The Caribbean is off the radar of many trade and commodity financiers, but as Luis Waldmann finds out, there are some interesting deals taking place.
Trade prospects for the Caribbean region will be mixed this year. Strong commodities will keep boosting countries such as oil exporting Trinidad and Tobago, whose US$15bn economy grew faster than China’s in 2003 and 2006. However, it may strain others like Jamaica, which depends on crude and food imports.
The Dominican Republic, which is recovering well from the 2003 banking and economic crisis, has attracted lenders and investors into a host of deals including short-term oil imports and a US$285mn power plant.
A likely global economic slowdown will affect the exports of these countries, except for commodity exporters who may be buoyed by reasonable robust demand from Asia, says Linda Yueh, an economist at Oxford University in the UK.
And a weak dollar, even if it recovers somewhat in 2008, will hamper tourism and make imported goods, including fuel, more expensive for the eight-member Eastern Caribbean Currency Union, Yueh points out. The Eastern Caribbean dollar has been pegged to the US dollar since 1976.
Fortunately, the oil constraint is being partially relieved by Venezuelan crude, which comes with cheaper and longer-dated financing. In all, exporters in the Caribbean Community and Common Market (Caricom) generated US$17bn in revenue in 2006, and importers spent US$23.4bn, according to the Kingston, Jamaica-headquartered Caribbean Regional Negotiating Machinery (CRNM).
The Dominican Republic, Jamaica and Trinidad and Tobago account for the bulk of US credit insurer FCIA’s exposure in the Caribbean, says Lin Franklin, president of FCIA.
The most important goods shipped under FCIA’s exporter policies are textiles, agricultural commodities, fertilisers and chemicals, reveals Franklin. FCIA also insures trade financings for banks, including limits in Jamaica and the Dominican Republic for the financing of oil imports.
For 2008, FCIA expects that economic improvement in the Dominican Republic will fuel premium growth. However, given that individual local banks are still recovering from the 2003 banking and economic crisis and many of the buyers FCIA is asked to insure are small, unsophisticated companies, commercial risks are a challenge in the Dominican Republic, ponders Franklin.
The Dominican Republic’s economy surged 9.3% in 2005 and 10.7% in 2006, according to the International Monetary Fund (IMF). Moreover, it jumped an expected 8% in 2007 and will grow 4.5% in 2008, according to IMF projections.
Franklin comments: “Management of the [Dominican Republic’s ] economy by President Leonel Fernandez has been good. And while November 2007’s Hurricane Noel was a slight setback, the overall improving risk conditions should allow offshore financial institutions to become more active in financing trade, and they in turn will likely be looking for credit insurance coverage.”
Average tenors seen in the Caribbean are 60 to 120 days on exporter policies, Franklin says, while for oil import financing tenors tend to be shorter at about 60 days. The insurer has limited its exposure in Haiti to very small limit due to the political situation and macroeconomic position.
For insurance company Zurich, the Dominican Republic leads the demand for political risk and trade credit insurance in the Caribbean region, says Dan Riordan, executive vice-president and managing director. Jamaica has also been one of the higher demand countries for cover in this market, adds Riordan.
Zurich-insured sectors in the Caribbean include telecommunications, power generation, agricultural equipment, transportation and medical equipment and supplies.
Zurich insures transactions on a non-cancellable basis for political risks up to 15 years and US$125mn, whereas credit risks can stretch to seven years and US$35mn per policy.
Caribbean trade will be influenced by global economic conditions, free trade agreements and, to a lesser extent, Venezuela, notes Riordan.
Slower economic growth globally in 2008 could negatively impact the Caribbean nations, which depend heavily on agricultural exports and tourism, he comments. In a bid to soothe this, a free trade agreement with the US and other countries would be handy.
Second, Venezuela’s President Hugo Chavez has proposed a new barter plan to trade oil to Caribbean nations in exchange for local goods. This, combined with Venezuela’s existing favourable trade terms for oil exports to many Caribbean nations, could help ease the effects of an economic slowdown for the region, Riordan comments.
Food for thought
The Caribbean, a region that imports much of its milk, meat and other products, is set to be further burdened by rising food costs.
