DeLisle Worrell Caribbean Centre for Money and Finance March 2009

1. The Impact of the Global Crisis, the Responses of Caribbean Governments, and the Choices Available to Caribbean Business DeLisle Worrell Caribbean Centre for Money and Finance March 2009

2. I will argue that .. • The Caribbean just started to feel the effects of the massive global economic hurricane • That hurricane strengthened suddenly to Category 5 in mid-Sept 2008, it continues to rage, and the end is not yet in sight • Caribbean gov’ts are trying to cope with the impact, within their means • Caribbean business should be in hurricane protection mode, until the storm is over, and we can assess the damage

3. In Sept 2008 a manageable financial crisis became an uncontrolled economic disaster • By mid-2008 the world financial system was in deep crisis, but the real economy appeared sound • On Sept 15, Lehman Bros was allowed to fail • That triggered calls on guarantees by AIG of securities issued by Lehman • US gov’t forced to lend to prevent AIG’s collapse • Seniority of US gov’t loan depressed AIG’s shares by 40% overnight, triggering world-wide depression • Johnson (2009)

4. How the outlook has worsened since Sept 2008 • World economy expected to grow by < 1%; now expected to contract by 2 – 3% • US job losses < 1 million; now approaching 3 million • US economy expected to recover in 2nd ½ of 2009; now nobody knows • Companies with moderate leverage and good liquidity expected to manage on their own; now even the most conservative need gov’t assistance

5. Impact on the Caribbean to Date • Tourist arrivals below comparable period one year earlier since Q4 of 2008 • A major regional financial conglomerate & a small Antiguan bank have been intervened • The Jamaican exchange rate depreciated about 20% • Regional stock exchange indices fell drastically, but they are small • However, foreign exchange reserves did not decline

6. Worse is expected • Most Caribbean economies are expected to contract in 2009 • In the exceptional cases where growth is expected, it will be slower than in 2008 • Demand for tourism, manufactures and mineral exports expected to fall • FDI and foreign borrowing will be lower than in 2008 • Unemployment rates to increase • Foreign exchange reserves expected to decline

7. It could be much worse if recovery in North America and Europe is delayed • Monetary policy has been taken to the limit in the US, UK and Japan, with no effect • While it is essential to prevent financial systems from collapsing, cash injections to the financial system will have no impact on credit, because there is no demand for credit from households (whose jobs are at risk) or businesses (whose markets are collapsing)

8. The uncertain outlook for North America and Europe, continued • The expenditures on job creation have so far resulted in few new permanent jobs, compared to the rate at which jobs are being lost, so economies remain in a downward spiral • Knowledgeable estimates suggest that the fiscal stimuli so far announced are significantly less than required (businesses and households are attempting to save more than the amount that gov’ts intend to spend, so total spending will continue to fall) • As of today, things are still getting worse

9. There is insufficient information about major sources of risk to the Caribbean financial sector • Risks arising from difficulties experienced by foreign owners (AIG, Stanford, losses of some Canadian banks) • Risks of contagion via conglomerate networks (CL Financial; 8 of the 10 largest conglomerates listed on regional stock exchanges are financial) • Lack of timely information reporting by nonbanks, which are a large % of financial assets in Jamaica and T’dad & Tobago

10. We cannot assess the extent of the economic impact on the Caribbean until the hurricane passes • Tourist bookings are down, but how much worse they will become is unclear • Investment in the tourism sector continues to fall • The future trend in commodity prices is very unclear, even in the near term • There will be foreign reserve losses in 2009, but the extent depends on the unknown factors

11. Caribbean gov’t responses • Support for export producers and providers of tourism service • Spending designed to protect living conditions of the most vulnerable • Intervention of financial institutions

12. Limitations on gov’t responses • Because of the high import content of consumer and investment spending, any additional spending will result in an even greater loss of foreign exchange. Too low a level will imperil exchange rate stability • No Caribbean country is limited in its ability to intervene the financial sector, because that results in no expenditure, merely a switch in ownership of assets

13. What advice can an economist offer to businessmen? • Before you can begin to think about the future you have to survive the current global economic hurricane • It is too late to prepare (reduce debt, cut obligations, increase liquidity). You are constrained to craft your survival strategy with what you have • Eliminate any spending or obligations that are not vital to survival as soon as that may be done without prejudice • Re-evaluate the situation continuously; the longer the leading economies take to get back on their feet the more drastic survival strategies will need to be

14. It is becoming clear what activities are socially desirable and environmentally necessary for the future • Human development – health, education, sanitation • Alternative energy • Energy conservation • Recycling and reusable materials • Cultural heritage & development • Public transportation, especially rail & buses • Etc

15. But major social, economic and psychological changes are not in place • The pricing and distribution system does not favour recycling, alternative energy or conservation • The global investment in the infrastructure of fossil fuel production, distribution and use is enormous. Alternative energy has no chance of being competitive • Public preferences for wasteful and environmentally destructive practices are well entrenched

16. Offering unrealistic advice will not make things better • Focus on getting past the hurricane alive, however long it lasts • Stick to what you know best, or something very close to it • If you decide to look to activities for the future, secure heavy gov’t backing • Even so, take no new initiatives until the hurricane passes, unless you have enough of your own resources to survive the storm and make new investment