Address to the St. Lucia Chamber of Commerce, Industry & Agriculture The Minister of Commerce, Business Development, Investment and Consumer Affairs, Honourable Emma Hippolyte President of the Chamber of Commerce, Mr. Gerard Bergasse Members of the Board of Directors of the Chamber Members of the Diplomatic Corps Permanent Secretaries of the various Ministries The President of the Caribbean Development Bank, Dr Warren Smith Captains of Industry, Members of the Media, Distinguished Ladies and Gentlemen, Good Morning to you all! I am indeed grateful for this opportunity to share with you a few perspectives on the performance of the St. Lucian economy, and its prospects for the near to medium term. Let me first say that the views expressed are consistent with that of my organisation, CariCRIS, unless stated otherwise. Macro-Economic Performance Starting with overall macro-economic performance, the St. Lucian economy can perhaps best be characterized by low economic activity and high unemployment. Economic activity continues to be negatively impacted by the lingering effects of the global financial and economic crisis of 2008, and as a result real GDP grew by an average of only 0.05% in the four years following the crisis.
Further, real GDP contracted by 1.2% in 2012; the main contributors to this decline being the Distribution, Communication and Construction sectors, which fell by 8.9%, 5.3% and 5% respectively. This performance, however, as dismal as it sounds, must be seen against what happened in the rest of the region, whereby real GDP contracted by an average of 1.7% in the OECS and 1.2% in the entire Caribbean over the same 4-year period. So I guess looked at in this context, St. Lucia comes out looking like a star! Looking ahead we expect economic activity in St. Lucia to remain more or less flat in 2013. The tourism industry, considered to be the main economic driver, suffered a 6.4% decline in total visitor arrivals in 2012, driven by a fall of 9.3% in cruise ship passenger arrivals and a 1.8% fall in stay-over arrivals. The fall in stay-overs was due largely to declines in arrivals from France, the United States and the Caribbean. Headwinds such as the ongoing economic challenges in the main tourism markets, the Air Passenger Duty in the United Kingdom, the loss of cruise ship calls and significant flight reductions into St. Lucia continue to impact the industry. Notwithstanding, visitor expenditure rose by 1.8% to just over US $570 million, which somewhat offset the overall economic impact of the lower arrivals. For the first half of 2013, total visitor arrivals are estimated to have slipped again by 0.5% on a comparative period basis, with a 4.9% increase in stayovers being offset by a 2% contraction in cruise ship passengers and a 38.6% drop in excursionists. Overall, CariCRIS expects total visitor arrivals in 2013 to also remain flat relative to 2012. Notably, activity in Agriculture, a significant source of foreign exchange and employment, increased by 8.4% in 2012 following three consecutive years of contraction. 2
This sector was severely impacted by the passage of Hurricane Tomas in 2010 with banana output in particular suffering tremendously from the storm and also from the onslaught of Black Sigatoka. The sector is expected to keep on growing in 2013 on account of continued recovery in both banana output and the output of other crops. Unemployment rates in St. Lucia continue to be very high at 20.6% in 2012 and 23.8% in the second quarter of 2013. Indeed, over the last five years the unemployment rate has averaged 19.9%. More importantly, structural unemployment, estimated at 17% is also very high, suggesting the need for more effective long-term solutions including specially tailored retraining and re-tooling programmes. The Price Level and Financial Sector Issues Turning now to the price level and financial sector issues, historically, inflation rates have been low in St. Lucia and are among the lowest in the OECS. In 2012 however, the rate of inflation increased to 4.2% from 2.8% in the preceding year. This increase seems to have been short-lived though, and the ECCB, in its June 2013 Economic and Financial Review, indicated that the Consumer Price Index fell by 0.8% in the first half of 2013 compared to an increase of 1.6% for the first half of 2012. Going forward, we expect inflationary pressures to continue to be curtailed, in line with the moderation in international commodity prices. Looking at the domestic banking sector, the minimum deposit rate of 3% set by the ECCB continues to contribute to a relatively stable interest rate environment, as evidenced by deposit and lending rates that have averaged 3.1% and 9% respectively over the last three years. Asset quality on the other hand, as measured by the ratio of non-performing loans to total loans, has been deteriorating since 2007 and slipped to 15.3% in 2012 from 13.2% previously, on account of the challenging economic environment and high unemployment levels. 3
