RRRRRR aaaattttiiiinnnngggg Caribbean Information & Credit Rating Services Limited

RRRRRRaaaattttiiiioooonnnnaaaalllleeee aattiioonnaallee

Government of Saint Lucia

XCD 140 million Debt Issue Cari BBB+ (Regional Scale Foreign Currency) (Initial) Cari BBB+ (Regional Scale Local Currency)

USD 50 million Debt Issue Cari BBB+ (Regional Scale Foreign Currency) (Reaffirmed) Cari BBB+ (Regional Scale Local Currency)

USD 38 million Debt Issue Cari BBB+ (Regional Scale Foreign Currency) (Reaffirmed) Cari BBB+ (Regional Scale Local Currency)

Analytical Contacts: RATIONALE SUMMARY

Sherry Ann Persad Tel: 1-868-627-8879 Caribbean Information and Credit Rating Services Limited E-mail: [email protected] (CariCRIS) has assigned ratings of Cari BBB+ (local and foreign currency) on its regional rating scale to the XCD 140 million bond Stefan Fortuné Tel: 1-868-627-8879 issue and reaffirmed its ratings of Cari BBB+ (local and foreign E-mail: [email protected] currency) for the USD 50 million and USD 38 million debt issues

Disclaimer: CariCRIS has taken due care of the Government of Saint Lucia. These ratings indicate that the and caution in compilation of data for this product. Information has been level of creditworthiness of these obligations, adjudged in obtained by CariCRIS from sources 1 which it considers reliable. However, relation to other obligations in the Caribbean is adequate. CariCRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the The ratings continue to reflect Saint Lucia’s moderate results obtained from the use of such information. No part of this report may macroeconomic performance in the face of an uncertain global be published / reproduced in any form without CariCRIS’ prior written environment. Saint Lucia’s real Gross Domestic Product (GDP) approval. CariCRIS is also not responsible for any errors in has expanded in the last 6 years; 1% in 2011 up from 0.6% in 2010. transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ 1 The term Caribbean as used here covers the following countries: Bahamas, Barbados, distributors of this product . Belize, Costa Rica, Dominican Republic, Guyana, Haiti, Jamaica, Panama, Suriname, Trinidad and Tobago and the following countries in the OECS: Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, St. Kitts & Nevis, Saint Lucia and St. Vincent & the Grenadines. Refer www.caricris.com for a more detailed explanation on CariCRIS ratings and rating definitions.

Visit us on the web at www.caricris.com

CariCRIS has a practice of keeping all its ratings under continuous surveillance and ratings are revised as and when circumstances so warrant. For the latest rating information on any instrument of any company rated by CariCRIS, please contact CariCRIS at +1 868 627 8879

The tourism industry, the engine of growth, performed creditably in the face of a myriad of challenges with stay-over arrivals declining by a mere 0.4% in 2011 and 2.1% to August 2012. However, a 7% decline was recorded in tourism expenditure in 2011. As expected, the fiscal deficit widened as capital expenditure rose to undertake repair works post Hurricane Tomas. CariCRIS expects that with the implementation of VAT, a full year’s collection of the new property tax together with an ongoing simplification of the tax system, there should be an improvement in overall fiscal flexibility in FY2012/13. The financial sector remained sound with banks continuing to be well capitalized. Balance of payments (BOP) surpluses were recorded for the period 2009 to 2011 and even though reserves have declined the level remained adequate and represented 4.7 months of imports in 2011.

CariCRIS believes that 2012 will be another challenging year as economic activity remains subdued, the global recovery sluggish and uncertainty and lack of confidence in the market prolonged. Notwithstanding, Saint Lucia is expected to maintain its performance in tourism as marketing initiatives in its key markets are strengthened. Additionally, even though the debt to GDP level is expected to rise it will remain moderate and among the lowest in the Organisation of Eastern Caribbean States (OECS) region.

