeating corruption and President Abinader will be expected to deliver on his anti-corruption campaign. Over recent years, high profile criminal cases against businessmen and political officials tied to a $92 million alleged Odebrecht bribery scheme, has fed grassroots activism against corruption. President-elect Abinader proposed appointing a politically independent Attorney General and increasing transparency in public contract procurement. Unresolved cases tied to Odebrecht remain a focal point for activists.
The new government will likely position itself closer to the U.S. in an effort to secure longer-term economic ties. The president-elect who studied in the U.S., campaigned on improving the bilateral relationship. In 2019 the Dominican Republic sent 53.7% of its exports to the U.S. and Americans accounted for 29% of tourist arrivals. The outgoing government of President Medina switched the DR’s recognition of Taiwan to China in 2018, a move that raised concern in the
U.S. government. It is expected that President Abinader will seek to leverage the DR’s free-trade agreement with the U.S. to boost domestic industry, trade, manufacturing, and export growth. If the U.S. and other large economies reorient their supply chains toward LATAM & the Caribbean the DR could stand to benefit. Strengthening trade and tourism ties with the U.S. is a top priority.
Real GDP is projected to contract by an estimated 6.2% in 2020 due to delays in lifting Covid-19 restrictions in El Salvador. Public health restrictions and falling remittance inflows caused a sharp contraction in spending. Although the Salvadoran government began loosening lockdown measures on June 16th by opening the manufacturing and construction sectors, the president postponed the second phase of reopening, which would have eased restrictions on public transit and other sectors of the economy. El Salvador imposed stringent restrictions on commercial activity and movement in March, which caused declines in monthly economic activity of 4.0%, leading to a 37.2% contraction in commercial activity during the first half of 2020.
El Salvador has a total of 26,000 Covid-19 cases and 742 deaths as of September 3, 2020. There has been a decline in the number of new cases in recent weeks. The health ministry confirmed 42 physicians died after contracting the virus while treating patients. A lawsuit has been filed alleging violation of the rights of healthcare personnel working during the pandemic. A reopening of the economy is ongoing. So far, the authorities claim the effects have been “satisfactory”. Depressed external demand will weigh on El Salvador’s exports. This, combined with subdued industrial output throughout 2020, will continue to weaken El Salvador’s growth potential. Exports during the first-half of 2020 contracted by an average of 42.1%, down from an average of 6.9% growth during the same period in 2019.
Guatemala will experience a sizeable recession in 2020 as public health restrictions and falling remittance inflows weigh on private consumption; and reduced external demand causes exports to contract.
To mitigate the slowdown in economic activity caused by Covid-19 and weakened global demand, the central bank has lowered interest rates. However, economic activity will likely remain weak over the coming months as public health restrictions remain in place and the authorities watch the virus’ trend in the U.S.
Although financial conditions have been loosened, there is still room for additional easing, which would support a pick-up in economic activity. For example, while growth in bank credit to the private sector accelerated from 5.5% in January to 7.7% in June, it remains well below the average growth rates seen between 2011 and 2015. Similarly, money creation recently jumped to 25.7% but remain below the 29.4% peak seen in February 2007.
Sluggish energy prices and reduced demand price pressures will also allow the central bank to loosen monetary policy. The forecast is for the Guatemalan economy to begin to recover in the third quarter of 2020, however the continued global spread of Covid-19 could delay a rebound.
Guatemala does a brisk business exporting agricultural goods, textiles, and automobile spare parts to the U.S., Canada and Europe. The country’s total external debt is modest at 26% of GDP while it is projected to fall to 24.8% of GDP in 2021. Real GDP is forecast to contract by 2.9% this year following growth of 3.8% in 2019. Growth is expected to pick up during the last quarter of 2020 and continue into 2021.
The country’s total external debt is modest at 26% of GDP while it is projected to fall to 24.8% of GDP in 2021. Real GDP is forecast to contract by 2.9% this year following growth of 3.8% in 2019. Growth is expected to pick up during the last quarter of 2020 and continue into 2021.
The worsening outbreak of Covid-19 and reduced remittance inflows have undermined private consumption. As new cases climbed in Guatemala, restrictions on movement were tightened during the first half of 2020. Employment in the informal sector was particularly impacted by lockdowns, hurting private consumption and spending. The forecast is for average unemployment to rise to 7.5% in 2020 from an estimated 2.9% in 2019.
