The Caribbean faces substantial economic risks in the wake of the devastating impact of Hurricane Irma, a Category 5 storm which moved through the region between September 6 -8 followed a few days later by Hurricane Maria with comparable intensity, cutting a swathe of similar devastation.
Territories impacted most by these storms include Dominica, Anguilla, Barbuda, Saint Martin, Turks & Caicos and the Virgin Islands, Antigua, the southern Bahamas, Cuba, the Dominican Republic, Haiti, Puerto Rico and St Kitts & Nevis. Barbuda was said by its Prime Minister to be “uninhabitable”, as was the case with several areas in southern Florida, especially the Keys.
BMI Research has announced that they expect substantial negative impacts on real GDP growth across the region, as much of the local infrastructure has been damaged or destroyed and the tourism industry is unlikely to rebound in the near future. In some smaller economies, most notably those of the ECCU and the US Virgin Is lands, there is increased risk of a credit event.
While accurate data on the extent of damage will likely not be available for some time, media reports indicate that the destruction is likely to be severe on islands directly hit by the storm. As a result, in the days ahead, forecasts regarding economic growth will need to be revisited for impacted countries and territory, for both 2017 and the years thereafter.
There are several precedents in the Caribbean for the damage done by Hurricane Irma. Most notable is the case of Grenada after Hurricane Ivan in 2004, which damaged or destroyed more than 90 per cent of structures on the island. Real GDP growth fell from 8.6 per cent in 2003 to 0.1 per cent in 2004, due to collapses in the agricultural, manufacturing and tourism sectors. Grenada defaulted on its debt as the storm hollowed out the country's revenue base and forced the government to ramp up spending on recovery efforts, undermining its ability to service its obligations. Similarly, Montserrat's real GDP growth slowed from 8.6 percent in 1988 to 3.0 per cent in 1989 following Hurricane Hugo, and Dominica saw its real GDP contract 3.7 per cent in 2015 after being hit by Tropical Storm Erika, following a 4.0 per cent expansion in 2014.
It is expected that reconstruction efforts, possibly fuelled by foreign grants, would see economic growth rebound at a rapid pace after major storms. In the case of Grenada, real GDP accelerated from 0.1 per cent in 2004, when the storm hit, to 12.5 per cent in 2005, in large part due to 90.8 per cent year-on-year growth in the construction sector. This suggests that some of the islands impacted by Irma could see a "V-shaped recovery", marked by a rapid re-acceleration of real GDP growth. However, the capacity of each economy to recover will depend on the availability of external financing, as most are unable to fund this process themselves. In addition, depending on the extent of damage, a return of the non-construction sectors to pre-storm activity levels may take several years given the extent of damage reported, as well as shallow domestic capital and labor pools.
The extremely limited fiscal capacity of domestic governments in several cases will make the Caribbean heavily dependent on outside grants to finance rebuilding efforts. It is possible that those islands which are overseas territories of larger, more developed nations are likely to rebuild at a faster pace in the years ahead, as they will have greater access to substantial relief funds. Anguilla, the British Virgin Islands, Sint Maarten, St Martin and Turks & Caicos are overseas territories. Antigua & Barbuda as well as St Kitts & Nevis are not, suggesting they may face a more challenging rebuilding process. The most vulnerable economies are Anguilla, Antigua & Barbuda and the US Virgin Islands as these have high debt loads, wide current account deficits and fixed exchange rate regimes. The likelihood of a credit event in each of the affected economies will be significantly impacted by the degree of international support each island receives.
Last week in an article entitled Coping with the Cost of Natural Disasters, this newspaper identified three solutions to address the impact of natural disasters in the region: the establishment of a regional stabilisation and liquidity fund, as well as a catastrophe fund and the adoption of stricter building codes. However, these are medium to long term solutions. We return to the issue of disasters because these affected countries need help now and the response must be quick and sustained to get the countries back to a position that will allow them to function and begin to take care of themselves. While individual countries will offer assistance, as the CARICOM region, we must provide coordinated assistance. This is where the Caribbean Disaster Emergency Management Agency (CDEMA) which is a regional inter-governmental agency for disaster management in the Caribbean Community (CARICOM). Included among its many functions are mobilising and coordinating disaster relief, mitigating or eliminating, as far as practicable, the immediate consequences of disasters in participating states and providing immediate and coordinated response by means of emergency disaster relief to any affected participating state. As a region, these member institutions of CARICOM have a critical role to play in assisting the member countries to address the effects of natural disasters. As citizens of this region we must demand that our governments fulfil their obligations both bilaterally and through institutions such as CARICOM to fulfil the expectations we had in these regional institutions.
Special to Business is a weekly column for the Business Day.