The ratings on Saint Lucia reflect its monetary and exchange rate stability underpinned by its membership in a quasi currency board arrangement and its relatively diversified economic base. Also supporting the ratings is an external sector characterised by moderate balance of payments (BOP) performances and relatively low external debt. Tempering these rating strengths are the limited fiscal flexibility emanating from its narrow tax base and continued fiscal pressures arising from sluggish revenue growth and rising expenditure. Another factor constraining the ratings is the high level of crime which is emerging as the main social issue impacting the island.

Monetary and exchange rate stability underpinned by membership in a quasi currency board arrangement

As a quasi currency board, the Eastern Caribbean Central Bank (ECCB) has adopted a number of operating parameters which have served to limit exchange rate uncertainty and foster macroeconomic stability. The ECCB maintains external reserves at a level that is at least 60% of its monetary liabilities, and can make temporary advances to member governments amounting to a maximum of 5% of the government’s average annual current revenue. The holdings in any one government’s treasury bills cannot exceed 10% of the estimated current revenue of that government, and holdings of other government

2

securities may not exceed 15% of currency in circulation and other demand liabilities. Relative to its Caribbean counterparts, the ECCB enjoys a greater degree of political independence.

The fixed exchange rate peg at EC $2.70 to US $1.00, which has been in effect since July 1976, has underpinned price stability, a credible currency and a stable environment conducive to foreign investment and growth. Historically, inflation rates have been low and are among the lowest in the OECS with a 2-year average of 3%. In 2011, the annual average inflation rate fell to 2.8% from 3.3% in the prior year; however, this trend was reversed rising to 3.5% in September 2012. Going forward, CariCRIS expects the inflationary pressures to mount in line with rising international crude oil and food prices. The peg to the US dollar resulted in a real effective depreciation of the currency averaging 0.7% in the last 2 years indicating the possibility of a gain in external competitiveness.

The financial sector in Saint Lucia is relatively small with 6 commercial banks, 16 credit unions, 26 insurance companies, 7 non-bank financial institutions and 1 development bank. Saint Lucia was a relative late starter in the offshore segment and has only 4 offshore banks. Licenses for both domestic and offshore banks are issued by the Minister of Finance, with the ECCB having sole responsibility for the supervision of the domestic banking sector, whilst the offshore sector is regulated by the Ministry of Finance. In spite of the passage of legislation for the establishment of the Single Regulatory Unit, the commencement of operations has been delayed following the change in government as a new board has to be appointed.

The financial sector remains broadly sound despite the challenging macroeconomic environment which has negatively impacted several key indicators. Commercial banks remained well capitalized as the capital adequacy ratio stood at 19% in 2011, well above the regulatory minimum requirement of 8%. However, non-performing loans (NPLs) to total loans, which have trended upwards since 2007, increased to 13.2% in 2011 from 12.4% in 2010; well above the ECCB’s minimum ratio of 5%. CariCRIS believes the asset quality of banks will continue to deteriorate given the subdued economic activity as well as the high unemployment rate. The provisioning levels continue to be low, relative to its regional peers, in spite of the rise to 36.2% of NPLs in 2011 from a 5-year low of 23.2% in 2010. Despite the sluggish economic activity credit to the private sector has recorded growth since 2003; though only marginal in the period 2009 to 2011. While there were no bank failures in the recent past, in September 2009, the ECCB’s Monetary Council was instrumental in the provision of a resolution for British American Insurance Company Limited (BAICO) operations in the islands of the OECS, including Saint Lucia. In July 2009

3

a Judicial Manager was appointed to the BAICO operations in Saint Lucia while the OECS heads of government, together with the heads of the governments of Trinidad and Tobago and the Bahamas, sought to restructure the operations of the company. Subsequently, the OECS governments have agreed on a three-stage restructuring which includes the creation of a compensation fund to settle eligible health insurance claims which began in May 2011 as the “Health Insurance Support Fund”. The 2 nd stage is the recapitalisation of BAICO’s traditional life insurance portfolio with funds from the “Liquidity Support Fund”, provided by OECS governments, after which it would be sold to a third party. The final stage is the creation of a compensation scheme for BAICO’s non-traditional policyholders.

