Regional Economic reprot _2_

Regional Economic Developments Reflecting continuing growth in economic activity from 2004 and 2005, unemployment rates generally declined, leading to some wages pressure, particularly in the construction sector, and to a continuing movement of labour to those countries experiencing high rates of growth. The rise in real sector activity was also reflected in an improvement in government revenues, which, coupled with efforts to improve tax administration and tax compliance, offset higher spending on social and physical infrastructure and on recurrent expenditures; as a result, fiscal outturns improved noticeably in most countries, although debt levels also increased in absolute terms as overall fiscal deficits were generally in evidence, and as countries borrowed to fund the capital programmes which generated the deficits. Despite a rise in financial system credit in most economies,indications are that there was still substantial excess liquidity in parts of the region, as deposit growth remained firm. Monetary authorities opted to raise interest rates as part of the effort to contain the growth in credit and relieve pressure on foreign reserves, and this was in step with the continued slow upward movement in international interest rates. The current account of the balance of payments deteriorated during the year as strong import demand, in line with the expansion in economic activity, outpaced growth in travel receipts; although a substantial portion of the expenditure was financed by foreign inflows, leading to a rise in gross reserves holdings across the region. Real Output Strong economic growth in CDB’s BMCs in 2006 was led by expansion in tourism and construction, and supported by agriculture, business and financial services, and manufacturing; in Trinidad & Tobago Regional Economic Developments Overview Macroeconomic conditions were generally good in CDB’s borrowing member countries (BMCs) in 2006, as a high level of external and domestic demand continued to drive expansion in the region. The main contributions to economic growth across the region came from tourism and construction activity, although growth in business services and in agricultural output was important in a few countries. In Trinidad and Tobago, petroleum-related activities were the main drivers, although non-petroleum operations expanded strongly as well. The contribution from tourism came despite moderate rates of expansion in the number of long-stay arrivals and a decline in the number of cruise visitors, and reflected increases in visitor expenditure. Construction sector activity was driven by a combination of factors, including reconstruction from past hurricane damage, investor expectations of continuing growth in tourism, high domestic demand from prospective home-owners and from the business sector given a favourable medium-term outlook and active credit marketing by financial institutions, and by high levels of public sector investment, with the increase in spending by the public sector in some countries being partly driven by the need to improve facilities and infrastructure – particularly in relation to transportation and competition sites – in anticipation of the cricket World Cup competition early in 2007. This performance, however, took place within the context of generally higher prices owing to elevated oil prices, and in some countries, supply disruptions in the provision of agricultural commodities and higher tariff levels. 6 CDB Annual Economic Review 2006 petroleum-related activities were a major contributor. With the exception of Montserrat, where heightened volcanic activity led to a reduction in economic activity, indications are that all other BMCs exhibited growth in 2006, with high rates recorded in Anguilla, Antigua and Barbuda, the British Virgin Islands, Trinidad and Tobago, and the Turks and Caicos Islands. Preliminary indications are that growth rates accelerated in nine economies while slowing moderately in seven. The tourism industry, following some slowing in growth in 2005, expanded in 2006 benefiting from a strong global economy, local marketing efforts and increased airlift; while in construction, preparations for CWC 2007 provided further support for an already vibrant sector. The manufacturing and agricultural sectors, while continuing to be plagued by high operational costs and unfavourable terms of trade movements, nevertheless were able to show some improvement in 2006. In agriculture, while some of the growth reflected a turnaround from the previous year’s unfavourable weather conditions, efforts by governments to expand existing facilities and provide support for farmers to improve agricultural practices contributed to expansion as well. With respect to manufacturing, the sector was able to capitalise on intensified intraregional and external demand to boost output levels substantially during the year, while the financial services industry was able to benefit from enhancements to the legislative and regulatory framework as well as ongoing marketing efforts. With the exception of Trinidad and Tobago, elevated oil prices remained a challenge for most economies, which coupled with other inflationary pressures are likely to have constrained output growth in 2006. Tourism The tourism industry was one of the three main contributors to growth in the region in 2006, following continuing expansion in recent years. Strong growth in the region’s main source markets, coupled with domestic efforts to improve the attractiveness of destinations, marketing, and air access, led to the continuing growth in industry performance. At the same time it should be noted that increased visitor expenditure was an important element in industry growth, since overall expansion in the number of arrivals was relatively modest, and since cruise visitor arrivals declined in many jurisdictions. With respect to long-stay arrivals, available source market data for BMCs suggest that while all markets performed well, the US and the Canadian markets were exceptional. The performance of the European market, excluding the UK was good; arrivals behaviour from the UK was mixed across the Regional Economic Developments region. Cruise tourism performance continued to be adversely affected by a number of factors including high fuel costs, changes in cruise routes, and a dampening of the industry segment’s performance during the year. Agriculture There was some improvement in agricultural sector performance in 2006, largely reflecting favourable weather following the adverse conditions of the previous two years. In addition, there appeared to be greater public sector involvement in 2006 through the implementation of projects designed to improve competitiveness and agricultural support services. Enhancements to agricultural infrastructure through better drainage and irrigation, and modernisation to existing facilities along with improvements in husbandry practices and seed quality also contributed to the improved performance during the year. The prospects for sugarcane, however, remained uncertain, with traditional sugar production facing worsening export price prospects as a result of import regime changes in Europe, while domestic efforts to utilise sugarcane in alternative ways, calculated to increase final value-added, continued. Construction Regional construction activity remained buoyant in 2006 as public and private sector projects proceeded apace. Preparations