Economic Challenges To Have Major Political Repercussions

BMI View: While we expect the Caribbean region to remain broadly stable in the coming years, slow growth and substantial debt burdens will lead to difficult policy trade-offs that could elevate political risk. Several of the key political themes that we highlight - increasing international constraints, growing Chinese influence in the region, mounting security challenges, and the preclusion of major independence drives among dependent territories - stem from the economic challenges facing the region.

We have recently been highlighting that the slowdown in growth in emerging markets will make economic and political environment s increasingly ch allenging over the coming years for both policymakers and foreign investors , result ing in difficult policy trade-offs that could lead to increased bouts of political risk ( see 'EM Turbulence To Continue As Policymaking Becomes Increasingly Difficult,' June 21) . We believe that the Caribbean region will feel these pressures acutely over the coming years, given that a sharp decline in global growth and turmoil i n financial markets has had negative economic consequences for the Caribbean region ( see 'Additional Credit Events Only A Question Of Time,' June 4) . Indeed, while the countries in the Caribbean receive an average score of 68.7 in BMI 's proprietary Short-Term Political Risk Ratings, above the average for regions such as Latin Ameri ca, Africa, and the Middle East , which contain well known political 'hotspots , ' the Caribbean scores worse than North America, Asi a, and Europe, illustrating that political risk remains elevated in relation to most developed market economies.

Below we highlight several key political themes for the Caribbean in the coming years, most of which stem from the economic challenges facing the region. W e believe that many Caribbean nations will be increasingly constrained in their pol icy choices given a reliance on multilateral organisations for financial support. Moreover, steady capital and financial account inflows from European countries will preclude major drives for independence from non-sovereign territories . Chinese influence will grow due to rising investment and trade ties with the region's oil and gas exporters, while t ight budgetary conditions will also see Caribbean nations struggle to contain rising security concerns, elevating political risk. Finally, the threat of natural disaster will continue to loom large .

Middle Of The Pack
BMI Short-Term Political Risk Ratings, Out Of 100

Economic Challenges To Have Major Political Repercussions

BMI View: While we expect the Caribbean region to remain broadly stable in the coming years, slow growth and substantial debt burdens will lead to difficult policy trade-offs that could elevate political risk. Several of the key political themes that we highlight - increasing international constraints, growing Chinese influence in the region, mounting security challenges, and the preclusion of major independence drives among dependent territories - stem from the economic challenges facing the region.

We have recently been highlighting that the slowdown in growth in emerging markets will make economic and political environment s increasingly ch allenging over the coming years for both policymakers and foreign investors , result ing in difficult policy trade-offs that could lead to increased bouts of political risk ( see 'EM Turbulence To Continue As Policymaking Becomes Increasingly Difficult,' June 21) . We believe that the Caribbean region will feel these pressures acutely over the coming years, given that a sharp decline in global growth and turmoil i n financial markets has had negative economic consequences for the Caribbean region ( see 'Additional Credit Events Only A Question Of Time,' June 4) . Indeed, while the countries in the Caribbean receive an average score of 68.7 in BMI 's proprietary Short-Term Political Risk Ratings, above the average for regions such as Latin Ameri ca, Africa, and the Middle East , which contain well known political 'hotspots , ' the Caribbean scores worse than North America, Asi a, and Europe, illustrating that political risk remains elevated in relation to most developed market economies.

Below we highlight several key political themes for the Caribbean in the coming years, most of which stem from the economic challenges facing the region. W e believe that many Caribbean nations will be increasingly constrained in their pol icy choices given a reliance on multilateral organisations for financial support. Moreover, steady capital and financial account inflows from European countries will preclude major drives for independence from non-sovereign territories . Chinese influence will grow due to rising investment and trade ties with the region's oil and gas exporters, while t ight budgetary conditions will also see Caribbean nations struggle to contain rising security concerns, elevating political risk. Finally, the threat of natural disaster will continue to loom large .