Saint Lucia has limited monetary policy flexibility being a member of the Eastern Caribbean Currency Union (ECCU). A minimum deposit rate of 3% is set by the ECCB whilst the lending rates are market determined contributing to the relatively stable interest rate environment. The deposit rate has averaged 3.2% in the last 3 years while the lending rate has averaged 9.4%.

The implementation of most of the recommendations in the IMF’s FSAP report, dated September 2004, has positively impacted the financial sector and places Saint Lucia ahead of some of its regional peers. The financial and capital market infrastructure in the OECS is relatively more developed compared to the other countries in the Caribbean region, and gives the government of Saint Lucia a crucial financing option. However, this facility is not being adequately utilised. While trading occurs daily, the volumes traded are low and there are only 15 companies listed on the Eastern Caribbean Securities Exchange (ECSE). Meanwhile, the Regional Governments Securities Market (RGSM), a regional market for the trading of debt instruments of the member states of the ECCU, operates on a fully electronic platform. As at December 2010 the value of outstanding securities on the RGSM was EC $1,127.3 million. Government of Saint Lucia has been the most active on the RGSM accounting for EC $741.8 million or 65.8%. Moreover, around 36% of Saint Lucia’s public debt is sourced on the RGSM.

With respect to preparations for Basel II, the ECCB’s plans include assisting member states in drafting financial legislation to address the gaps in their supervisory and regulatory framework. Additionally, prudential guidelines on the treatment of assets, market, credit and operational risks amongst others were issued. As with many other Caribbean countries that have an offshore financial sector, the government of Saint Lucia continues to closely follow the legislative reforms of the United States of America (USA) as well as the Organization for Economic Cooperation and Development (OECD). Saint Lucia is on the

4

OECD’s white-list having signed around 18 Tax Information Exchange Agreements (TIEAs).

Relatively diversified economic base

Saint Lucia’s real GDP 2 has grown in the last 3 years, albeit marginally, with 1% in 2011 following 0.6% in the previous year. In 2012, the projection for growth remains low at just under 1%. In spite of an uncertain global environment and the impact of Hurricane Tomas in 2010 real GDP has recorded growth since 2006. Indeed, Saint Lucia’s growth performance has surpassed most of its ECCU counterparts as real GDP contracted in most territories over the last 2 years with the exception of Dominica. Saint Lucia’s economic base remains the most diversified in the OECS region with growth driven by distributive trade services (5.6%), manufacturing (2.5%), hotels and restaurants (2.4%) and construction (2.1%) in 2011. The other industries recording growth were health (12.7%), other community, social and personal services (9.3%), education (4.8%), electricity and water (1.8%) and real estate, renting and business activities (1%). This diversity affords Saint Lucia a greater degree of economic resilience relative to its OECS peers. Saint Lucia’s nominal GDP is the largest in the OECS region and stood at US $1,229.6 million in 2011 followed by Antigua and Barbuda at US $1,152.8 million.

The tourism industry, Saint Lucia’s main economic driver, is estimated to contribute around 60% of GDP (direct and indirect) and is the largest earner of foreign exchange. Despite the uncertainty in the global market only a marginal decline of 0.4% was recorded in stay-over arrivals in 2011. Long stay visitors from France increased by 20.3%, Canada by 10% and the United Kingdom (UK) by 6.3%. Germany’s stay-over arrivals fell by 26.1%, the rest of Europe by 14.9%, the rest of the world by 7.5% and the USA and the Caribbean by 4.2% and 3.2% respectively in 2011. Up to August 2012, total arrivals fell by 2.1%, generated by declines from France (26.4%), Germany (15.5%), USA (7.3%), and the Caribbean (6.5%). Notwithstanding, there were increased arrivals from the rest of the world (13.3%), the rest of Europe (11.9%), UK (7.6%), and Canada (7.1%). Saint Lucia’s geographically diversified tourism markets provide some degree of resilience with the USA accounting for 40.6%, UK 23.5%, the Caribbean 17.2% and Canada 11.6% in 2011. Total visitor arrivals fell by 5.1% in 2011 driven by declines in cruise passengers and

2 In December 2010 the ECCB revised its GDP methodology as well as rebased the GDP series (to 2006 from 1990) for all 8 member states resulting in the new GDP series showing considerable improvement which were reflected in the fiscal and debt ratios.