It also exceeded the average NPL ratio of 14.8% for the ECCU, and 11.7% for the Caribbean, and this may continue to deteriorate moderately in 2014 given the weak prospects for economic growth for the region as a whole. This is not a good thing and attention must be placed on the capital adequacy of banks in the country to ensure there is enough of a buffer to weather this shock. Moderate Balance of Payments Performances Looking now at the external sector St. Lucia can be characterized by moderate balance of payments performances and a moderate reserves position by both OECS and regional standards. For the past four years St. Lucia has generated overall balance of payments surpluses that have averaged 1.8% of GDP annually. This is commendable and in 2012, the balance of payments surplus improved to 1.2% of GDP from 0.6% previously. The overall external balance is being driven by the surpluses on the Capital and Financial Account that have averaged 16.9% over the period 2009 2012. Further, net Foreign Direct Investment inflows grew by 10.7% in 2012, the first increase in six years. St. Lucia s external current account however a reflection of the country s competitiveness - has perennially been in deficit, averaging 17.9% over the last five years. The deficit improved in 2012 to 14% of GDP from 18.8% in 2011, with the 2012 outturn being one of the lowest in the OECS. Lower world commodity prices, particularly for fuel, along with increased banana exports, led to the improvement in 2012. The country s Gross international reserves improved every year for the last four years to US $384.6 million from US $258.4 million, up 25.9% from the prior year. Gross international reserves represented 5.9 months of import cover in 2012, compared to 4.8 months previously. That said, import cover was low when compared to the OECS average of 11.1 months and the regional average of 9.8 months for 2012. 4
Weak Fiscal Performances Leading to Rising Debt Ladies and Gentlemen, the real thorn in St. Lucia s side, and cause for rising concern is the country s weak fiscal performance and rising debt level. The government s fiscal operations reflect weak revenue growth, persistent fiscal deficits and rising debt levels on account of these deficits. For the last five financial years to FY2012/13, government s average annual revenue growth has been marginal at just 0.6% with wide fluctuations in between. Preliminary data indicates that in FY2012/13, total revenue fell by 7.6% to EC $845.7 million. More importantly, current revenue has fallen by an average annual rate of 0.3% over the same five year period, with preliminary data indicating a 5.2% decline to EC $792.8 million in FY2012/13. This slippage in revenue has occurred despite government s best efforts to simplify the tax system, improve the efficiency of collection and broaden the tax base through the recent introduction of VAT, and other prior interventions. Total expenditure on the other hand, has increased by an annual average of 7.9% over the 5-year period FY2008/09 to FY2012/13. Expenditure however did slow considerably in FY2012/13 to 2.3%, but mainly as a result of a contraction of 9.4% in capital spending, which had previously averaged annual growth rates of the order of 13%. Growth in current expenditure has also been high, averaging 7.9% over the same five year period, with growth in FY2012/13 accelerating to 7.9% from 4.6% previously. No doubt factors such as the global financial and economic crisis, high structural unemployment, the continued pursuit of counter-cyclical fiscal policy and the impact of Hurricane Tomas, all contribute in a material way to the pressures on government s revenue and expenditure. 5
Given the increases in total expenditure and corresponding weak revenue growth, the Government of St. Lucia has realized increasing fiscal deficits that have grown from 0.9% of GDP in FY2008/09 to 8.8% of GDP in FY2012/13, the highest in over ten years. The FY2012/13 deficit exceeded the OECS average of 1.9% and was among the highest in the OECS. Further, on account of the low growth in current revenue relative to current expenditure in FY2012/13, the government reported a deficit of 1.2% on the current account for the first time since FY2002/03. CariCRIS expects the fiscal deficit to deteriorate further and as such we believe that government s fiscal operations will exceed the budgeted deficit of 7.4% in FY2013/14. The high and rising fiscal deficits have had a corresponding impact on debt, both in terms of the overall debt stock, and also in terms of debt as a percentage of GDP. The heavy reliance on debt financing has resulted in a doubling of the public sector debt stock in the last ten years to EC $2.5 billion in 2012 from EC $1.3 billion in 2003. Over the last five years the ratio of total public sector debt to GDP has grown to 71.1% in 2012 from 55.4% in 2008. I should point out that at 71.1% Debt/GDP for 2012 was comparable to the OECS average of 73.6%, as well as our regional sample average of 71.3%. That said, although St. Lucia s Debt to GDP is within the median range for both the OECS and the wider Caribbean region, it is moving further and further away from the less than 60% benchmark that the ECCB requires its member states to achieve by 2020. Moreover, CariCRIS expects debt levels to continue to increase in the medium-term and projects debt/gdp to rise to the order of 76% in 2013. Regarding composition of the debt, there has been a distinct shift towards domestic debt which has increased steadily over the period 2007 2012 and now accounts for 53.9% of total public sector debt, up from 37.6% in 2007. 6
