America’s ignored backyard: The Caribbean debt crisis
Some folks in the comments section expressed an interest in having me write more about the USA’s island territories that are in the Caribbean and the Pacific. These territories are mostly ignored and unknown to the US public, with the exception of Puerto Rico, and the vague knowledge of the US Virgin Islands as a nice vacation destination. I myself didn’t even know our Pacific territories existed until a few years ago!
I have been thinking about how best to begin this discussion, and I’ve come to the conclusion that the best place to start is a discussion of the Caribbean debt crisis. While the Pacific territories aren’t part of the Caribbean region, there are a lot of common themes.
The Caribbean as a whole tends to be ignored by the US except as a vacation destination. When I mention the Caribbean is struggling with a debt crisis, most people are quite surprised. I should preface this article by saying that while every Caribbean country is different, and has its own problems, the debt crisis as a whole is rooted in common problems that most of these islands share.
I should also add that when talking about “the Caribbean,” this includes Belize in Central America, and Suriname and Guyana in South America. This is because those countries are culturally and linguistically distinct from the Spanish speaking Latin America. Suriname is a former Dutch colony, and Guyana and Belize are former British colonies. None of these countries speak Spanish and instead, English or English-based Creole languages are most commonly spoken. All are part of the Caribbean Community, or CARICOM.
Originally, many of these countries had economies rooted in agriculture, specifically in the growing of bananas, sugar, and rice. As most of the Caribbean islands consisted of former colonies of the UK, France, Spain, and the Netherlands, the region’s income and trade was heavily centered around exports to Europe. Agriculture was a backbone of most of these countries for centuries. Eventually, Europe was able to develop its own domestic sugar industry and reduce its dependence on exports from the Caribbean.
Nonetheless, the former colonies enjoyed preferential access to European markets for a long time. The Caribbean was able to export its goods to the EU tariff-free and at guaranteed prices higher than world market prices. Agriculture was a major employer of local labor, especially the poor and disadvantaged.
All of that changed when the EU introduced a more liberalized trade regime in the 1990s and the early 2000s. The Caribbean found itself under pressure from exporters in Central and South America, particularly Colombia, Costa Rica, and Ecuador. The various countries attempted to find a solution to this problem and diversify their economies away from agriculture. Unfortunately, the structural weaknesses of these countries made diversification difficult.
Most of the Caribbean is not self-sufficient, and they are heavily reliant on imports of nearly everything, leading to heavy outflow of local capital. Wealth is limited, and many of these countries are kept afloat on a mixture of tourism, sale of what resources can be extracted (such as bauxite in Jamaica), and foreign loans. While not every Caribbean nation has been as bad off, Jamaica has been crippled by a huge debt burden for decades. And then there is the endemic political corruption as well.
It is also worth noting many of these countries are extremely small in both land mass and population, further limiting growth industries. St. Kitts and Nevis has a population of 51,936. The British Virgin Islands have only 33,454 people, and Montserrat, which was partly destroyed by a volcano some years ago and had the southern half of the island turned into a Chernobyl-like exclusion zone, has only 5,241 people.
So, that leads us to the 2008 economic crisis. Much of the Caribbean has been getting by on income from tourism, dependent on it as a source of income, employment, and growth. For example, in Grenada and Jamaica, about a quarter of all the citizens are part of the hospitality industry. In St. Lucia and the Bahamas, tourism was about 30% of the nations’ GDP. All of that crashed into a wall when the US economy faltered in late 2008 due to the Lehman Brothers collapse. As should be clear by now, the Caribbean is heavily dependent on foreign investment and trade with the United States and the European Union, particularly the United Kingdom.
When the 2008 crisis hit, foreign investment into the Caribbean slowed and tourism likewise dropped. Job losses were heavy and poverty increased. Many of these countries already had substantially high debt burdens and were unable to react effectively to the crisis, and borrowed to the limit of their capacity. Recovery in these countries was slow, and growth in the region has generally been stagnant.