5

yachting by 6.3% and 2.4% respectively. Up to August 2012, these two sub-industries recorded further declines of 7.5% and 8.6% respectively.

Regional travel to Saint Lucia was boosted with REDjet, the region’s low-cost carrier, commencing twice weekly flights in December 2011 and Caribbean Airlines offering a daily flight from February 2012 out of Trinidad. However, REDjet’s operations were suspended in March 2012. Moreover, some of the additional airlifts secured in 2010 were short-lived and may have contributed to the decline in some of the key markets. For instance, American Airlines discontinued its direct service out of New York in January 2011 and in April reduced its daily flight out of Miami to 1 from 2. Furthermore, flights were lost as American Eagle phased out its San Juan, Puerto Rico route. Also LIAT has proposed an almost 50% reduction in its Saint Lucia’s flight itinerary as part of a major route restructuring program.

There was mixed performance for some of the key tourism indicators in 2011. Average hotel occupancy rates declined marginally to 57% from 58% in the prior year while cruise ship calls fell by 6.4% to 351 from 375 in 2010. Visitor expenditure dropped to US $502.4 million from US $540.2 million in the previous year. The average length of stay decreased to 8 days from 8.6 days in 2010 and a high of 9.4 days in 2008. The authorities are projecting a marginal decline in stay-over arrivals in 2012.

Notwithstanding the industry’s performance in 2011, there are a number of factors that will provide a challenge in 2012 inclusive of Europe’s debt crisis, the lethargic recovery of the US economy and the resumption of the 3 rd tranche of the Air Passenger Duty (APD) in April 2012. Additionally, the Olympic Games in London and US presidential elections may have adversely impacted travel from these destinations.

Saint Lucia’s manufacturing base is the most diversified within the OECS region and contributes around 5.4% to GDP. The industry is driven mainly by the food and beverage, paper and paperboard and electrical sub-industries. However, the industry was adversely impacted by Hurricane Tomas as disruptions in the water supply affected its output, particularly the brewery operations.

6

The agriculture industry was severely impacted by Hurricane Tomas 3 and the outbreak of the Black Sigatoka resulted in a sharp contraction in value added of 6.5% in 2011. The banana sub-industry was among the most affected as value added contracted by 37.6%; production fell sharply by 75.8% to 6,557 tonnes from 27,074 tonnes and export earnings dropped by 69.1% to EC $12.9 million from EC $41.9 million in 2010. Notwithstanding, the authorities continued to focus on the industry with government support being provided to farmers affected by the Black Sigatoka. As a result, banana export earnings rose by 167.5% up to September 2012 (this must be considered in light of the prior year’s issues). Additional agricultural initiatives are underway towards the development of sub- industries within agriculture inclusive of fisheries, farming and agro-processing.

Unemployment rates remain high at around 20% and given the challenging macroeconomic environment CariCRIS believes this figure may rise further in 2012. In an effort to reduce the high unemployment level, the government introduced a Short Term Employment Programme (STEP) shortly after assuming office. Estimated to cost EC $6- $12 million annually, this beautification initiative programme involves the clearing of debris and general maintenance of the surroundings. Subsequently, a number of other programmes were instituted, for example, the Joint Opportunities for Building Saint Lucia (JOBS), Single Mothers Employment Programme (SMILES), Youth Empowerment Programme (YEP), and Youth Agricultural Entrepreneurship Programme (YAEP), targeting the more vulnerable members of society.

