The Challenge of High Debt and Growth in the Caribbean

Nita ThackerPresentation for the Caribbean Growth Forum

June 18, 2012Western Hemisphere Department

International Monetary Fund

What is the current picture of debt in the Caribbean?

What has led to the accumulation of debt stocks?

What has helped sustain high debt stocks over time?

What is the effect of high debt (i.e., on growth)?

What can be done?

Outline

Growth in the Caribbean has been lower than in other countries

CountriesAverage Growth

Average Std. Dev.

Caribbean 3.3 4.6ECCU 4.1 4.4Non ECCU Caribbean 2.6 4.7

Commodity Exporters 1/ 2.3 5.3Other Caribbean 2/ 2.9 4.3

Tourism intensive Caribbean 3/ 3.6 4.4Emerging Markets 3.9 5.7Latin America 3.5 4.3Non Caribbean Small Islands 3.3 5.1

Sources: World Economic Outlook; and IMF staff calculations.1/ Trinidad and Tobago, Guyana and Suriname.2/ The Bahamas, Barbados, Jamaica and Belize.3/ Antigua and Barbuda, Bahamas, Barbados, Grenada, St. Kitts and Nevis, St. Lucia.

GDP Growth and Volatility(Based on real GDP growth rates 1971-2011)

Caribbean countries have lost ground since the1990s, with the exception of commodity exporters

1.5

2.0

2.5

3.0

0.3

0.5

0.7

0.9

1.1

1970 1975 1980 1985 1990 1995 2000 2005

Ratio to Caribbean (non-ECCU) (left scale)Ratio to emerging and developing

Ratio to small islands

ECCU ¹

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.6

0.8

1.0

1.2

1.4

1.6

1970 1975 1980 1985 1990 1995 2000 2005

Ratio to Caribbean (non-commodity exporters) (left scale)Ratio to Latin America (left scale)Ratio to emerging and developing

Commodity Exporters ²

1.8

2.3

2.8

3.3

3.8

4.3

4.8

0.8

1.0

1.2

1.4

1.6

1970 1975 1980 1985 1990 1995 2000 2005

Ratio to Caribbean (non-other) (left scale)Ratio to emerging and developing Ratio to small islands

Other Caribbean ³

Source: IMF staff calculations.¹ Includes Antigua & Barbuda, Dominica, Grenada, St. Kitts & Nevis, St. Lucia, and St. Vincent & the Grenadines.² Includes Guyana, Suriname, and Trinidad & Tobago.³ Includes the Bahamas, Barbados, Belize, and Jamaica.

Caribbean: Per capita GDP (PPP) Relative to Relevant Comparators, 1970–2009

Public Sector Debt in the Caribbean is among the highest

0

20

40

60

80

100

120

140

160

180St

. Kitts

and N

evis

Jam

aica

Leban

on

Bar

bad

os

Gre

nad

aSe

ychel

les

Bel

ize

Egyp

tA

ntigua

and B

arbuda

St. L

uci

aSt

. Vin

cent an

d…

Dom

inic

aJo

rdan

Bra

zil

Guya

na

Pola

nd

Moro

cco

Uru

guay

Mal

aysi

aM

auritius

Bah

amas

, The

Arg

entina

Mex

ico

Tunis

iaPhili

ppin

esTu

rkey

Panam

aLa

tvia

Trin

idad

and T

obag

oC

ost

a Ric

aD

om

inic

an R

epublic

Surinam

e

Sources: IMF, WEO; and IMF staff calculations.1/ Average of Emerging Markets and Developing Economies.

Average 1/

Public Sector Debt in Selected Countries, end-2011(In percent of GDP)

The global crisis has led to a rise in debt in most countries

-15

-10

-5

0

5

10

15

Caribbean: Debt to GDP Change, 2009-11(In percent of GDP)

Sources: IMF, WEO; and IMF staff calculations.

Includes impact of debt restructuring operations

Over a longer period, primary deficits and interest costs are the main reason for debt accumulation

In the ECCU, large fiscal deficits and interest bills have contributed to debt accumulation, magnified by off-balance sheet events.

In the rest of the Caribbean, the impact of heavy interest bills dominates as a key contributor, followed by that of ad-hoc events...

-6

-4

-2

0

2

4

6

8

10

12

14

Real GDP Primary balance

(ex. grant)

Grants Interest Price effect

Other factors

Total increase

1991-97 avg 1998-04 avg2005-08 avg 20092010 2011

Sources: Country authorities; and IMF staff estimates.

