Publish in Perspectives - Wednesday, April 15, 2020
The Westin Puntacana Resort & Club in Punta Cana in the Dominican Republic, which was inaugurated in 2013. (Photo: Dominican President's Office)
Coronavirus hits Central America, Caribbean via tourism, remittances.
Central American and Caribbean sovereigns are particularly vulnerable to the expected fall in remittances and tourism revenues from the spread of coronavirus.
This will affect growth, public finances and external finances simultaneously, on top of the impact of national policies designed to contain the virus. Some relief will come from lower oil prices.
Fitch rates all Central American sovereigns other than Honduras as well as Jamaica, Dominican Republic and Aruba.
The tourism industry was among the first to be affected by the health crisis and the impact may be long-lasting. The median Fitch-rated country in the region receives from tourism the equivalent of 8 percent of GDP. Fitch expects that the effect on the balance of payments will be tempered by the high import content of the tourism industry, particularly in places where “all-inclusive” is a significant or even majority part of the sector (Aruba, Jamaica, Dominican Republic).
Remittances will face downward pressure as social distancing measures affect the U.S. service sector. The median Fitch-rated country in the region receives from remittances the equivalent of 10 percent of GDP. Remittances to Latin America and the Caribbean fell 15 percent in 2009, the last recent year with a comparably large output contraction in developed markets.
Jamaica is exposed to alumina and bauxite prices (exports were 6 percent of GDP in 2018), which could come under persistent pressure if China’s manufacturing slowdown is prolonged.
All Fitch-rated sovereigns in the region are net importers of oil, so lower oil prices could temper but will not offset the loss in foreign currency revenues. For example, net oil imports in Jamaica totaled US$1.2 billion in 2018, but this is less than one-half of tourism earnings (US$3.1 billlion).
Exchange rates have been more stable than those of larger LatAm economies, partly because smaller economies with less-developed capital markets are less exposed to portfolio flows. Pressure on currencies could build as foreign currency receipts from remittances and tourism fall.
Central banks have larger international reserves than in 2008 to meet extra demand for foreign currency. Countries with a U.S. dollar peg (Aruba) or with stabilized exchange rate arrangements (Costa Rica, Dominican Republic, Nicaragua) could see larger pressures on their reserves than countries with floating exchange rates (Guatemala, Jamaica). Dollarization will also constrain El Salvador and Panama’s monetary policy responses.
RESTRICTED SCOPE FOR RESPONSE
As elsewhere, governments are responding to the crisis with expansionary fiscal and monetary policies and regulatory easing. Some central banks have cut policy interest rates (Costa Rica and Dominican Republic by 100 bp, Guatemala by 50 bp). El Salvador announced a three-month moratorium on utility bills. Costa Rica has legislated for a three-month moratorium on some taxes including VAT, business income tax and customs duties. Panama, Jamaica and El Salvador have announced conditional cash transfers to those most affected by the closure of non-essential businesses. El Salvador has suspended its fiscal rule and other countries with similar rules (Costa Rica, Jamaica and Panama) are likely to follow.
However, the scope for policy responses may be restricted. Most countries have increased their debt-to-GDP ratio since 2008, giving them less space for fiscal expansion. Nicaragua has relatively benign fiscal metrics (in 2019 debt-to-GDP was 46 percent and deficit-to-GDP 0.5 percent) compared with ‘B’ category peers, but external financing options are constrained after the political unrest of April 2018 and by U.S. sanctions in the Nicaragua Human Rights and Anticorruption Act of December 2018.
This article is based on a non-rating action commentary from Fitch Ratings.