Middle Of The Pack
BMI Short-Term Political Risk Ratings, Out Of 100

Debt Woes Will Keep International Constraints Heightened

We anticipate that many Caribbean countries will see their policy choices constrained by the financial assistance they receive from multilateral organisations in the coming years. Indeed, left reeling by the global financial crisis, several small islands have severe external account imbalances, necessitating continued assistance from international bodies such as the International Monetary Fund. Our current 2013 forecasts see 12 Caribbean countries running current account deficits in excess of 10.0% of GDP, and eight countries running nominal fiscal deficits greater than 5.0% of GDP. As we have previously noted, this year alone has seen three formal debt restructurings in the Caribbean region (Belize, Grenada and Jamaica), and we believe that several countries, particularly those in the East Caribbean Currency Union (ECCU), are at risk of both credit events and exchange rate crises ( see 'Rising Risks To Exchange Rate Regimes,' June 28). The process of reducing large debt burdens is likely to necessitate pull-backs in public spending on social welfare programmes and general reductions in the size of the public sector, which could see governments forced to renege on prior policy pledges. Similar to other political environments where fiscal austerity has been implemented (see the United Kingdom, Greece, and Spain from 2010-2012), we expect popular support for ruling parties to wane, leading to a higher risk of public protests and social instability. In countries such as Jamaica and Saint Kitts And Nevis, we are already seeing this risk begin to play out. Indeed, in Saint Kitts And Nevis, we have highlighted that the likelihood of a constitutional crisis is growing, as several thousands of citizens have taken to the streets in recent months to protest the government's fiscal reforms, along with allegations of corruption against Prime Minister Denzil Douglas, the Caribbean's longest serving head of state ( see 'Likelihood Of A Constitutional Crisis Growing,' July 23).

Economic Challenges Will Take Further Drives For Independence Off The Table

Along similar lines, we believe that economic challenges are likely to preclude major near-term independence drives by Caribbean islands that remain territories of overseas sovereign governments in Europe. Indeed, given that the close association of several Caribbean economies with their overseas sovereign governments has helped to keep capital and financial account inflows steady in recent years, mounting economic headwinds are likely to see territories remain loyal until growth prospects brighten. However, one notable exception could be Turks and Caicos (TCI), where unified opposition to British-backed fiscal reforms threatens to undermine the fragile political consensus that has been built up with the British-appointed governor's office in the period since the territory returned to autonomous rule in late 2012 ( see 'Opposition To Fiscal Reforms Poses Risks To Autonomy,' March 28).

Caribbean Islands Without Full Independence
Country Overseas Sovereign Government
Source: BMI
Anguilla United Kingdom
Aruba Netherlands
Cayman Islands United Kingdom
Curacao Netherlands
Guadeloupe France
Martinique France
Montserrat United Kingdom
Puerto Rico United States
Sint Maarten Netherlands
Turks and Caicos Islands United Kingdom
Virgin Islands, British United Kingdom
Virgin Islands, U.S. United States

Chinese Influence On The Rise

We believe that Chinese influence in the Caribbean will continue to grow in the coming years, particularly in countries with oil and natural gas resources. Indeed, although Chinese demand for many global commodities - particularly industrial metals - is expected to wane as growth trends lower, our Asia Country Risk team believes that Chinese imports of oil and natural gas will continue to rise in the coming years ( see 'China Future Imports: Enduring Trends & New Trajectories,' June 17). Chinese President Xi Jinping pledged US$3.0bn in aid to the Caribbean region in a visit in early June, and his warm welcome highlighted our view for a moderate re-balancing in the region's foreign policy towards the east. Xi also invited Trinidadian Prime Minister Kamla Persad-Bissessar to visit Beijing in November to open an official embassy, signalling a desire to establish more formal relations with the region. While not guaranteed, we also believe that some of the countries that currently have diplomatic relations with the government of Taiwan, against the wishes of the Chinese government, may align closer to Beijing in order to qualify for Chinese aid. These countries include Saint Kitts And Nevis, Saint Lucia, Saint Vincent, Belize, and Haiti.

