Caribbean integration finds its rhythm.

• Author: Kleiman, Gary N.

After years of discussion on forging a unified trade zone among the fifteen members of the Caribbean Community (Caricom), a smaller version was launched in February between core countries, dos, Jamaica, and Trinidad and Tobago. Their Caribbean Single Market and Economy (CSME) envisions free cross-border goods and services flows, and aligned banking and securities regulation to promote financial sector integration. A similar effort is underway on financial services harmonization in the neighboring Organization of Eastern Caribbean States (OECS) bloc, which shares a common currency tied to the U.S. dollar.

Emerging market debt and equity investors have begun to take notice of this evolution. Jamaica was one of the best performing frontier stock markets on the S&P/IFC index in 2004, up 108 percent. Trinidad and Tobago won coveted investment grade status, which allows conservative U.S. mutual and pension funds to allocate a portion of their multi-trillion dollar portfolios. Attraction to the area has increased despite overreliance on basic commodities and tourism, weak fiscal policy, and hurricanes and natural disasters that regularly pressure domestic and external accounts.

JAMAICA

For Jamaica, the situation has dramatically reversed since 2003 when debt default or rescheduling was widely predicted. A debt/GDP ratio of 150 percent, double-digit inflation, a sliding currency, and 35 percent interest rates coincided with a severe visitor downturn. The country was ready to turn to the International Monetary Fund for funding to meet international bond payments. Instead, an emergency program was adopted--the so-called Partnership for Progress whose chief element is a public-sector wage freeze--which bought time as a broad-based recovery replaced recession with 2 percent GDP growth.

In the past year, tourism, bauxite, and alumina have all boomed on record world prices and heavy cruise ship and facility outlays. Agriculture, however, has suffered from the effects of Hurricane Ivan in summer 2004, and the imminent removal of EU duty-free preferences for banana and sugar exports. Inflation, despite a steep oil import bill, has receded to near single digits, aided by halving the annual fiscal deficit to 3.5 percent of GDP on a combination of better tax collection and cuts in government capital and personnel expenditure.

Nonetheless, servicing the debt, most of it the legacy of a system-wide banking rescue in the late 1990s, continues to absorb 60 percent of revenue. A fall in interest rates to the 15 percent range has provided relief, but the domestic burden alone is crushing at 100 percent of GDR The gap is financed by local bonds bought by Jamaican banks and institutional investors. External obligations are less of a weight, and equally split between official and commercial creditors. With a "B" sovereign rating and no representation in the benchmark JP Morgan Index, bonds are not held abroad by mainstream investors, although reserves have recently swelled above U.S. $1.5 billion on good remittance and foreign direct investment numbers providing a needed cushion.

Reduced returns on government debt and single market launch have spurred a prolonged equity upswing on the forty-company, U.S. $14 billion bourse. Blue chips such as conglomerate...