for the Cricket World Cup competition provided a considerable part of the impetus for activity during the year, although high levels of activity could also be traced to residential demand and to non-cricket-related business and tourism demand Hotel, condominium and villa construction dominated activity in the private sector, while, in the public sector, work included, but was not restricted to, improvements to road infrastructure, air and sea-ports enhancement, and refurbishment of sports stadia. Other public sector work included expanding the housing stock, hospital services, flood mitigation activities, and improving arrangements for the delivery of general government services to the public. The sector experienced difficulty from time to time during the year as a result of cement supply inadequacies. Manufacturing There was some output growth in the manufacturing sector in the region during the year, although the sector continued to provide major contributions to output, employment and incomes only in the major economies and in the larger countries of the region. The growth which occurred was fuelled by increased regional and international demand, with domestic demand in some countries being encouraged by “buy-local” campaigns, and by other forms of public sector support. In particular, there appeared to be some CDB Annual Economic Review 2006 7 increased market penetration in the US, particularly for petrochemicals, electronic components, data services and high-end wooden products. Mining and Quarrying Available data suggest that regional mineral production turned in a mixed performance in 2006. In Guyana, sector output continued to show the effects of the closure of a large gold producer, consequent on the completion of ore extraction from its main mining sites. However, product declarations from small and medium sized firms suggest an expansion in their operations, fuelled by rising prices. The bauxite industry fared better, showing signs of growth in both Jamaica and Guyana on account of favourable international demand. In Guyana this occurred at a slower pace than in 2005, as a fall in prices led to the closure of a major producer of calcined bauxite. This was partially offset, however, by increases in the production of chemical grade and metal grade bauxite as another major player entered the market. Production of alumina in Jamaica, however, is likely to have declined marginally. In Trinidad and Tobago, the energy sector continued its rapid expansion, spurred on by high oil prices and ongoing exploration. Growth in this sector has been mainly attributable to strong performances in the exploration and production,refining and petrochemical sub-sectors. Small quantities of oil were discovered in Belize, and production for export to the US commenced during the year. Offshore Business Services Indications are that the regional international business and financial services sector continued to build on past gains and expanded further in 2006, as evidenced by a rise in the number of licenses and an increase in registration fees. While this would have reflected the favourable external environment, efforts at the local level to enhance the attractiveness of the jurisdictions also contributed to the overall outturn. During the year, work continued on improvements to the region’s legislative regime with the passage of new legislation and refinements to its regulatory structure. There was also some evidence of product diversification and consolidation in the sector, with the establishment of new investment vehicles such as SMART funds in the Bahamas,and mergers particularly in the areas of banking and trust companies, which offered new scope to realise operational efficiencies. Prospects The outlook for regional economies appears to be favourable in 2007. Tourism activity is expected to benefit from the hosting of the Cricket World Cup competition in the first half of the year, although, given the size of the undertaking, the final outcome may not be easily predictable. While construction sector activity is projected to slow somewhat as a number of related cricket investment projects are completed, other public and private sector projects currently underway or about to commence will fill the slack in the short- to mediumterm; and the expected marketing benefits should drive visitor arrivals. There are areas of risk, however. While tourism has become the major income, employment and growth driver in the region, many BMCs have in effect substituted a past dependence on a single industry, sugar or bananas, for a new one, tourism. The consequences of tourism dependence were evident in the immediate aftermath of 9/11, and, more particularly, during the months preceding the terrorist attack when the US economy contracted and some Caribbean governments thought it necessary to provide special assistance to the industry. Secondly, the industry is extremely sensitive to the quality of environmental management; and it is not always clear that environmental issues, and the associated disaster management issues, are being given the attention that is commensurate with the contribution of the industry to the economic and social well-being of countries. Concerns related to the possible effects of global climate change on the industry will also need to be explored. Perhaps even more critical are the increasing signs of social instability, evident in the steady rise in the incidence of violent crime across the region; in an increasing disaffection, particularly among male youth, with education; in decreasing levels of tolerance and courtesy; and in increasing unwillingness to seek excellence in work performance. While there is a clear link between innovation and problem-solving, on the one hand, and freedom to explore and to imagine, on the other, there is a increasing need for institutional arrangements to stimulate and motivate creativity in the region, and to channel the resulting social energies into pathways which are productive. The agricultural and manufacturing sectors will continue to be challenged by competitiveness and productivity issues, particularly as trade liberalisation and globalisation processes evolve. The improved competitiveness and production flexibility that is sought for these and other sectors will be achieved through the industry restructuring that is a critical part of the economic transformation to be attained through the Regional Economic Developments 8 CDB Annual Economic Review 2006 two currently ongoing regional integration processes, one affecting the OECS sub-region, the other affecting the wider CARICOM region. Significant effort will be required to ensure that the benefits in fact flow from integration; and a great deal of care will be required from the OECS countries and from the wider CARICOM grouping to ensure that the two sets of initiatives do not develop into areas of conflict for each other. Focused attention to fiscal and debt management will be critical, particularly given the economic and social adjustments that will need to be made, and at a faster pace than that to which we have traditionally been accustomed. Regional decision-makers, however, are well-aware of the issues, and it is the expectation that the opportunity provided by the current level of economic performance will be seized, and that the appropriate decisions will be taken and expeditiously implemented. Regional Economic Developments CDB Annual Economic Review 2006 9