External sector characterised by moderate BOP performances and relatively low external debt

Saint Lucia has generated balance of payment (BOP) surpluses for the period 2009 to 2011 (Chart 1). The overall external balance fell marginally to EC $78.4 million representing 2.4% of GDP in 2011 from EC $85.7 million or 2.6% of GDP in 2010. These BOP surpluses are attributable largely to higher net inflows on the capital and financial account. The surplus on the capital and financial account rose to EC $618.1 million from EC $495 million in the prior year as commercial banks reduced their foreign investments by EC $143.5 million following an outflow of EC $102.2 million in 2010. Foreign direct investment (FDI) inflows have declined steadily since 2007 reaching a 5-year low of EC $204.7 million in 2011 from a high of EC $734.1 million in 2007. CariCRIS believes FDI inflows will continue

3 The cost of the damage and losses associated with the passage of Hurricane Tomas in October 2010 was conservatively estimated to be around EC $907.6 million or 27.7% of GDP. The damage caused was mainly structural in nature and estimated to be around EC $391.5 million. Damage to the agriculture sector was estimated at EC $151.7 million of which damage to the banana sub-industry represented 36% with approximately 88% believed to have been adversely impacted.

7

to decline given the challenging global environment and uncertainty that still prevails among investors. As a result several key tourism projects such as Raffles, Le Paradis and Ritz Carlton have been halted while the commencement of a number of other projects remained delayed.

Gross international reserves declined marginally to US $305.5 million in 2011 representing 4.7 months of import cover, unchanged from 2010. CariCRIS expects another moderate BOP performance and the maintenance of adequate reserves in 2012 despite further declines in FDI inflows even as the economies of several source countries show tentative signs of recovery.

Chart 1 Balance of Payments Indicators 2007–2011

10

0 2007 2008 2009 2010 2011 -10 % of GDP -20

-30

-40 Year

Current Account Balance Financial Account Balance Overall External Balance

Source: CariCRIS Sovereign Spreads, ECCB Estimates

External public sector debt grew by 5.7% to EC $1,124.4 million (US $416.4 million) in 2011. This rise has been the sharpest in the last 3 years relative to 4.7% in 2010 and 2.6% in 2009. External debt to GDP rose to 33.9% from 32.2% in the earlier year. External public debt has averaged 32.6% over the last 3 years. Saint Lucia has a relatively moderate debt service ratio compared to many of its regional peers; averaging 11.6% of exports of goods and non-factor services for the period 2009 to 2011. Gross financing requirements to reserves fell marginally to 70.8% in 2011 relative to 72.4% in 2010, on account of the decline in the reserves position and the expansion in the external current account deficit. The exchange system is free of restrictions for both current and capital transactions and there have been no instances of default on debt in the recent past.

8

These rating strengths are tempered by the following factors:

Continued fiscal pressures arising from sluggish revenue growth and rising expenditure

The government’s fiscal operations continue to be impacted by the relatively sluggish revenue growth over the last 5 years while current expenditure, which is dominated by significant non-discretionary expenditure in the form of wages and salaries, has been growing steadily each year. The general trend in the revenue and expenditure has, in part, resulted in the deterioration in both the current account surplus and overall fiscal deficit as a percentage of GDP, particularly since 2009. While an expanding GDP usually results in increased government revenue and employment, this has not been the case in Saint Lucia. Generally, current revenue has been increasing at a declining rate over the period FY2005/06 to FY2008/09 before actually contracting by 5.6% in FY2009/10. However, there was a reversal in the last 2 fiscal years as current revenue rose 3.7% and 6.1% in FY2010/11 and FY2011/12 respectively. Current revenue as a percentage of GDP rose to 25% in 2011/12 from 24% in the prior year and has averaged 24.2% in the last 3 fiscal years. On the other hand, current expenditure has shown considerable variability over the period FY2007/08 to FY2011/12, averaging 6.2%. In FY2011/12 it decreased 4.7% from the prior year (Table 1). Despite the annual fluctuations in current expenditure, as a percentage of GDP, it rose to 26.1% in FY2011/12 from 25.4% in FY2007/08.

