Puerto Rico 2.0? Wall Street Warns of Caribbean Debt Crises

(Bloomberg) -- The Caribbean countries of Barbados, Belize and the Bahamas, among the preferred playgrounds for the world’s wealthiest bankers, may soon become known instead for Wall Street’s dark side: Debt crises.

The three nations are some of the most exposed to the sudden stop in global tourism due to the coronavirus pandemic. And after decade-long borrowing sprees, they’re also staring down big bond payments, raising concern over how the Caribbean region can repay its debt.

“This pandemic shock is unlike any shock that these sovereigns have seen in their history,” said Julia Smith, a Toronto-based analyst at S&P Global Ratings.

Tourism in the Caribbean will probably decline by 60% to 70% from April to December compared with last year, according to S&P. The ratings company downgraded the Bahamas and Belize last week, and it lowered credit outlooks in Aruba, Belize, the Dominican Republic and Jamaica to negative.

Junk Bonds

Marla Dukharan, an economist in Barbados, calls it a once-per-century shock for the Caribbean. She said even in the most optimistic scenario, the region will lose about 50% of its tourist revenue this year.

That will weigh heavily on the Caribbean’s roughly $80 billion foreign debt load. Some of the largest reported holders of those notes include BlackRock Inc., AllianceBernstein, Pacific Investment Management Co., Goldman Sachs Group Inc. and JPMorgan Chase & Co., although the regional exposure is just a fraction of their total assets under management. Officials at BlackRock, Goldman Sachs and JPMorgan declined to comment.

Pramol Dhawan, Pimco’s head of emerging-market portfolio management, said differentiation is key. He highlighted the Dominican Republic’s strong balance sheet and request for rapid financing from the International Monetary Fund.

Katrina Butt, AllianceBernstein’s senior Latin America economist, said there’s value in some Caribbean nations like Jamaica and the Dominican Republic, which benefit from ample fiscal space and bigger reserve buffers.

“The smaller islands in the region have much more limited buffers,” she said.

Deja Vu?

It’s too soon to say whether the damage will rival Puerto Rico, the basket case of Caribbean default dramas. When the three major credit-rating firms cut it to junk in 2014, the island’s debt burden had reached about 74% of gross domestic product. The government dipped into its savings to repay bonds, and in 2016, Governor Alejandro Garcia Padilla defaulted.

How Puerto Rico Managed to Dig a Deep Financial Hole: QuickTake

Puerto Rico’s woes were compounded the next year when Hurricane Maria killed almost 3,000 people. Some nations may face another gut-wrenching expense this year: Weather forecasters predict above-average storms during the June-November hurricane season.

S&P already rates the Bahamas, Dominican Republic, Jamaica, Barbados and Belize in junk territory. Fitch Ratings cut Aruba to non-investment grade earlier this month. Several of them have debt ratios surpassing Puerto Rico’s in 2014.

On Tuesday, a United Nations’ office for Latin America and the Caribbean warned that the region will contract by 5.3% in 2020, the worst ever, with GDP slipping by 6.8% in the Bahamas, 5.8% in Barbados and 5.3% in Jamaica.

Frontier markets, including some Caribbean nations, are particularly exposed to the pandemic, according to Whitney Baker, the New York-based founder of Totem Macro, which advises funds overseeing more than $3 trillion.

“Their ability to issue dollar bonds in a yield-starved world has enabled them to run deficits,” she said. “Now they’re reliant on something that’s going away, at the same time they actually need more resources.”

‘Completely Dependent’

Like many of its Caribbean neighbors, Aruba’s main airport is closed to the roughly 2 million foreign tourists who visit each year. Its beach-side resorts are shuttered and the streets are practically empty. Dangui Oduber, the nation’s tourism minister, said he’s never seen the island so desolate.

“We are completely dependent on tourism,” he said in an interview.

Oduber estimated that more than a quarter of the island’s population of about 100,000 will lose their jobs. Aruba is pushing to diversify the nation’s economy with the cultivation of medicinal cannabis as well as new agricultural and infrastructure projects, he said.

If social distancing remains necessary for the next two years, as some research suggests, nations such as Aruba may be forced to divert dwindling reserves toward social services rather than foreign creditors.

“We do not have the necessary savings to pay our debt,” Oduber said.

There are a few buffers to potentially stave off default. Oduber said the Netherlands, which still handles much of the island’s foreign affairs, is willing to provide a bullet loan without interest to Aruba. It’s possible the U.K. could provide similar support to Bermuda and Turks and Caicos. Other nations may lack that luxury and depend on the IMF as a lender of last resort.

“People are afraid and government support will be necessary to boost up these regions until we enter a new normal,” said Sylvia Jablonski, managing director of capital markets at Direxion in New York. “That new normal may be further away than we think.”

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