This has triggered a wave of defaults and debt restructurings across the Caribbean. Antigua & Barbuda, St. Kitts & Nevis, Belize, Jamaica, and Grenada have all defaulted or restructured their debt, with Jamaica having had to restructure twice! Jamaica is also currently in the midst of trying to work out its fiscal problems with IMF assistance. Many other Caribbean countries will likely face default in the near future. Barbados’ debt has gotten dangerously high and passed the 100% of GDP mark.
Moody’s Investor Service (one of the big three credit rating agencies) recently released a report on the debt crisis. A few excerpts will help to illustrate just how severe the problem is:
Unlike elsewhere, the build-up of debt in the Caribbean region has been neither sudden, nor caused by the global financial crisis. Instead, it happened gradually over many years. Currently, 12 of the 20 Caribbean economies for which data is available have government debt-to-GDP ratio of over 60% and four have debt-to-GDP in excess of 100%.
While Moody’s expects that growth in the region will recover from its recent lows, average growth in the Caribbean has declined materially over time, according to the report “Caribbean Sovereigns: The Silent Debt Crisis.” The report reviews the historical experience of Caribbean countries since 1980, focusing on their economic performance, fiscal and debt developments, and sovereign default history.
“If history is to serve as a guide, more defaults are very likely by the highly-indebted countries in the region,” said Elena Duggar, a Senior Vice President at Moody’s. “Most economies in the region are reliant on cyclical industries that are susceptible to external shocks. Large exposure to natural disasters only makes the situation more challenging. As a result, these economies have not succeeded in achieving fiscal adjustment or sustained decline in debt-to-GDP ratios without a debt restructuring.”
The default of St. Kitts in 2012 is very typical of the region:
This swap agreement encompasses just $150 million out of the $750 million subject to its global debt-restructuring exercise, which includes domestic bank debt, bilateral debt and intra-government debt. Approximately $250 million, the rest of its debt load, is made up of multilateral debt and Treasury billions, neither of which are subject to the restructuring, White Oak said.
St Kitts and Nevis, with a population of about 50,000 and Queen Elizabeth II as its head of state, had an overall debt-to-gross domestic product ratio of close to 200 percent, putting it above the 160 percent level for Greece before its own debt swap initiated in the last week.
Yes, you read that right. Before defaulting, St. Kitts had a debt to GDP of about 200%!
There are a few countries which have weathered the initial crisis fairly well. One of those countries is Trinidad, which is a major producer and exporter of oil and natural gas. Many major multinational oil giants have made substantial investments in Trinidad. Suriname and Guyana are also rich in natural resources as well (Suriname has been bringing in foreign investors to develop gold mines), and Suriname’s government even worked to reduce its debts, which is something that is rare these days. Unfortunately, commodities and oil prices have been in steep decline since before 2015, and these countries have all quickly followed prices down into decline and in Trinidad’s case recession.
Like most of the rest of the Caribbean, these countries have serious problems with poverty, government mismanagement, and corruption, though the situation in regards to that is worse in Suriname and Guyana than Trinidad.
The Dominican Republic’s economy is probably the region’s only real remaining success story. The country has a diversified economy and is not heavily dependent on the success of just one or two industries:
SANTO DOMINGO, Dominican Republic (AP) — The economy of the Dominican Republic grew 7 percent last year and established itself as the most robust in the Latin American and Caribbean region, officials said Wednesday.
Central Bank Governor Hector Valdez credited in part the drop in international oil prices and the strengthening of the U.S. economy for the economic growth, which he said helped generate more tourism and remittances for the Dominican Republic.
The GDP grew 7 percent for the second consecutive year, according to central bank figures, with help from strong performances in construction, tourism and banking, he said.
I’d like to thank everyone who took the time to read this post. It was much lengthier than I intended for it to be, and a lot of work went into it. This could have been much longer, and there are some other interesting issues in this topic I could have talked about, but at some point I had to call it quits. I don’t think the coming posts on the situation in the US territories will be quite this long!
Some of the sources I used for the background information, beyond my own knowledge and memory: http://repositorio.cepal.org/bitstream/handle/11362/3173/LCcarL168_en.pdf?sequence=1
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