Table 1 Summary Fiscal Performance Highlights FY2007/08– FY2011/12

FY2007/08 FY2008/09 FY2009/10 FY2010/11 FY2011/12 EC $ Million Total Revenue 753.1 829.0 826.8 874.5 915.0 Current Revenue 741.2 804.9 759.6 787.8 835.9 Total Recurrent Expenditure 663.1 734.5 771.4 833.2 872.2 Capital Expenditure 230.7 208.2 241.3 298.6 366.1 Total Expenditure 893.8 942.7 1,012.7 1,131.8 1,238.3 % Change Total Revenue 12.0 10.1 -0.3 5.8 4.6 Recurrent Revenue 13.0 8.6 -5.6 3.7 6.1 Total Recurrent Expenditure 2.6 10.8 5.0 8.0 4.7 Capital Expenditure -20.7 -9.8 15.9 23.7 22.6 Total Expenditure 5.7 5.5 7.4 11.8 9.4 Source: Ministry of Finance, Saint Lucia

9

Central government has consistently run fiscal deficits. In the last 2 years this deficit has averaged 5.9% of GDP (Chart 2). These deficits arose from government’s continued pursuit of a counter-cyclical fiscal policy which began with the downturn in FY2001/02. The deficit for FY2011/12 expanded to 6.7% of GDP from 5.1% in the previous year. Capital expenditure rose to 11% of GDP in FY2011/12, mainly attributable to repairs post Hurricane Tomas, from 9.1% in the previous year. Capital expenditure has risen consistently since 2008 and averaged 9.2% of GDP in the last 3 fiscal years. Capital expenditure has largely been funded by debt as current account deficits were recorded in the last two fiscal years averaging 1.2% of GDP.

Chart 2 Current Account, Overall Fiscal and Primary Balances FY2007/08–FY2011/12

6.0

4.0

2.0

% 0.0 of 2007 2008 2009 2010 2011 GDP -2.0

-4.0

-6.0

-8.0 Year Current Account Balance Overall Fiscal Balance Primary Balance

Source: CariCRIS Sovereign Spreads, Ministry of Finance

The heavy reliance on debt funding has resulted in a more than doubling of the debt stock in the last decade. In 2011, the total public sector debt rose 11.6% to EC $2.3 billion from EC $2 billion in the prior year. As a result the general government gross debt as a percentage of GDP rose to 68.5% from 62.2% in 2010 and a 5-year low of 55.7% in 2008. Notwithstanding, these ratios are considered relatively moderate and Saint Lucia remains one of the least indebted countries in the ECCU. Additionally, the ratio is just above the ECCB’s stipulated benchmark of less than 60% of GDP to be attained by all countries of the sub-region by the year 2020. CariCRIS is of the opinion that debt levels will continue to rise in the medium term with a projection of around 70% of GDP in FY2012/13.

10

The increasing debt levels are mirrored in higher interest payments which rose by 1.9% to EC $103.7 million in FY2011/12 from EC $101.8 million in FY2010/11. Interest payments in FY2011/12 consumed 12.4% of current revenue. Further increases are expected in interest payments in FY2012/13 with projections of EC $126.8 million consuming 15.5% of current revenue. Saint Lucia’s interest payments as a component of current expenditure compare favourably with higher rated Caribbean peers such as Barbados. There has been a distinct shift towards domestic debt which has steadily increased over the last 5 years to EC $1.1 billion (accounting for 50.5% of the total public sector debt) in 2011 from EC $654.2 million (37.3% of total public sector debt) in 2007. On the domestic side, commercial loans increased to EC $522.7 million, representing 25% of central government total debt, incurring the highest weighted average cost at 7.01% resulting in higher funding costs. The primary deficit rose to 3.6% of GDP in FY2011/12 from 2% of GDP reported for the prior year.

In the medium term, CariCRIS expects revenue growth to remain sluggish, in the face of subdued economic activity, and the high dependence on debt funding to continue as the authorities strive to maintain real GDP growth and stem the rise in unemployment levels. However, while the level of debt/GDP is expected to rise, it is anticipated to remain moderate. Furthermore, CariCRIS believes that expenditure pressures would have to be counterbalanced by increases in revenue collection and containment of discretionary expenditure going forward.