Increasing Chinese Influence In The Region
T&T - Trade With China

Limited Fiscal Resources Will Elevate Security Risks

Tight budgetary conditions will see Caribbean nations struggle to harness adequate financial resources to address rising security concerns. Indeed, we expect crime rates to become a greater concern in the 'Eastern Caribbean Corridor' (as identified by the US government), which is a major transhipment route for drugs coming from South and Central America to the US mainland, while remaining relatively stable in other parts of the region. As we have previously noted, the US State Department has highlighted the potential that an ongoing regional crackdown on drug trafficking in Central America, and the migration of militarised drug crime south of the US border, could lead to more security problems spilling over into the Eastern Caribbean in the coming years ( see 'Improvements In Security To Be Minimal,' May 10). The East Caribbean Corridor centres primarily on Trinidad & Tobago (T&T), given its close proximity to the Venezuelan coast, as well as several of the smaller islands located between T&T and Puerto Rico. Given the significance of tourism to many Caribbean economies, a rise in crime could become an important issue in Caribbean political campaigns, with candidates who have robust security proposals positioned to perform better. We expect security to be one area where the US continues to maintain an outsized influence in the Caribbean relative to China, as the US Drug Enforcement Agency will likely continue to invest resources into fighting maritime narcotics trafficking. According to the United Nations Office on Drugs and Crime, the average homicide rate per 100,000 people among reporting Caribbean countries in 2010 stood at 24.0, well above the global average of 6.9.

Supranational Caribbean Organisations
Country Caribbean Community Organisation Of East Caribbean States Association Of Caribbean States
Note: X=full membership, Y=associate membership, Z=observer status; Source: BMI
Anguilla Y Y
Antigua and Barbuda X X X
Aruba Z Y
Bahamas X X
Barbados X X
Belize X X
Bermuda Y
Cayman Islands Y
Cuba X
Curacao Z Y
Dominica X X X
Dominican Republic Z X
Grenada X X X
Guadeloupe
Guyana X X
Haiti X X
Jamaica X X
Martinique
Montserrat X X
Puerto Rico Z
Saint Kitts and Nevis X X X
Saint Lucia X X
Saint Vincent X X X
Sint Maarten Z Y
Suriname X X
Trinidad & Tobago X X
Turks and Caicos Islands Y Y
Virgin Islands, British Y Y
Virgin Islands, U.S.

Regional Integration Will Strengthen Over The Long Term

Although slowing growth and external account imbalances could see regional tensions rise in the short run, as exemplified by the ongoing trade dispute between Jamaica and T&T, and could threaten the sustainability of the ECCU in the coming years, we believe that the broader long-term trend will be towards greater regional integration ( see 'Debt Woes To Exacerbate Regional Tensions,' July 24). Indeed, analogous to the eurozone in recent years, we believe that many Caribbean governments will advocate for increased political cooperation to match the social and economic integration that has grown over the last several decades in the form of trade agreements, customs unions, and, in the case of the ECCU, a single currency. The oldest and most significant supranational Caribbean organisation, the Caribbean Community (CARICOM), which consists of 15 full-status members and five associate members, created a Caribbean Court of Justice in 2001, and 12 of the members instituted a common passport in 2009. Over a long-term time horizon, we believe CARICOM may work towards building a common legislative body.

Eastern Corridor A Growing Transhipment Route For Narcotics
Map Of Caribbean Region

Natural Disasters Will Remain A Wild Card

The Caribbean's susceptibility to extreme weather - earthquakes and hurricanes - will continue to be a wild card that could affect political risk. Indeed, the 2010 earthquake in Haiti serves as a key example of how a natural disaster can upset the political trajectory of a country in the short and long term. Although Haiti was a relative trouble spot prior to 2010, the after-effects of the earthquake exacerbated already heightened political and social instability in the country - namely, high levels of crime, disease (particularly Cholera), and political infighting ( see 'Huge Challenges Ahead For Martelly,' April 21 2011). Moreover, Hurricane Sandy in November 2012 set Haiti back further, reigniting the food crisis that was initially spurred by the Earthquake. With scientists from the United Nations forecasting that global climate change could lead hurricanes to occur more frequently and with increasing severity, natural disasters could become a more significant factor negatively affecting the political risk profile of the Caribbean going forward.

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