Caribbean Property & Investment Review — Caribbean Summer Outlook, Elevated Oil Prices, T&T Windfall & Jamaica Energy Burden | May 2011

Caribbean Property & Investment Review | Edition 183 | Published 3 May 2011 | Coverage period: 3 April – 2 May 2011

Morning Briefing

• Brent crude holds above US$120 per barrel as Arab Spring tensions keep global oil markets elevated, providing a significant revenue windfall for Trinidad & Tobago’s energy sector.
• Jamaica’s foreign-exchange reserves steady at approximately six weeks of import cover, though the island’s near-total dependence on imported petroleum keeps energy costs punishing for households and businesses alike.
• Barbados reports encouraging early-season tourism bookings for summer 2011, with North American arrivals partially offsetting softness in the British market.
• The CARICOM Single Market and Economy (CSME) framework draws renewed attention as regional economists argue that deeper integration could buffer individual island economies from commodity-price swings.
• The Eastern Caribbean Central Bank (ECCB) maintains its currency peg and projects modest growth of 1.5–2.0% for the Eastern Caribbean Currency Union (ECCU) in 2011, contingent on hurricane-free peak season.
• Regional real-estate professionals report growing interest from North American buyers in Barbados, St Lucia and the Turks & Caicos, with enquiries up roughly 12% compared with the same period in 2010.

Oil Prices and the Caribbean Divide

The Arab Spring uprisings that swept North Africa and the Middle East from late 2010 onwards have redrawn the global energy map in ways that few Caribbean planners anticipated. By early May 2011 Brent crude was trading in the US$120–125 range, roughly 40% above its year-earlier level. For Trinidad & Tobago, which exports liquefied natural gas and petrochemicals rather than crude itself, the knock-on effect has been broadly positive: LNG contract prices are partly linked to oil benchmarks, boosting government revenue and underpinning the fiscal arithmetic that funds social programmes and infrastructure spending.

The picture is starkly different for the oil-importing majority of Caribbean states. Jamaica, which generates roughly 90% of its electricity from imported petroleum-based fuels, faces an energy bill that has ballooned by an estimated J$15 billion above 2010 levels in annualised terms. The Jamaica Public Service Company has been forced to pass through fuel-cost increases to consumers, compressing the disposable income of households already squeezed by an IMF-supervised austerity programme. Barbados, Belize, Grenada and most of the Eastern Caribbean face similar dynamics, with petroleum import bills eating into already thin external-payments buffers.

Caribbean energy analysts argue that the medium-term answer lies in accelerated diversification toward renewable sources. Several islands — Barbados, St Kitts, Dominica and Montserrat — have active geothermal or solar programmes, but the scale remains modest relative to overall energy demand. The Inter-American Development Bank and the Caribbean Development Bank have both signalled readiness to co-finance renewable projects, yet project-preparation capacity at the country level remains a binding constraint. Until that gap is closed, the Caribbean’s exposure to Middle Eastern and North African political volatility will remain a structural vulnerability.

Trinidad & Tobago: Managing the Windfall

Trinidad & Tobago’s Prime Minister Kamla Persad-Bissessar, approaching her first full year in office, faces a challenge familiar to natural-resource-rich governments worldwide: how to husband a revenue windfall prudently rather than let it fuel inflationary public spending. The People’s Partnership government has committed to restoring fiscal balance after the deficits accumulated during the 2008–2009 commodity-price downturn, and the current oil-price environment provides welcome headroom to do so without imposing fresh austerity.

The Heritage and Stabilisation Fund, T&T’s sovereign wealth vehicle, has seen inflows resume after drawdowns during the recession years. Finance Ministry officials have indicated a target of rebuilding the fund toward the TT$20 billion mark by the end of fiscal year 2012, a level they regard as providing meaningful insulation against a future price decline. Simultaneously, the government has ring-fenced capital spending on road rehabilitation, the Point Fortin highway extension and social-housing programmes as priority uses of the windfall revenue, aiming to generate employment and improve competitiveness without simply enlarging the recurrent expenditure base.