Limited fiscal flexibility emanating from a narrow tax base with high dependence on international trade taxes

Saint Lucia’s tax base is narrow with a high dependence on international trade taxes which limits its fiscal flexibility. The main tax sources are international trade (50.6%), income and profit (32.1%) and domestic goods and services (17.3%). The personal income tax structure is complicated with around 26 allowances rendering its administration challenging and burdensome. Compliance levels are relatively low for property taxes which are also fraught with administrative challenges. Collection of the new market based property taxes were to take effect in April 2011, but there were delays and commenced in January 2012. With the slowdown in global economic activity, revenue earning capacity has come under pressure. However, the long delayed VAT was introduced effective October 1 st , 2012. Annually, VAT’s contribution to revenue is estimated to be around EC $30 million net and is expected to replace a number of taxation measures. The current administration continues to review the existing tax regime with the objective of improving efficiency and

11

simplification of the system. CariCRIS expects greater fiscal flexibility in the medium term with the introduction of VAT and the simplification of the existing taxation regime which should result in higher compliance levels.

High and rising non-discretionary expenditure also severely limits fiscal flexibility. Wages and salaries and transfers and subsidies accounted for 45.1% and 13.3% of current expenditure respectively in FY2011/12. The government’s implementation of the Fuel Pass-Through Mechanism in September 2009 served to preserve revenue by reducing /eliminating the subsidy it was paying for fuel thereby easing some of the fiscal pressures this subsidy presented.

High crime levels an area of concern

Crime continues to be a key concern in Saint Lucia as it has impacted the tourism industry and business in general. In 2010 the island’s cruise sub-industry was adversely impacted by crime, resulting in the loss of service from the Norwegian Cruise Line; however this line returned in October 2012. Notwithstanding the reported attacks on tourists, there have been no negative travel advisories announced by the main markets. Operating costs for business owners have increased over the last couple of years for security services. In addition, businesses which operate a shift system have experienced operational issues due to crime.

Elections were held on November 28, 2011 and the Saint Lucia Labour Party (SLP) led by Dr. Kenny Anthony won 11 of the 17 parliamentary seats to return to office after 5 years in Opposition. The country has a long history of political stability characterised by smooth transitions to power and this was demonstrated in the last election. CariCRIS believes the macroeconomic policies will remain broadly unchanged. CariCRIS’ expectations of a shift in foreign policy given the SLP’s close alignment with China in the past has not materialized to date as the incumbent administration has maintained relationships with Taiwan. As such, capital works projects funded by the Taiwanese continued resulting in little interruption to the implementation of Saint Lucia’s economic programme.

In spite of the high level of unemployment there were no reports of industrial unrest in 2011. While trade unions in Saint Lucia seem to be aligned to the major political parties, their modus operandi appears to be one of collaborative discussions rather than the use militant action.

12

Rating Sensitivity Factors
Significant changes in the fiscal position
Significant changes in the debt stock levels
Significant changes in the external indicators
Timely and successful implementation of revenue increasing measures

ABOUT THE SOVEREIGN

Saint Lucia, ‘Helen of the West Indies”, lies roughly between 60 and 61 degrees west longitude and 13 and 14 degrees north latitude. The island is situated in the Eastern Caribbean, at the northern end of the Windward Islands chain, 33.6 km (21 miles) south of Martinique, 40 km (26 miles) north of St Vincent and the Grenadines and 126 km (110 miles) northwest of Barbados. The total area of Saint Lucia is approximately 616 km 2 (238 square miles).

Total population is estimated at 177,194 persons, with the greater part of the population living around the capital, Castries. The majority of the population is of African ancestry (82.5%), with the minority comprising Mulattoes (11.9%), East Indians (2.4%) and other or unspecified ethnicities (3.1%). Average life expectancy is 76.8 years. Infant mortality is estimated at 12.7 deaths per 1,000 live births. The official language is English but French patois is widely spoken.

Tourism is the mainstay of the economy with the main markets being the United States of America (USA), United Kingdom (UK), Caribbean and Canada. Agriculture, specifically bananas, plays a significant role in the economy but has been on the decline. There is a small manufacturing sector, the most diverse in the Eastern Caribbean, producing clothing, beverages, corrugated cardboard boxes, as well as the assembly of electronic components and the processing of lime and coconut. A relatively small financial sector also exists.

