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Paradise Lost: Banks brace for economic fallout in tourism-driven Caribbean

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Royal Caribbean's Symphony of the Seas docked in Miami. The cruise ship frequently brought tourists through the Caribbean but has been out of service for months during the COVID-19 pandemic.
Source: AP Photo

The island nations of the Caribbean are no strangers to disaster preparation: hurricane season, which officially began June 1, brings disruptions and destruction on a regular basis.

But the coronavirus pandemic this year has wrought even greater economic damage to the region.

"Every year ... one of our brother or sister islands gets affected by a hurricane," FirstCaribbean International Bank Ltd. Managing Director Adam Carter said in an interview. "This has been far broader: It has hurt the world and, consequently, all of the Caribbean islands."

While the islands work to contain the spread of the virus itself, many are also working through the sudden shutdown of global tourism, which Carter called "the lifeblood of the Caribbean in terms of driving the economy." The Dominican Republic, for instance, saw between 300,000 and 400,000 North American arrivals by air each month during last year's high season, which runs from mid-December to mid-April.

In March of this year, however, those arrivals dropped 67% year over year, to about 130,000, according to central bank figures; in April, just five visitors came, compared to more than 300,000 in April 2019.

The drop-off could cause severe economic damage. International tourism receipts represent 37.5% of exports in the Dominican Republic, the region's largest economy, but the percentage tops 80% for some smaller island nations.

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"The global pandemic has brought to the fore the Caribbean's high dependence on the travel industry," CIBC Capital Markets director Luis Hurtado noted in a recent report. "Widespread air travel restrictions, border closures and the eventual termination of commercial flights to the region led to an almost immediate closure of hotels and a cessation of tourism services, while the region's cruise industry has been sunk."

Bank preparation

There is little doubt that the region's banks will be impacted. "Any financial institution in the region will generally have a fairly wide exposure to tourism, either directly or indirectly," FirstCaribbean's Carter noted.

Caribbean banking systems' direct loan exposure to the hotel and restaurant sector varies; it stands at about 5% in the Dominican Republic and 11% in Jamaica, though is as high as 20% in some smaller countries. The indirect exposure is even more substantial, experts say, reflecting tourism's significant impact on the broader economy.

Banks in the region have already begun to prepare for the fallout. FirstCaribbean, whose footprint spans 17 Caribbean island countries, set aside US$100 million of provisions in its fiscal quarter ending April 30. Trinidad and Tobago-based Republic Financial Holdings Ltd., another of the region's major banks, set aside about US$54.5 million in additional provisions as part of its response to the COVID-19 crisis.

Banks also are curtailing lending and reviewing conditions on automatic credit lines granted to companies prior to the crisis, according to Larisa Arteaga, a bank analyst with Fitch Ratings.

"Right now, what banks have decided on is to shut the door to all affected sectors," she said.

Tourism's uncertain return

In recent weeks, Caribbean governments have started moving towards reopening their economies. Several countries have reopened airports to international travel and more plan to do so in the coming weeks. Resorts are beginning to open their doors to guests once again.

But some remain skeptical as to whether international tourists will actually come.

"There is not a crystal ball here in terms of when will tourism recover. ... There are huge economic incentives to reopen, but will there be a demand to support it? When will people feel safe to get on a plane again?" said Carter. He predicted the impact likely will continue through the whole of 2020.

For the short term, experts say the industry is focusing on gaining domestic visitors who do not need to fly in. The hope is to create some semblance of cash flow before the full brunt of hurricane season hits later in the year, though locals are not likely to make a major impact.

"Occupation rates are going to be very low, but that is where the sector is going to place its bets," Fitch's Arteaga said.

Despite the uncertainty, experts stressed that the financial sector generally is well capitalized to handle the crisis. The Dominican banking system, for instance, entered the pandemic with a tangible common equity of 11.6%, according to Fitch Ratings calculations.

As FirstCaribbean's Carter noted, banks in the region are familiar with responding to sudden shocks, given the propensity for natural disasters in the area.

"We do expect these sorts of catastrophes," he said. "Not in this shape or form, but you can draw parallels to other events in the past that we recovered quite well from."