The energy sector itself remains dominated by Atlantic LNG and the major international oil companies, but the National Gas Company and Petrotrin continue to expand their downstream roles. Investment in petrochemical capacity — particularly ammonia and methanol plants — is ongoing, and several new industrial-park berths at Point Lisas are expected to begin construction before year-end. Tobago, meanwhile, is making a renewed pitch for tourism investment, with the Tobago Tourism Agency highlighting the island’s uncrowded beaches and eco-tourism credentials to European and North American travellers deterred by the busier mass-market destinations.

Jamaica: Fiscal Reform and Property Market Resilience

Jamaica’s National Democratic Movement government, led by Prime Minister Bruce Golding, continues to navigate the demanding terms of its IMF Extended Fund Facility, now approaching the end of its second year of implementation. The programme requires primary fiscal surpluses, public-sector wage restraint and a gradual reduction in the public-debt-to-GDP ratio from its elevated level of over 130%. Progress has been measurable if uncomfortable: the fiscal primary surplus target was met in the most recent quarterly review, allowing the IMF to release the next tranche of programme funds.

Against this backdrop of macroeconomic belt-tightening, Jamaica’s property market has shown unexpected resilience. Residential transactions in the Kingston metropolitan area remained broadly steady in the first quarter of 2011 compared with a year earlier, according to data compiled by the Real Estate Board. The New Kingston and Liguanea commercial corridors continue to attract tenant interest from the business-process outsourcing sector, which has become one of the fastest-growing employers on the island. Several BPO operators have taken on additional office space in Kingston and Montego Bay as North American clients expand their outsourcing footprint.

The tourism sector provided an encouraging early read for summer. Montego Bay’s Sangster International Airport reported passenger numbers for the January–March quarter running approximately 8% ahead of 2010 levels, and several all-inclusive resorts reported strong advance bookings for July and August. The Jamaica Tourist Board has been actively marketing the island in second-tier North American cities — Atlanta, Toronto, Dallas — where yield per visitor tends to be competitive, and early returns suggest the campaign is gaining traction.

Caribbean Real Estate: Summer Preview

With the Northern Hemisphere spring well under way, Caribbean real-estate professionals are reviewing bookings data and market signals ahead of the critical summer selling season. The consensus emerging from agency networks across Barbados, St Lucia, Antigua, the Cayman Islands and the Turks & Caicos is one of cautious optimism: enquiry volumes are running ahead of 2010 levels but remain below the pre-2008 peak, and the conversion rate from enquiry to signed contract continues to be depressed by tighter mortgage-lending standards in the United States, United Kingdom and Canada.

The luxury segment — properties priced above US$1.5 million — is showing the greatest activity, as cash buyers from North America, the United Kingdom and, increasingly, Latin America seek second-home investments in politically stable jurisdictions with established legal frameworks. Barbados’s platinum coast, St Lucia’s north and the Cayman Islands continue to attract this demographic. Several developers in these markets report that the nationality mix of buyers has shifted: Latin American purchasers now account for a meaningfully larger share than five years ago, a reflection of rising high-net-worth wealth in Brazil, Colombia and Mexico.

At the mid-market level, demand remains constrained. Financing for non-resident buyers from local Caribbean banks is available but typically limited to 50–60% loan-to-value at rates of 7–9%, which effectively prices out buyers who require significant leverage. Several developers have responded by offering vendor-financing arrangements or instalment purchase schemes that allow buyers to spread payments over three to five years, in effect substituting the developer’s balance sheet for the bank. This innovation has opened up a segment of demand that would otherwise have remained latent, though it concentrates credit risk on developers themselves.

Caribbean Leaders This Month

Kamla Persad-Bissessar, Prime Minister of Trinidad & Tobago, marked the approach of her first anniversary in office with a series of policy announcements focused on energy-revenue management and social housing. Her People’s Partnership coalition has maintained reasonable parliamentary cohesion despite differing priorities among its constituent parties, and the PM’s personal approval ratings remain competitive, buoyed by the revenue-rich environment that elevated oil prices have created.

