The Tribune

The United Nations’ (UN) Economic Commission for Latin America and the Caribbean (ECLAC) has predicted the the economic impact from COVID-19 is expected to be more intense that the 2008 global financial crisis. The Caribbean is expected to be impacted in numerous ways, including a decline in economic activity among its trading partners and lower demand for tourism. There will also be an impact from the interruption of value chains. This may have a greater effect on manufacturing countries, but there is a general impact for all imports as many countries that are being impacted feature prominently in the global supply chain. There will also be a drop in the price of exports, primarily as a result of a demand-side shock, and greater risk aversion on the part of investors.

TAKE A LONG POSITION

There has been sufficient information to help policymakers refine the initial positions and projections taken. The world is in the midst of a real global financial crisis. Consideration must be given to potential bankruptcies or business failures, the reluctance of firms to use capital, and dramatic changes on the flow of money within the economy. The shutdowns across the world could be prolonged but, especially, in our main trading partner. This could be many, many weeks. China is rumbling back to life but, for many in the Caribbean, the US is the intermediary in our supply chains, the main source of demand for the region’s tourism product, and main export market. Therefore, while the initial point of supply in many supply chains may be ramping up, the most important point in that chain could be facing its own shut down. Despite efforts to the contrary the evidence on the ground suggests that the US has some way to go before normality can be entertained.

There is a risk to financial stability. The crisis holds great implications for global financial stability, which is under pressure. We anticipate that central banks across the globe will take the necessary actions to deal with this. So, we must focus on our local economies. With firms suffering, and with household incomes under pressure from loss of employment, the banking sector will see a spike in non-performing loans. Small businesses in the Caribbean have traditionally had their financing tied to personal mortgages or sources. This represents a big risk for these entities, as the means of repayment are tied to their ability to trade. Lockdowns will affect cash flows and, if prolonged, will hurt these businesses. The impact on the banking system, therefore, must become an important factor in developing scenarios going forward.

With all this in mind, a long-term outlook must be taken. The decision-makers must now decide what fiscal, monetary and macro-prudential treatment will best suit the suggested economic outcomes, and to what extent can they be afforded. Here is where fiscal reforms will become important. Will governments be willing to borrow in order to finance stimulus packages? Do they actually have sufficient headroom to address, not just the previously determined potential out-turn, but scenarios that could result in a marked reduction in foreign direct investment (FDI); business closures; bad loan spikes; an absence of currently-funded projects to drive employment and further investments; a precipitous fall in foreign exchange inflows; and the implications for net internal reserves and balance of payments.

Debt-to-GDP ratios loom large in the successful strategies being pursued by Jamaica. They also loom large as a measure of success for The Bahamas’ recently-detailed fiscal strategy, and this is generally the same across the region. We are reminded of the state that Barbados found itself in not too long ago. To what extent are policymakers willing to buck the trend and do what may be required to inject growth through deficit spending? This calls for playing the long game. There are certainly near-term issues to be addressed, and which must be given careful attention if success is to be secured in the long-term. However, long-term success and sustainability must not be sacrificed for short-term outcomes. If historical experience holds true for the event then this could be at least a three to five- year cycle. Planning and responses should be tailored accordingly.

THE POLICY TREATMENTS

The policy responses, as indicated before, can range from fiscal - where the government uses its tax and spending policies to support firms and persons affected by the event - to monetary easing that is usually designed to support demand confidence, and reduce the borrowing cost for households and firms. Central banks can take actions to provide liquidity to markets and ease stresses on credit and currency mechanisms. The reality is that as we look across the region the ability to implement these options varies significantly. In a number of instances, a country’s economic structure limits the range of options available and the potency as it relates to monetary policy.

With that in mind, we outline our views on possible actions that can be taken. We limit our focus to The Bahamas, being the jurisdiction we are most familiar with, on the assumption that they will hold instructive value for others.

