Caribbean economic outlook adds to difficulties for insurers

Monday, June 2, 2014

As insurance industry leaders gather in Curaçao to discuss the challenges and opportunities they face in the region, low economic growth and high public sector indebtedness continue to pose serious headwinds.

In its latest economic outlook in April, the IMF described economic growth in the region as having remained tepid, rising 2.8% in 2013, constrained by high debt levels and weak competitiveness.

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The global economic crises took a heavy toll on the region with tourism numbers plummeting following 2008 and financial sector stress continuing in the Eastern Caribbean Currency Union (ECCU), reflecting low growth and high and rising nonperforming loans.

In addition, low bank profitability brought on by a regulatory interest rate floor on savings deposits has seen credit growth to the private sector remain subdued, and a resolution of troubled financial institution constitutes a risk.

In the tourism dependent economies of the region – including Bahamas, Barbados, Jamaica and ECCU member states – real GDP growth in 2013 picked up just modestly to 0.75 of a percent from close to zero in 2012, according to the IMF, as tourism numbers and spending continued to underperform. Construction activity meanwhile showed signs of bottoming out.

The fund expects the region as a whole to grow 3.3% in both 2014 and 2015, with growth for tourism-dependent nations recovering to 1.4% this year and 1.9% in 2015. Growth, however, is likely to remain constrained by a debt overhang, weak competitiveness, and necessary fiscal consolidation given that public debt levels averaged over 90% of GDP in 2013.

For the commodity exporting nations of the regions – Belize, Guyana, Suriname and Trinidad and Tobago – the fund expects growth to remain at 3.2% in both 2014 and 2015, exhibiting no improvement on growth in 2013. Public debt levels are significantly lower for the commodity exporters at 50% of GDP on average in 2013.

Inflation is generally low across the region and, with domestic demand remaining weak and food and fuel prices softening, the medium term outlook appears benign.

One further point of concern remains the financing from Venezuela's Petrocaribe, which in the cases of is Guyana, Haiti, Jamaica, and most of ECCU represents as much as 4-7% of GDP per year. A sudden interruption of any of these flows, as the IMF notes, would cause severe financing difficulties.

In the face of necessary action to reduce public debt levels, consolidate fiscal positions, cut spending and improve competitiveness, the economic situation is likely to remain challenging across the region in the medium term, presenting difficulties for insurers and the economy as a whole.