ECCU: Contributions to Changes in Public Debt(In percent of GDP)

-8

-6

-4

-2

0

2

4

6

8

Real GDP Primary balance

(ex. grant)

Grants Interest Price effect

Other factors

Total increase

1998-04 avg 2005-08 avg

2009 2010

2011

Other Caribbean: Contributions to Changes in Public Debt (Sub title - Segoe UI - Size 18)

Sources: Country authorities; and IMF staff estimates.

High debt levels have been financed by domestic sources

Most often, domestic debt concentrates on securities, with some countries relying heavily on loans and overdrafts.

ATG

DMA GRD

KNA

LCAVCT

BHS

BRB

BLZ

GUY

JAMSUR

TTO

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150 200

Shar

e of dom

estic

deb

t to

tota

l (2010)

Total public debt to GDP (2010)

Total and Domestic Public Debt

Growth has been weaker in countries with higher debt levels..

ATG

BHS BRB

BLZDMA

GRD

GUY

JAM

KNA

LCA

VCT

SUR

TTO

-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120 140

Ave

rage

real

GD

P g

row

th, 2

009-1

1

Public Debt 2008 (percent of GDP)

Public Debt Burden and Real GDP Growth

Sources: World Economic Outlook; and IMF staff calculations.

Non-linear effects of Public Debt on Growth

-1

-0.6

-0.2

0.2

0.6

1

0 20 40 60 80 100 120

Cont

ributi

on o

f deb

t to

annu

al o

utpu

t gro

wth

(in

perc

ent)

Debt (percent of GDP)

Stylized Shape of the Threshold Effects of Public Debt on Growth

CaribbeanIndicativeTarget (60%)

30

High levels of debt have meant revenues have to be diverted to debt service payments

Debt Service Ratios(percent of revenues)

0

10

20

30

40

50

60

70

80

90

100

0

5

10

15

20

25

30

35

40

45

50

SUR TTO BHS GUY DMA VCT LCA BLZ ATG GRD BRB JAM KNA

Interest Payments, 2011

Total Debt Service, 2011 (right)

Debt (% of GDP)0% - 60%

Debt (% of GDP)61% - 90%

Debt (% of GDP)Above 90%

Past debt relief episodes have yielded mixed results

1/ Debt ratios for Antigua and Jamaica include projections. For comparison reasons with the old debt ratios, 2011 debt ratios for Dominica and Grenada use an estimation of the non-rebased nominal GDP.

1/ For Antigua and Jamaica debt service includes projections and t (before DS) refers to the year before debt restructuring.

Total Public Sector Debt(percent of GDP)

Debt Service(percent of GDP)

0

20

40

60

80

100

120

140

160

DMA (2004) GRD (2005) BLZ (2007) ATG (2009) JAM (2010)

t (before DS) t (after DS) Average 3 years after DS (actual) 2011

0

5

10

15

20

25

30

35

40

DMA (2004) GRD (2005) BLZ (2007) ATG (2009) JAM (2010)

t (before DS)

t (after DS)

Average 3 years after DS (actual)

2011

Reducing debt can be good for growth

EC

CU

Car

ibbe

an ..

.

Adv

ance

d E

...

Em

ergi

ng &

...

Wor

ld

0

1

2

3

4

5

6

0

1

2

3

4

5

65.3

2.0

3.2 3.2 3.22.7

1.5 1.6

0.81.1

Falling debtRising debt

Pe

r ca

pita

GD

P g

row

th

(Pe

rce

nt)

Real per Capita GDP Growth During Periods of Rising and Falling Debt, 1970–2007

Real GDP growth has tended to be higher in periods of declining debt

Reducing debt has a positive impact on growth, and the inverse is also true

-0.4

-0.2

0

0.2

0.4

0.6

-0.4

-0.2

0

0.2

0.4

0.6

ECCU Commodity exporters Other Caribbean

Growth if debt at 60 percent of GDPGrowth if debt at emerging and developing countries level

Caribbean: Effect of Debt on Growth ¹(Percent)

Source: IMF staff calculations.¹ Assumes 2009 debt-to-GDP levels drop (or increase) to 60 percent or 44.9 percent of GDP.

Fiscal consolidation Debt restructuring

◦ Lengthen maturity and lower interest cost◦ Debt-equity swaps◦ Debt-land swaps

Private sector led growth

Looking ahead

Thank you!