13

Table 2 Selected Economic and Social Indicators 2007-2011

2011 2010 2009 2008 2007

Income & Economic Structure Nominal GDP (US $ Mn) 1,229.6 1,213.2 1,177.5 1,177.9 1,136.8 Nominal GDP per capita (US $) 6,939.1 6,983.5 6,831.0 4,761.9 4,658.5 Real GDP Growth (%) 1.0 0.6 0.3 5.2 2.4 Unemployment Rate (%) na 20.6 20.5 16.8 14.7 Human Development Index 82/187 - 69/182 66/179 72/177 Transparency International Corruption Perceptions Index 25/183 - 22/180 24/179 na

2011 2010 2009 2008 2007

Fiscal Accounts (% of GDP) Central Gov't Current Revenue 25.0 24.0 23.7 25.3 23.9 Central Gov't Current Expenditure 26.1 25.4 24.1 23.1 21.4 Central Gov't Current Balance (1.1) (1.4) 4.5 4.8 3.8 Central Gov't Capital Expenditure 11.0 9.1 7.5 6.5 7.4 Central Gov't Primary Balance (after grants) (3.6) (2.0) (0.4) (1.9) (0.8) Central Gov't Overall Balance (after grants) (6.7) (5.1) (3.1) (0.9) (1.9) Central Gov't Gross Debt 62.7 55.9 51.6 50.2 51.3 General Gov't Gross Debt 68.5 62.2 57.5 55.7 57.1

2011 2010 2009 2008 2007

Monetary, Financial & Exchange Rate Indicators Consumer Price Index (end of period) 4.8 4.2 -3.1 3.8 8.2 Consumer Price Index (annual average) 2.8 3.3 -0.2 8.2 3.1 Credit to the Private Sector & NFPE (% GDP) 120.9 121.3 130.0 130.4 124.3 Credit to the Private Sector & NFPE (YOY change %) 2.4 1.2 2.2 10.0 25.9 Non-Performing Loans/Total Loans (%) 13.2 12.4 7.9 6.6 5.8 Provision for NPL (% of NPL) 36.2 23.2 31.4 37.5 45.5 Banking Sector Capital Adequacy Ratio (%) 19.0 18.6 18.3 17.5 20.4 Base Money (YOY change) 1.5 9.8 10.2 3.1 7.6 Broad Money or Money Supply (YOY change %) 6.7 1.9 1.3 6.7 6.8 Average Bank Deposit Rate (%) 3.1 3.3 3.1 3.2 3.1 Average Bank Lending Rate (%) 9.0 9.5 9.7 9.6 8.8 Interest Rate Spread 6.0 6.2 6.6 6.4 5.8 Nominal Exchange Rates (lc per US$) 2.7 2.7 2.7 2.7 2.7 Nominal Effective Exchange Rates (YOY change %) - - - - - Real Effective Exchange Rates (YOY change %) (1.1) (0.4) 3.8 4.3 (3.4)

External Sector Indicators 2011 2010 2009 2008 2007

Current Account Balance (% GDP) (15.4) (14.4) (11.9) (29.4) (30.3) Capital & Financial Account Balance (% GDP) 17.8 17.0 14.7 28.5 31.9 Overall External Balance (% GDP) 2.4 2.6 2.8 (0.9) 1.6 External Public Debt (% GDP) 33.9 32.5 31.7 30.9 35.5 Gross International Reserves (US$ Mn) 305.5 307.0 283.0 258.4 304.6 Net International Reserves (US$ Mn) 64.4 97.5 (8.9) 11.0 103.6 Gross International Reserves (in months of imports) 4.7 4.7 5.2 4.0 5.0 External Public SectorDebt Service (incl. STD) (% of exports of na 6.8 7.8 8.3 9.2 GNFS) Total Debt Service (% of exports of GNFS) 11.6 10.7 12.4 11.3 14.6 Gross Financing Requirements / Reserves (%) 70.8 72.4 58.2 143.9 119.2

November 12, 2012

14