Cash remittances to the Caribbean have fallen due to crackdowns on criminal activity in the financial sector but fintechs are picking up some of the slack.
In the Caribbean, economic problems can arise from natural disasters or structural vulnerabilities. For most Caribbean and Central American countries, however, the biggest economic impacts come from the US, which can bring either prosperity or disaster. The quip famously attributed to former Mexican President Porfirio Díaz could well apply to the countries south and east: “So far from God and so close to the United States.”
Washington’s crackdown on money-laundering and terrorist-financing, for example, prompted many banks to sever correspondent relationships from 2013-2015, including in Central America and the Caribbean, to avoid any potential problems. This hampered cash remittances to many emerging-market economies, especially in the Arab world. But Caribbean nations merely saw the rate of growth in remittances level off for a couple of years, before leaping ahead again in 2014.
For 10 countries across both regions, remittances accounted for more than 10% of their GDP in 2017, according to data from the Inter-American Dialogue (IAD). For Haiti, the figure was 33.6%; and for Honduras, 19.5%. Cuba receives more than $3.5 billion a year from its 2 million emigrants. “Family remittances to Latin America and the Caribbean grew over 8% in 2017, reaching $75 billion,” IAD reports. “In terms of scale, remittances have grown nearly as much as exports from the region in 2017.”
Fintechs and other start-ups in the banking and money-transfer fields helped mitigate the impact of severed correspondent banking ties, says Otaviano Canuto, executive director at the World Bank Group. These innovations could have a wider impact in these economies, where households’ and small to medium-size companies’ access to the bank system is still limited.
More-widespread access to capital could spark entrepreneurship and economic diversification in the region; but for the present, Caribbean and Central American countries depend to a great degree on a few sources of income—all considerably intermeshed with the US. Guyana is growing strongly, supported by two large new gold mines and the prospect of oil production beginning in 2020.
For most countries in the region, and especially the island nations of the Caribbean zone, tourism is a lifeline. “Tourism is the industry with the best performance in this region; and it is sustaining economic activity, as the countries’ efforts to diversify their economies didn’t work,” says Jaime Reusche, senior analyst of sovereign risk for Latin America at Moody’s Investors Service. “These economies are trying to find ways to adapt to a new reality.”
Even so, the near-term prospects for tourism in countries such as Barbados and Jamaica are far from outstanding, in large part due to damage from Hurricanes Harvey, Irma and Maria. And among the region’s commodity-export economies that depend heavily on the US market, such as Suriname and Trinidad and Tobago, low prices and the effects of climate change are dampening prospects as well.
Cuba: A Special Case
Prospects are even dimmer for Cuba—a special case, as it has been for the past 60 years.
“We cannot see significant changes in Cuba,” says Reusche. “The new constitution will not fundamentally change the economic model. The country still suffers a poor external liquidity situation; and with greatly diminished support from Venezuela, it has very limited alternatives.”
A new constitution is being drafted, one that carefully embraces some capitalist practices, as has been done in China and Vietnam, without revamping the economy entirely. It is not expected, for example, that the state will alter or abandon its role in the labor market. All foreign investors are required to transfer to the national government the task of hiring local workers. The companies then pay 100% of their salaries to the state, which in turn pays them a small percentage—not more than $20 per month—and deploys the rest elsewhere. The same salary rules apply to the almost 50,000 Cuban doctors who are working abroad—one more source of national income.
Reusche expresses disappointment that reforms haven’t gone further at a time when life expectancy is rising while the birth rate falls. The population is demanding more social programs but the government lacks the revenue to deliver them, and educational and health standards—a trademark of the revolution—are slipping.