• Reduce the Central Bank reference (discount) rate from its present four percent. We understand many will not agree. There are significant complexities resting on this rate. The earnings, reserves and balance sheets of insurance companies; the level of earnings of banks; asset liability challenges; and potential demand for currency with cheaper funding etc. Without discounting the complexities, we caution not to make the mistake of 2008, when non-performing loans (NPLs) ballooned and hurt the housing market and homeowners. In many ways, the Bahamian banking sector has not fully recovered from this event. While the issue may be currently concentrated in certain institutions, further pressure on mortgages could create an interesting reality for both the government and the sector. While currently highly capitalised, individual banks could feel pressure on their capital adequacy ratios.

• Public sector spending will need to be ramped up. Over the last three fiscal cycles, there has been a depression in capital spending. Consequently, there are not many substantial projects that can form the basis for a stimulus package. Maybe it is time to look at how effectively managed debt financing may deliver infrastructure expansion, which will facilitate future growth and development. This must be done within the context of a long-term plan, and the necessary checks and balances, to prevent the loss of public resources.

• Consideration should be given to reducing VAT as a means of supporting consumers going forward. We understand the implications for government revenue, but argue that should unemployment deepen to the levels projected, government would still need to find resources for welfare support. A reduction in taxes increases the buying power of the individual, and potentially reduces the level of government spending and the natural ineffectiveness that tends to be present when it comes to public sector machinery reaching those in need.

• The announced loan programme of $20m for MSMEs will likely need to be expanded with a significant pool targeted at supporting these entities over the next 12 to 18 months. Consideration would therefore need to be given to the cost of accessing this funding.

• As part of a long-term outlook, the policymakers should consider how to use the fiscal apparatus to encourage the development of sectors that have potential but are not growing. There is an urgent need for greater diversification, and exploiting potential horizontal and vertical integrations and linkages across sectors. This is where this crisis represents an upside potential. Having exposed vulnerabilities across the Caribbean, it is critical that the status quo is broken and other economic contributors for growing GDP are located.

• Plans should be considered for supporting tourism on the back end. It is our view that this sector could display a delayed recovery due to leftover concerns from the virus. Other than that, the impact on disposable income may increase demand for budget locations amid tentativeness in the market. Smaller properties and concerns connected to tourism may therefore need a longer support horizon.

• Given fiscal limitations, public-private partnerships (PPPs) should be actively considered as part of any stimulus approach. The crisis could present the impetus for driving this much-discussed means of supporting government investment in infrastructure and the provision of public goods.

• The government should deploy its concessions regime to support the retooling of companies, and encourage the expansion of existing ones into the digital space. Allocations should be made for the development of generic digital sand boxes for entities willing to commit to reasonable conditions.

• There must be a return to the National Development Plan with an emphasis on building a more resilient economy. The opportunity should be taken, regardless of how COVID-19 unfolds, to take a serious look at health systems and their capacities - social welfare systems, food security, and those elements that support ease of business across all sectors.

We believe that a fundamental recasting of the projections, with appropriate adjustments to the above-proposed actions, will provide an effective tool kit for policymakers. The issue of timing remains for their consideration, informed by the continued unfolding of the crisis. In all instanced we anticipate that all actions taken will be regulated by the individual country’s foreign currency reserves.

CONCLUSION

In our last piece we outlined the vulnerabilities that exist within the Caribbean, giving thought to the measures that governments will employ. Here we sought to look at the efficacy of those responses, and consider whether they could be suboptimal given the early projections that were made. We argued, using Jamaica and The Bahamas as examples, for a rethink of the outcomes and the timeline over which these will unfold, and suggested actions that policymakers can take specific to The Bahamas.

The issues at hand are very complex for the region. As we write we are minded that we are in the midst of an unfolding event with a high level of uncertainty. Our hope is that none of the dire circumstances alluded to will materialise. This is not an exploration of doom, but an exercise geared at preparedness. If the worst materialises, the Caribbean must be prepared to the best of its ability. The fight, in the first instance, is for the lives and well-being of the citizens and playing an important part of protecting all of humanity from the ravages of COVOD -19. That must never be lost in all that is contemplated and implemented. This is a health event with significant economic and financial implications. Success in beating the health aspect is critical to saving the economy. Both are intrinsically intertwined, but demand separate treatments. Any country that loses the battle will pay dearly.

In our next piece, we will look at other developments and perspectives relating to the COVID -19 crisis.