Expansionary Fiscal Policies Could Heighten Credit Risk In ECCU
BMI View: We continue to highlight that the eight countries that make up the East Caribbean Currency Union face an elevated risk of fiscal and balance of payment crises in the coming quarters, particularly in light of a recent uptick in government spending. Indeed, should expansionary fiscal policies continue through 2014, the resulting economic imbalances may necessitate further debt restructurings in the region.
The Caribbean region continues to face significant challenges stemming from unsustainable external positions and heavy external public debt loads. As we have previously noted, countries in the East Caribbean Currency Union (ECCU), which use a fixed exchange rate, remain in a particularly difficult bind with regards to rebalancing their economies ( see 'Additional Credit Events Only A Question Of Time', June 4 2013). With the central bank having taken a competitive devaluation of the East Caribbean Dollar off the table as a policy option for the time being, much of the burden for an economic rebalancing has fallen on domestic demand, which has prevented a substantial recovery in economic growth and required governments to expend political capital in pursuing lower public spending and unpopular wage cuts. Contractionary fiscal policies, along with a subdued outlook for tourism, help to inform our forecast for real GDP growth to come in between 0.9-2.0% in all eight ECCU countries in 2014.
However, while significant improvement had been seen on the fiscal front in the ECCU late in 2012 through the first half of 2013, with several governments implementing substantial tax reforms and cutting back on current expenditures, that progress began to unravel towards the end of the year ( see chart above). Some of the uptick in spending is attributable to domestic political resistance to ongoing reforms, as we have highlighted in St. Kitts and Nevis, for example, where current expenditures contracted by 3.9% year-on-year (y-o-y) in H113, but ticked up slightly to 0.8% y-o-y in H213 ( see 'Uncertain Election Calendar To Exacerbate Political And Economic Risks', November 21 2013). Moreover, in Grenada, where debt restructuring negotiations remain ongoing, the potential political costs of agreeing to further cutbacks in public spending in exchange for bondholders taking a significant haircut have seen the ruling party chart an uncertain course forward ( see 'Rocky Road Ahead For Debt Restructuring', February 11). In Antigua & Barbuda, we recently revised our forecast for the country's budget balance in 2014 to reflect a much wider fiscal deficit than initially anticipated, due to the weaker-than-expected fiscal picture in 2013, as well as a sizeable debt payment due this year ( see 'Principal Payments Lead To Weaker Fiscal Position In 2014', February 10).
|Spending Ticking Up|
|ECCU - Current Revenue & Expenditure, % chg y-o-y 12mma (LHS) & Current Budget Balance, XCDmn 12-Month Rolling (RHS)|