On September 4, the Guatemalan president reported a fall in new Covid-19 cases over several weeks. Hospitalizations are down and fear among residents appears to have subsided. There were 77,863 cases reported as of September 4 and 2,863 deaths from Covid-19 in Guatemala. This is the highest number of deaths in Central America. There were approximately 8,700 active cases remaining on that date. Approximately 60% of the country remain on high alert in response to Covid-19 resurgence.
At the same time, the country reported a surprising recovery in remittances for two consecutive months. There were inflows of $1.08 billion in July followed by $1.05 billion in August from Guatemalans living abroad. High unemployment in the U.S. curbed remittance inflows during the first-half, causing an additional drag on private consumption. During the first six months of 2020 remittance inflows into Guatemala contracted by an average of 14.7% y-o-y. In 2019 remittance inflows were equivalent to 13.5% of GDP, providing a major source of income for Guatemalan consumers. According to the World Bank approximately six million Guatemalans (30% of the population) depend on remittances for daily survival.
A contraction in economic activity in the U.S. have weighed on Guatemalan exports. Any prolonging of the epidemic in Guatemala would lead to higher death tolls and certain delay in an economic rebound. Foreign exchange reserves are comfortable at approximately $15.7 billion, equivalent to 10.5 months of import cover.
The forecast is for GDP to contract 3.1% in 2020, as preventative public health measures weigh down private consumption and travel restrictions disrupt the tourism sector. Government-mandated restrictions to contain the spread of Covid-19 have significantly weighed on domestic demand and pushed unemployment higher. Unemployment rose to 12.5% in the first-half of 2020.
With retail shopping establishments and beaches closed, employment and private consumption remain depressed. Starting September 9, Costa Rica begins a new phase in its controlled reopening of the economy. As of this writing, 44,458 Covid-19 cases have been reported; the death toll stands at 460.
Costa Rica is forecast to run a budget deficit of 9.4% of GDP, compared to the 7% shortfall recorded in 2019. This will limit the government’s ability to enact fiscal stimulus to support growth. A steep fall in VAT and income tax revenues due to the suspension of commercial and tourism activity will cause the fiscal deficit to widen and revitalize concerns about Costa Rica’s fiscal position. The expectation is that the central bank is likely to quickly unwind stimulus measures in the short-to-medium term and rely on dovish monetary policy to spur a rebound in domestic activity.
The central bank is committed to keeping its benchmark interest rate low at 0.75% [where it has been since early 2020] through the end of 2020, as the pandemic continues to weigh on domestic growth. If Covid-19 cases continue to rise in Costa Rica, the government will likely delay reopening of beaches and retail shopping. The decline in commerce will deepen the country’s contraction and could spur the central bank to cut interest rates further. Inflation expectations were revised down to 0.8% from 2.2%, as weak energy prices and limited domestic demand alleviate pressure on prices.
Foreign inflows including tourism, remittances and investments registered declines. The outlook for an early turnaround remains uncertain. An IMF Rapid Financing Instrument (loan) worth $504 million was approved in August for Costa Rica. This will help the government close the financing gap in its fiscal deficit for the year. The same is unlikely in 2021, leaving the government to rely on more expensive market borrowing to fund a larger share of deficits next year. The IMF resources will be used this year to meet emergency expenditures related to the Covid-19 pandemic.
The Honduran economy is projected to contract by 3.9% in 2020 as the pandemic weighs on private consumption and export growth. The disruptions caused by Covid-19 will push the country into its steepest recession in decades, far larger than the 2.4% contraction in 2009 during the global financial crisis.
Honduras heavily relies on remittances from nationals working overseas. The trend has been a steady stream of remittance inflows (following a dip during the first-half); and a spike over 2019 levels seen in recent months. This is presumably because migrants living in the U.S. are concerned about the impact of a spike in Covid-19 cases on relatives in Honduras, given the lack of and/or loss of domestic jobs and poor health systems, which sometimes require cash payments to receive medical treatment. The remittance inflows contrast with the World Bank’s earlier predictions that remittances would fall by 20% in 2020.
Many of the U.S. workforce of Hondurans [and other Central America and Caribbean countries] are believed to have been eligible to receive benefits from the U.S. government’s federal unemployment package, allowing workers to keep sending money home. The continued spread of the virus in Honduras delayed the easing of the lockdown measures, which has extended the contraction in private consumption.
