Moody's Investor services has called on Eastern Caribbean member countries to devalue the Eastern Caribbean dollar (EC$) or adopt the US Dollar (US$) in an effort to address the worrying debt crisis facing the region.
MNI Alive asks, if this is the best option for the region currently? The Caribbean is indeed faced with a debt burden that is sporadically being serviced. Coupled with that, productivity within the region has been under the microscope for some time. However, the tough question to be asked is whether currency devaluation of even US dollar adaptation will help alleviate these stressful fiscal issues facing the region?
Quoting from their recently published report, Moody's said, "Currency devaluation and the dissolution of the Eastern Caribbean Currency Union (ECCU), while unlikely, could enhance the region's competitiveness."
We do not see policymakers voluntarily choosing these options because they would sacrifice price stability (Caribbean countries rely heavily on food and fuel imports) and risk political upheaval, the report cited.
They further went on to state, Only a balance of payments crisis (similar to what happened in 1989 in Trinidad, when it abandoned its currency peg and subsequently defaulted on its sovereign debt) could force policymakers to choose these options.
Moody's published this report dated May 20, and gave a negative outlook on the future of regional debt. It is noteworthy to mention here that just this week, MNI Alive received the World Bank's Development Horizons Report that stated that in less than a generation, the Caribbean was poised to be a leader in global savings and investment. This assessment according to the World Bank was derived from patterns of investment, savings and capital flows as they are likely to evolve over the next two decades.
Thus, if the World Bank is painting such a positive outlook for the region, it does seem to go against the assessment of Moody's which is a well respected international investor services agency.
Moody's commented in their report that, Severe domestic adjustments through deficit reduction and structural reforms intended to stimulate growth, are the only options that remain. We see the defaults of Belize, Jamaica and Grenada over the past year as being part of a broader debt crisis in the Caribbean, the agency stated.
At the moment, we see a high probability that Belize and Jamaica will relapse into default. In addition, Grenada is currently restructuring its debt for the second time since 2004, which mirrors broader distress in the ECCU.
The Moody's report noted that St Kitts & Nevis defaulted on its debt in 2011 and that Antigua & Barbuda restructured its debt in 2010. It also mentioned that despite these restructurings, ECCU members remain among the most heavily indebted nations in the world.
Moody's commented on regional budgets stating that within the region are largely inflexible, due to high and rising interest costs and government expenditure on wages and social benefit programmes.
The report concludes that debt restructuring, while an attractive tool, has done little to address the threat of insolvency posed by unmanageable debt burdens.