Fantastic views for tourists, low taxes for investors - the Virgin Islands has been seen over the years as paradise on Earth. However, today the Caribbean territory is facing a bankruptcy ghost, and is in serious troubles. The whole economy has been struggling after closing down only one company - writes Marcin Lipka, senior analyst at Conotoxia.
Even in 2011, the US Virgin Islands (USVI) moved quite well against other US-dependent territories. With GDP per capita about 60% higher than in Guam and more than twice as high as in the Northern Mariana Islands, with a better overall economic condition than in Puerto Rico, the Islands were not only relatively wealthy, but their creditworthiness was also highly assessed. Six years ago, Moody's gave USVI a Baa1 level, which is just two degrees less than for Poland.
All started to change in 2012 when one production plant was closed.
Addiction to one company
At the beginning of this decade, the Virgin Islands' economy was based on three pillars. The first one, although later it turned out to be not the most important, was tourism. According to estimates by economists at the New York Federal Reserve, it provided employment for about 20 percent so just over 100k of the population.
In USVI functioning a significant role had the rum's export. According to Moody's data from 2010, sales of alcohol produced on the Islands to the continental US have generated 100 million USD hence, more than 11 percent of which at that time was all of USVI budget incomes.
However, it was not the tourism or the rum that had been ensuring the welfare of the Virgin Islands, but a huge refinery that had been operating until 2012. It processed 500k. oil barrels a day (so almost the equal demand for fuel in Poland every day). If the refinery had continued to operate till this day, S&P Global Platts would be among the top five in the world.
Its closure was a huge economic blow for the Virgin Islands. Data from the Bureau of Economic Analysis of the US Department of Commerce (BEA) has shown that in 2011-2013 the GDP of this territory fell by more than a quarter, and only in 2012, the exports of goods from USVI decreased by 84%.
The next two years had not brought much improvement. Last BEA's macroeconomic readings have shown that the USVI economy has been growing at barely 0.2%.YOY. The value of goods' exports in 2015 was 329 million USD, while in 2011 - 13.3 billion USD, and a decade ago, in the peak of the economy - 17.2 billion USD. In total, exports decreased by 98% compared to 2008.
Slippery slope
The disappearance of the petrochemical industry from the Virgin Islands has been the beginning of serious problems, not only in relation to the foreign trade or GDP growth. Local authorities did not cope with overwhelming debt problems and under-funded pension scheme.
On June 30, 2016, Moody's has downgraded USVI rating by up to five grades from Baa2 investment rating to B1 speculative rating. The agency pointed out that USVI's credit position has been still deteriorating and "the government has a very weak financial position". Half a year later, the rating was reduced by three degrees to Caa3 level, due to "extremely weak financial and liquidity position."
At the beginning of 2017, the agency has stressed that the pension scheme on the Islands could be "insolvent before 2023". USVI solvency concerns have been also visible in the debt market.
Yields of bonds maturing in 2024 have reached the level of 14.7 percent, while a few years ago they fluctuated between 3-4 percent range. Likewise, quotations of Puerto Rican treasury instruments (US territory) are being priced today, which in May this year has officially declared bankruptcy.
Looking at the USVI economy, it is hard to find an argument that would hope for a fast recovery. On the contrary, the deteriorating state of the local pension scheme, where now, one worker statistically counts for almost one beneficiary, combined that with a lack of investment and practically zero exports, theses may suggest that the Virgin Islands can quickly share Puerto Rico's fortunes.