The Ebbs And Flows Of Currency Tides

If there is one constant in the markets it is that nothing is constant. Like the waves at the shoreline, markets are driven by their tides and winds, ever changing, always shifting. It was only a few weeks ago that the British Pound seemed to be reasonably secure, trading in a range between B$ 3.20 […]

By Michael Berry CFA

February 2, 2010

If there is one constant in the markets it is that nothing is constant. Like the waves at the shoreline, markets are driven by their tides and winds, ever changing, always shifting. It was only a few weeks ago that the British Pound seemed to be reasonably secure, trading in a range between B$ 3.20 and B$ 3.40. Suddenly, though, Sterling has the look of a wounded currency. And, with the Pound now below the B$ 3.20 level again, we need to take note.

The Barbados dollar is pegged to the US dollar and over the years that has delivered a framework of discipline for policymakers. However, a peg against the US dollar does not insulate us completely from currency fluctuations and, more importantly, we need to note how those fluctuations affect our main markets: Canada in the case of the international business sector and the UK in the tourism and real estate sectors.

If one were to look back over the last twenty years, it is noticeable that there is a high correlation between the health of the Barbados economy and the value of the Pound to the Barbados dollar. In addition, a casual observation suggests that a level of B$3.20 per Pound is a tipping point. If the Pound rises above that, and towards B$ 4.00, then the island is doing well; if it falls below, the converse appears to be true.

In the late 1980’s a strong Pound brought us the “Concorde” boom; this ended with the crisis of 1991, when the Pound sank to B$ 2.80 from around B$ 3.80. And, it wallowed in limbo there for a number of years until improving fortunes saw Sterling rise above the magic B$ 3.20 level in 1995. There followed two successive booms, “Arthur l” and “Arthur ll”, which were punctuated by the 2000 Dot Com crash that led into the 9/11 terrorist attack. By mid 2000 the Pound, which had traded as high as B$ 3.40 in the late nineteen nineties, had slumped back to B$ 2.80 and, it stayed there through to the end of 2001.

The financial crisis of 2008 brought an end to “Arthur ll”, which was the more powerful boom featuring bottlenecks in the construction sector, inflated prices and, perhaps, some lofty dreams. The Pound, which peaked at B$ 4.20 in late 2007, has since plunged and it looks as though it may have more ground to give. Currency predictions are dangerous but it would not surprise if the Pound fetches B$ 2.80 or less (with an emphasis on the less) by mid-year. With an election looming it will take Britain several years, with tough remedies applied, to dig its way out of its problems. That suggests the UK economy will not be a very potent driver for Barbados for the next few years.

Canada, on the other hand, presents a different story. Whereas business from the UK drives tourism and real estate development, business from Canada drives the offshore sector. This provides a neat counterweight, and a form of economic insurance, for the island. Canadian banks, which have a significant presence in the region, are strong and well managed. The Canadian economy has been fairly resilient to the world’s economic problems and this suggests that the international business sector will fare reasonably well. In all likelihood it may now be making a bigger relative contribution to the Barbados economy.

At the height of the 2000/2001 crisis a Canadian dollar fetched only B$ 1.25. It has risen steadily since then to a recent high of just over B$ 2.20 per Loonie. Where it goes from here is difficult to assess but in all likelihood the Canadian dollar should remain in the range of B$ 1.80 to B$ 2.00. For Canadian businesses operating from Barbados, that provides a stable platform from which to build, and one which is cheaper today than it has been for many years. The international business sector is now contributing approximately 60% of corporate tax revenues and the “spend” derived from these entities is thought to be equal to around 11% of GDP.

The crisis we are facing is an evolving one. It began as a credit crisis when confidence in the markets and financial institutions evaporated. It then became an economic crisis which hit the ordinary chap in the street. And now, with higher spending and reduced revenues, it has become a fiscal crisis, as governments struggle to overcome their budgetary problems. Portugal, Ireland, Italy, Greece and Spain (the PIIGS, as they have become known, and no insult intended to any national of these countries) have emerged as countries with issues, putting a strain on the Euro.

But it is the UK which should trouble us most for the implications that problems there have for our real estate and tourism industry. It is quite possible that a weak Pound will turn UK investors into better sellers than buyers. On the other hand, Canada may provide a partial offset. There the currency is strong and the banking system is sound and privately owned. With access to capital, a traditional interest in the region and an increasingly international approach, Canadians may be the ideal partners for these times.

Yet, even as the tides of currencies ebb and flow, it is important to remember one thing; it is individuals who ultimately make things happen through their decisions to buy or sell, move or stay, work or rest. If as a jurisdiction we don’t have an accommodating and welcoming platform then it really won’t matter whether a particular tide is in or out; the boats will just pass us by.

Michael Berry CFA

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