Meanwhile, external public sector debt has declined as a percentage of GDP over the same period to 32.8% in 2012 from 35.5% in 2007. The 2012 ratio is among the lowest in the OECS and compares favourably with CariCRIS regional sample average of 36.2%. The increasing overall debt levels have resulted in increased interest payments which grew by 14.6% in FY2012/13 to EC $121.2 million from EC $105.8 million in the prior financial year, and consumed 15.3% of current revenue. Prospects If the status quo continues, CariCRIS expects that over the medium-term, in the face of subdued economic activity, revenue would likely contract or grow sluggishly and the high dependence on debt funding is likely to increase. The expected rapid increase in the level of debt/gdp threatens St. Lucia s continued ability to meet its fiscal commitments in the medium term. As authorities strive to stimulate real GDP growth and stem the rise in unemployment levels all possible options need to be considered, including strategies to curtail discretionary expenditure. The success of efforts to improve the performance of the tourism industry, is, by and large, highly dependent on the medium to long-term economic prospects of the traditional source markets. As we all know the outlook for these economies can perhaps best be described as cautiously optimistic with major downside risks looming. Efforts to staunch the reduction in airlift capacity into St. Lucia, as well as enhanced marketing efforts both to traditional, and more importantly, new markets, are likely to provide some level of success. Despite the several efforts by government to reduce the high unemployment level through the introduction of a number of targeted programmes to the more vulnerable in society, unemployment remains high. Greater and more sustainable medium-term success in this regard would likely occur from the ongoing efforts to develop sub-industries within the agricultural sector such as agro-processing, farming and 7
fisheries. CariCRIS believes that the slight uptick in FDI inflows will continue, as work continues on a number of tourism related projects. These and other on-going projects related to government s public sector investment programme are likely to provide some temporary construction related jobs in the short-run. My own view is that greater engagement with and support of the SME sector should be pursued, so as to accelerate efforts to grow and diversify the wider economy. Ladies and Gentlemen micro, small and medium-sized companies are the engine of growth of any economy and properly primed they can deliver sustainable employment opportunities for the people, and generate valuable foreign exchange earnings. A greater focus on the development of this sector by the Government, including facilitating better access to finance and availability of more appropriate funding mechanisms, can bring rich rewards in the medium and long term. To this end, St. Lucia must be commended for some progress made in this area. In a recent World Bank survey entitled Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises, St. Lucia topped the entire Caribbean region. The report benchmarks the performance of 189 countries as it relates to regulations affecting 11 areas of the life of a business, these being: starting a business, dealing with construction permits, getting electricity, registering property, accessing credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers. St. Lucia ranked 64 out of the 189 countries, the highest in the Caribbean and ahead of Trinidad & Tobago (66), Barbados (91) and Jamaica (94). As regards other issues looming on the horizon that we should look out for, and these apply not only to St. Lucia but the entire OECS and perhaps the wider Caribbean, there is the question of the sustainability of PetroCaribe and the possible negative impact that a change in direction of 8
this funding mechanism can have on member countries. My own view is that while PetroCaribe provides much needed liquidity and cash flow relief to participating countries, good pro-active risk management would suggest accelerated efforts towards lessening dependence on this initiative, which in my view could perhaps best be achieved through aggressive development of alternate energy solutions solar, wind and geothermal and preferably on a collaborative basis throughout the Caribbean. Then there is the issue of the sustainability of the value of the EC dollar and you may have seen the recent call by one of the global rating agencies (Moody s Investor Services) to devalue the EC dollar, in a bid to assist the sub-region in addressing its debt crisis. It is my personal view and this is just my view and not necessarily that of my organisation that such a move may not have the desired effect given the structure of these economies, and that such a move may only serve to remove the relative price stability the sub-region has been enjoying for quite a while now. Further, in my view the ECCB has been doing a decent job of managing the currency over the past 30 plus years. I would rather see greater efforts on the fiscal front (i.e. increasing revenue and reducing expenditure) and in increasing productivity in the country. In closing, Ladies and Gentlemen as you well know from successfully running your own businesses, nothing but strong and fearless leadership is what is needed to steer the country through these challenging times. It is not yet too late but we are getting to that point very quickly. I thank you and wish you a productive and successful AGM. 20 November 2013 9