Hundreds of taxi drivers and public transport bus operators protested in major Honduran cities, demanding the government ease lockdown restrictions and allow them to go back to work. The drivers are also demanding government subsidies, including removal of vehicle registration fees ($320), since most have not been able to work in six months. The government in August approved a partial reopening of the economy including a pilot test program for bus and taxi operators. However, that is considered too restrictive for drivers who have suffered serious loss of income over an extended period.
The Honduran death toll from Covid-19 climbed to 2,023 on September 8, with 64,814 confirmed cases as of that date. The country was under curfew from March until early June, which significantly undermined commercial activity. The government has twice suspended the Phase 1 reopening in parts of the country, including the capital Tegucigalpa, amid record daily case growth. The extension of curfews compounded the negative impact on spending, as informal workers are restricted in their movements. The informal economy averaged 46.3% of total economic activity between 2004-2015.
The U.S. is Honduras’ largest export market, accounting for 57.3% of total exports in 2019. The projected sharp contraction in the U.S. have reduced demand for Honduran exports, primarily machine equipment for the U.S. manufacturing sector. The Honduran manufacturing sector contracted by 15% during the first-half 2020, compared with 0.5% growth in 2019. Fiscal and monetary stimulus will partially offset the decline in economic activity.
The Honduran Parliament has authorized the Ministry of Finance to borrow up to $2.5 billion between 2020 and 2021 in response to Covid-19. The government will increase public spending to combat the epidemic and provide relief to affected workers with stimulus measures equal to 2.1% of GDP. This includes monthly salary assistance to formal sector workers and cash support for informal sector workers.
At the same time, the central bank has loosened monetary policy substantially in an effort to stimulate growth. The bank’s benchmark policy interest rate was reduced from 5.5% to 4.5%. The central bank also altered its liquidity management policy, which will provide liquidity injection of approximately $860.9 million, equivalent to roughly 3.5% of GDP. These measures are a recognition that achieving an economic turnaround will not be easy.
The economy is reliant on trade, remittances from Mexicans working abroad, and tourism. Together these are important contributors to jobs, consumer spending, construction sector activity and overall economic growth.
The public health lockdowns in place to combat Covid-19 have heavily impacted each of these sectors. Weaknesses will continue over the coming months. Until Mexico lifts restrictions many sectors including construction are being held back. Manufacturing is expected to rebound in the months ahead. However, travel restrictions and lingering concerns about the virus are likely to continue to weigh on tourism activity throughout 2020.
Mexico received $3.53 billion remittances in July – a 7% increase over the same month in 2019. The funds are a major support to the Mexican economy and low income families across the country, supporting approximately 1.5 million families according to the government. Workers abroad make a special effort to send money during hard times, because they know their families back home do not have access to good health systems. The average remittance during the period January to July was 4.3% higher than the same period in 2019. The economic downturn has forced many living in the U.S. to dig deeper to find the funds to send back home. Some 12 million Mexicans lost their jobs during the pandemic according to the government.
Separately, the US Mexico Canada Agreement [USMCA] will serve as a positive for future investments in Mexico. The USMCA took effect June 1, 2020, replacing the North American Free Trade Agreement (NAFTA) which had been in place since 1994. The implementation of the USMCA will significantly reduce uncertainty over the future of Mexico’s trading arrangement with the U.S. The deal carries preferential access to the U.S. market.
Additionally, the regional content requirement in the agreement, particularly around autos, will help Mexico boost its market share in the near term as manufacturers increase production in Mexico, the cheapest of the three markets.
The cooperation necessary to make the deal happen should be a positive for relations between Mexico and the U.S. which is vital for the stability of trade between both countries.
Due to its lower costs and frictionless access to the U.S. and Canadian markets, Mexico’s manufacturing sector has grown to encompass nearly the full set of mid-range manufacturing activities. Mexico has a particularly well developed auto sector, which includes both parts and full vehicle production. Major auto producers have been establishing and expanding auto production capacity in Mexico to serve the region and the U.S.
Significantly, the USMCA underpins Mexico’s regulatory environment, ensuring the establishment and enforcement of consistent rules that provides the certainty foreign firms need to make large, long-term investments into a foreign market. The USMCA rules of origin require a greater percentage of products be produced within the free trade area, further incentivizing investments in Mexico.
That said, Mexico’s reliance on its trade relationship with the U.S. is a vulnerability. The economic importance of Mexico’s exports to the U.S. is a source of unease among those with protectionist sentiment.