Bruce Golding, Prime Minister of Jamaica, continued to steer his country through the demands of IMF conditionality while managing expectations on the pace of economic recovery. His government faces a difficult political environment — unemployment remains stubbornly high and crime statistics have not improved as rapidly as the public would wish — but the fiscal programme is on track, providing a degree of credibility with investors.

Freundel Stuart, Prime Minister of Barbados, consolidated his position following the unexpected elevation to the role upon the death of David Thompson in October 2010. His Democratic Labour Party government is managing the island’s tourism-dependent economy carefully in the context of elevated energy costs and softer European visitor arrivals, with the Ministry of Finance emphasising fiscal prudence and targeted infrastructure investment.

Dean Barrow, Prime Minister of Belize, pursued his government’s dual agenda of energy independence and fiscal consolidation. Belize’s discovery of additional offshore oil reserves has provided modest but welcome additional revenue, and the government continued negotiations with international investors over the long-term development of those resources while also advancing a programme of solar and wind energy projects for domestic power generation.

Roosevelt Skerrit, Prime Minister of Dominica, emphasised the island’s geothermal potential in meetings with Caribbean Development Bank officials during the coverage period. Dominica’s volcanic geology positions it as the Caribbean’s most credible candidate for large-scale geothermal generation, and the PM has been actively courting international development-finance institutions to underwrite the upfront capital required to prove up and develop the resource.

Tillman Thomas, Prime Minister of Grenada, focused on rebuilding the island’s agricultural export sector, which was damaged by Hurricane Ivan in 2004 and has not fully recovered. Nutmeg and cocoa production — the traditional pillars of Grenadian export earnings — have been supported by replanting programmes, and the government has been working with regional development partners to develop agro-processing capacity that adds value before export.

Winston Baldwin Spencer, Prime Minister of Antigua and Barbuda, addressed ongoing fiscal pressures as the government worked to reduce arrears on public-sector salaries and supplier payments that accumulated during the global recession. Antigua’s heavy dependence on tourism makes it acutely exposed to economic conditions in the United States and United Kingdom, and the government has been diversifying its marketing efforts toward emerging source markets including Brazil and China.

Denzil Douglas, Prime Minister of St Kitts and Nevis, continued to advance the island’s debt-restructuring negotiations with creditors, a process that has been underway since 2010 and is expected to result in a significant reduction in St Kitts’s debt-to-GDP ratio from its unsustainably high level of over 150%. A successful restructuring would free up fiscal space for development spending and improve the island’s creditworthiness for future borrowing.

Looking Ahead

The next two months will be dominated by two intersecting dynamics: the further evolution of Arab Spring oil-price impacts on Caribbean energy budgets, and the opening of the Atlantic hurricane season on 1 June. Forecasters are already signalling that the 2011 season could be above normal in activity, a prospect that focuses minds in insurance markets, tourism boards and property registries across the region. Islands that experienced significant infrastructure damage from Hurricane Tomas in late 2010 — particularly St Lucia and St Vincent — will be watching the forecast with particular attention.

On the investment side, the summer months typically see the peak of Caribbean real-estate enquiries from Northern Hemisphere buyers taking holidays in the region and using the opportunity to view properties of interest. Developers and agents who have invested in marketing during the spring will be hoping to convert that pipeline into signed contracts by August and September. The strength of that conversion rate will offer the clearest signal yet as to whether the Caribbean property market is genuinely recovering or merely stabilising at a lower level of activity.

CARICOM heads of government are expected to convene for their mid-year inter-sessional meeting, where the agenda is likely to include energy-security policy, the status of CSME implementation and the region’s collective approach to international climate-change negotiations. The outcomes will bear watching for any signals of deeper regional economic integration — a development that Caribbean investors and property buyers have long wished for but which has proved elusive in practice.

Caribbean Property & Investment Review is published on the first business day of each month. Coverage period for this edition: 3 April – 2 May 2011. Next edition publishes 3 June 2011.

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