“We’re very concerned with price increases because our consumers are not necessarily people who can afford to pay more,” says Gregory Solomon, international business manager at GraceKennedy, a Jamaican-headquartered company that sells US$500mn worth of food annually.
The company’s subsidiary in the UK, WT Foods, is facing price increases from suppliers almost every week, Solomon reveals. GraceKennedy usually imports on open account between 30 and 45 days and only resorts to letters of credit when entering new markets like the US.
Brazil is a significant source of corned beef to GraceKennedy, while Thailand supplies canned fish and coconut water; New Zealand originates milk, he adds.
Solomon expects 85-year-old GraceKennedy, which caters to Caribbean people around the world, to sell up to 10% more food this year. The company’s largest markets are Jamaica, Trinidad, Barbados and Antigua. GraceKennedy has plants in Jamaica, the UK, US and Canada.
Companies in Brazil are planning to build plants in the Caribbean in 2008 to dehydrate Brazilian-made ethanol and export it to the US duty free. Ethanol exported directly from Brazil is levied US$0.54 per gallon when entering the US.
Infinity Bio-Energy, which owns sugar and ethanol mills in Brazil, will invest US$150mn this year in the Dominican Republic and two other countries to avoid US barriers on ethanol shipped from Brazil, says Sérgio Thompson-Flores, CEO of Infinity Bio-Energy.
If anything, the Caribbean Basin Initiative (CBI), a US trade programme that provides duty relief for Caribbean-made goods, is an alternative for Brazilians to bypass much of the US duties, explains Thompson-Flores. Ethanol traded at about US$2.00 on the Chicago Board of Trade in early January 2008, he adds.
In the medium term, Infinity Bio-Energy plans to step up investments in the Caribbean to produce biofuel locally, he says, adding that other ethanol companies from Brazil may follow suit. Last May, Bermuda-incorporated Infinity announced plans to build a US$120mn plant in the Dominican Republic, in a joint venture with local firm Bio Etanol Boca Chica.
Infinity will invest a total of US$450mn in 2008 to buy sugar mills and logistics assets such as ports and barges in Brazil and abroad. It raised US$477mn on London’s alternative investment market (AIM) in 2006 and will have an IPO in the first half 2008 on Bovespa, the Brazilian stock exchange, Thompson-Flores anticipates.
The Caribbean Development Bank (CDB) has an exposure of US$800mn, on top of US$300mn in its so-called special development fund, says Compton Bourne, president of the institution.
The CDB has significant exposures in Jamaica and Barbados, supporting roads, airports, seaports, education and other sectors. Pricing in the second half of 2007 was between 6-6.25% per year, while special development fund resources cost 2.5-4% per year, Bourne adds.
In 2007, the bank backed road infrastructure in Jamaica and Belize, worked in Grenada, which was severely damaged in hurricanes in 2004 and 2005, and improved the main airport in Kingston, Jamaica.
Similarly, Andrade Gutierrez, the Brazilian construction company, is building the US$285mn Las Placetas hydro-electric power plant in the Dominican Republic. The project is supported by export credit agencies Sweden’s EKN, Finland’s Finnvera, Norway’s Giek and Portugal’s Cosec. Meanwhile, funding came from the Nordic Investment Bank, ABN Amro and BNDES of Brazil.
Andrade Gutierrez also finished in October 2007 the construction of the US$241mn Northwest Aqueduct in the Dominican Republic. The Belo Horizonte, Brazil-headquartered company has a US$700mn project backlog across Latin America and the Caribbean. The Dominican Republic’s infrastructure is placed 73 out of 131 nations ranked by the World Economic Forum in Geneva. Jamaica is ranked 58 and Trinidad and Tobago is 64.
Regarding Cuba, trade financing is more centrally controlled, says Richard Bernal, director general at CRNM. Caribbean countries such as Jamaica, via Jamaica Ex-Im Bank, have lines of credit with Banco Nacional in Cuba, which provide working capital for exporters.
Whether it is commodities, tourism or another sector, the Caribbean is dependent on global growth to keep its finances healthy. Yueh at Oxford University comments: “Although the global credit crunch and financial market turmoil may have limited effects on the Caribbean region, the impact of the slowdown of the real economy coupled with inflationary pressures on the supply side will be acutely felt in these small economies.”