Solid growth and contained inflation predicted for Caribbean and Central America

Friday, February 15, 2019

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Following a recovery in 2018 after two years of underperformance, the Institute of International Finance (IIF) is projecting solid growth and contained inflation for 2019-20 across Central America and the Caribbean.

In a regional report on Central America and the Caribbean published on February 7, IIF reasoned that growth throughout the region will be supported by overall macroeconomic policy improvements.

Head of LatAm Research, Martin Castellano, also reckons that positive spillovers from the US economy - the region's main market—through trade, tourism, remittances, and investment would be somewhat less supportive in the coming years.

“Downside risks to the outlook are linked to weaker-than-expected global growth, increased protectionism, and policy slippages in some countries amid structural weaknesses that could result in lower capital inflows,” the report said.

JAMAICA GATHERING GROWTH MOMENTUM

A global association of the financial industry, with close to 500 members from 70 countries, IIF forecasts growth in Jamaica to remain close to two per cent this year supported by private consumption, before moderating somewhat in 2020.

The regional report, however, noted that downside risks in Jamaica are substantial.

“First, while a stronger fiscal position has helped reduce the public debt-to-GDP ratio, indebtedness remains significant. Fiscal slippage ahead of the February 2021 election, in the absence of an IMF programme, or weaker-than-expected activity amid a tougher external backdrop, could quickly lead to adverse debt dynamics,” it said.

It added that the economy is also vulnerable to higher oil prices due to a sizable energy import bill (28 per cent of total imports in 2018, up from 24 per cent in 2017) and weather shocks affecting the agricultural sector.

Finally, on the structural front, reducing still-high crime has been difficult despite solid employment growth and improved social conditions, the report read.

It warned that reinforcing policies to broaden access to credit, strengthen institutions, upgrade infrastructure, for which China has been an increasingly important financing source, and enhance the efficiency of state-owned firms would be key in the coming years.

Jamaica's economy gradually recovered following averaged growth of 0.5 per cent over the period 2010-17. GDP growth rose to about two per cent in 2018 from one per cent in 2017, propelled by robust external demand and increased confidence amid well-anchored macroeconomic stability.

The country's key growth engines were mining production, boosted by the reopening of the bauxite plant Alpart in mid-2017, construction, tourism, and remittances.

“Despite a still-wide current account deficit amid higher oil prices, the overall external position has remained stable. While unemployment has dropped to historically low levels in a context of controlled inflation, lifting private sector-led growth has been the main long-standing challenge,” IIF said.

It anticipates that the country's inflation will gradually converge to the central bank medium-term target of four per cent to six per cent this year as domestic demand continues to strengthen amidst accommodative monetary conditions.

REGIONAL GROWTH

Regionally, the uptick in average real GDP growth last year was driven by a rebound in the Dominican Republic, masking intra-regional divergence.

According to IIF, domestic factors dragged down activity in Costa Rica (policy uncertainty), Honduras (security conditions), and Panama (strikes in construction); while lifting it in the Dominican Republic (past monetary policy easing), Jamaica (mining output), and Trinidad and Tobago (natural gas production).

As several countries are transitioning to full-fledged inflation targeting regimes, inflation declined in 2018 to the lowest level since 2015. Enhanced monetary policy credibility has allowed central banks to avoid forceful tightening, leaving scope for further exchange rate flexibility in some cases.

Nonetheless, a gradual pick-up in inflation in 2019-20 due to strengthening domestic demand and downward pressure on currencies could require maintaining relatively high policy rates, IIF reported.

—Karena Bennett


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