LatinFinance - January/February 2015 - 37

CARIBBEAN
SOVEREIGN
DEBT

The sharp fall in the global price of oil is elevating the risks to
Caribbean economies, just as they get back on track after the 2008
financial crisis. By Lucien Chauvin

Shaky foundation

he Caribbean has long been a
region of contradictions. Tropical beaches
and a relaxed atmosphere may pull in tourists, but rather more worrisome macroeconomic imbalances have kept debt investors
at arm's length.
The 2008 international financial crisis
exacerbated the problems, as economies
shrank and sovereign debt grew. Jamaica's
economy, for example, contracted 4.4% in
2009, one of the steepest post-crisis drops
in Latin America.
Over the past two years, a different story
has begun to emerge. The IMF expects
all Caribbean economies to expand in
2015, and countries like Jamaica and the
Dominican Republic have started to bring
their debt under control. More tourists are
arriving, and the whole region's exports are
doing better as developed countries' economies perk up.
"I am upbeat," says Gregory Fisher,
a managing director and fixed income
specialist at US investment boutique Oppenheimer.
"The Caribbean has gone through a number of painful restructurings over the past
five years and is emerging stronger today."
But this year, the region faces new
dangers to its finances, beginning with
the prospect of higher borrowing costs as
rate hikes in the US near. A possible end to
Venezuela's PetroCaribe scheme, which

partially defers oil payments to member
countries, is an even bigger threat.
Oil prices fell around 40% late last year, a
crash that should lower the current account
deficits of most oil-importers. But, in another Caribbean contradiction, cheaper oil
could push up deficits if Venezuela, a large
exporter, has to scale back the PetroCaribe
program.

GUILLERMO QUIROGA, BANCTRUST

"A GREAT DEAL WILL
DEPEND ON DECISIONS
MADE IN VENEZUELA.
IF THEY DECIDE TO
REDUCE SUBSIDIES
THROUGH PETROCARIBE, THE DOMINICAN
REPUBLIC WOULD
HAVE TO SPEND MUCH
MORE COVERING
ENERGY NEEDS"

PetroCaribe accounts for around 34%
of consumption in the 18 member states,
11 of which are Caribbean nations, according to a September Scotiabank report. The
scheme keeps up-front oil at around $40 a
barrel - still $17 lower than the market price
for Brent Crude in mid-December - in a
subsidy that encourages otherwise uneconomical oil-fuelled power generation, says
the report.
Venezuela's foreign minister Rafael
Ramírez has said the country would keep
up support to Caribbean nations, despite
the lower oil prices. But it is not clear
whether the government will be able to do
so - soaring credit default swap spreads in
December indicated deepening investor
fears over how long the sovereign could
stave-off default.
Comeback
Haiti and Jamaica are at greatest risk of
PetroCaribe's collapse, Scotiabank reckons.
Jamaica's deferred payments to Venezuela
under the scheme total around 4% of GDP,
and around a third of the country's energy
comes from oil from the program.
And although the country has a startling
debt-to-GDP ratio of around 140%, that is
some five points lower than a year earlier -
one of the indicators that Jamaica is making
progress at getting its finances in order.
Perhaps the strongest vote of confidence
in the turnaround came in July last year,
when it sold an $800 million cross-border
bond, the largest in the country's history.
It marked the sovereign's market return
after restructuring for the second time in
five years, in February 2013. The 10-year
soft-bullet bond was priced to yield 7.625%,
down from initial thoughts of 8%.
Underpinning the improvements is a
January/February 2015 - L ATINFINA NCE.COM 37

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