Barbados has not escaped the negative impacts of the worst global economic recession in living memory.
The lag effects are likely to create very difficult conditions for us at least until 2011 at the earliest.
The parlous state of Public Finances also makes the situation more complicated.
In its September 2009 report on Barbados, the IMF stated as follows:
“Barbados has strong public and private institutions and benefits from high political and social stability. The country has some of the highest social and competitiveness indicators in the region and enjoys investment-grade rating on its sovereign bonds. Its low crime level, well-educated work force, reliable infrastructure, and attractive natural setting have helped make it a leading destination for high-end tourism and a prime location for offshore financial services.â€
They however go on to say:
“Barbados is facing a severe economic recession. Output is contracting, as the global financial crisis has depressed tourism, brought FDI to a sudden stop, and weakened public
finances. Consequently, unemployment has risen to double-digit level, and international reserves have declined. While the underlying balance of payments is expected to remain weak, international reserves are expected to increase marginally in 2009, on account of the
SDR allocations and the large government bond issue abroad.â€
On 13 November 2009, Standard & Poor’s Ratings Services revised it outlook on Barbados from ‘stable’ to ‘negative’.
“The outlook revision on Barbados to negative is due to our view that
the timeliness and magnitude of the government’s fiscal consolidation,
necessary to preserve Barbados’ credit fundamentals at the current ‘BBB’ level, is uncertain because of a worse-than-anticipated economic recession in the country.”
They also state :
“Results for the first three quarters of 2009 underscore a rapid deterioration in Barbados’ public finances, at a faster rate than we had previously assumed, and a sharper economic contraction. We have revised Barbados’ real GDP estimate to negative 4.8% in 2009 (from our previous estimate of negative 2.5%), with a further decline of 1% expected in 2010, before a return to growth in 2011.â€
The Central Bank of Barbados has responded as follows:
“Central Bank welcomes Standard and Poor’s affirmation of investment grade of the country’s external debt. We are of course aware that the outlook has worsened. We said so in our most recent report on the economy, at the end of last month. Some adjustments in fiscal stance will be required, in order to maintain the stability of the economy. As the S and P report notes, Barbados boasts strong institutional and social arrangements, political stability and a well-funded NIS, and there is every reason to expect that government will take the necessary measures to protect Barbados’ external credit-worthiness.
The Bank also noted that other leading economic indicators either have remained strong or have improved.
Between January and September 2009, the current account deficit has improved to an estimated 4.3% of GDP, compared to 13.3% for the corresponding period the previous year.
In respect of the Net International Reserves (NIR), it is estimated that by year-end, the import reserve cover will be 20.7 weeks of imports of goods and services; 12 weeks of import cover is the accepted international norm.â€
The better news is we do haveÂ sound well capitalized Banks and a financial sector that has emerged unscathed from the global financial meltdown.
As a small open economy Barbados depends primarily for prosperity and growth on inflows of foreign exchange from foreign direct investments, visitors (leisure or business), the exports of other goods and services and remittances from Barbadians living abroad.
The global recession has taken its toll on all of these sources of income.
There are signs that the global recession may be ending and recovery is on its way, lead by Asia. Lets hope so.
Many believe however that unemployment, currently at around 10% in our traditional markets-USA,UK and Canada-will remain high for several years. The so-called jobless recovery.
Additionally people have been hurt so badly-lost savings, homes, jobs etc.-that many are changing their consumption patterns. People are saving more and spending less on travel, luxury goods etc. Whilst this is a positive development in the longer term, in the short term it will negatively impacts the Barbados economy, as fewer will travel here and those that do are demanding better value for money-‘more for less’.
This reality will put stress on our tourism businesses.
Bank finance has also tightened considerably so borrowing for second homes overseas will be more difficult.
UK elections in 2010 will most like mean the new Government having to raise taxes and cut expenditure-not good news for us in the short term.
The strength of the Canadian dollar and its economy give us cause for some optimism in that market.
Unemployment in Barbados is estimated to be around 10% and will most likely increase in response to Government’s belt tightening and shrinking profit margins of businesses.
Government has announced plans to balance its budget by 2012 (current deficit estimated at about 8% of GDP) and to reduce the debt to GDP ratio from the current estimated 115% to 70 % by about 2018.
Measures recommended by the IMF include:
(Potential savings in percent of GDP)
Continue to moderate wages to bring down the central government wage bill to about 10 percent of GDP over five years (1 percent);
- Reverse the large expansion of expenditure in goods and services (2 – 2Â¼ percent);
- Prioritize and reduce capital outlays across the public sector (Â½-1percent);
- Streamline the operations of stateowned enterprises, and adjust prices for utilities and other public services (2Â½-3percent);
- Improve tax administration and broaden the tax base (Â½ percent);
- Raise the VAT rate by 1 – 2 percentage points (Â¾-1Â½ percent); and
- Sell government assets.
It seems likely that some of these recommendations must be implemented very soon.
A focus on growth strategies is essential.
This is not a tax and defend (the status quo) moment.
Clearly the poor in society must be protected in the transition phase.
Notwithstanding the challenges and perhaps because of them, Barbados is poised to make critical strategic decisions that will ensure future competitiveness, economic growth and prosperity.
The priorities must include:
- The creation of a new competitive Public Service that can become a key ‘value proposition’ for the country. This must be done and is a top priority.
- Transforming the roles of Workers Unions-they must become true enablers of the investment environment thus attracting investment and creating economic growth and better, more sustainable jobs. Any labour practices that make us less competitive must be identified and eliminated.
- Encourage the shift of employment from the Public to the Private Sector . Advocate self-sufficiency by supporting and enabling Entrepreneurship at every level. We must develop an Entrepreneurial Culture and become the ‘Entrepreneurs Paradise in the Caribbean’. We can fast track this opportunity by inviting strategic entrepreneurs to relocate their businesses to Barbados to partner with us in industries where we have strong global growth potential.
- Focus on earning of foreign exchange through engaging in global trade in indigenous exports of goods and services-education, arts & culture, professional services, multi-media, health & wellness, sports, ICTs, construction services etc.Â The list is endless.
- Grow more food.
- Become a self-sustaining Green Economy.
With its abundance of talent and wise heads in leadership positions in Barbados this opportunity must be grasped. It will be fatal if we don’tÂ ‘grab the bull by the horns’. Team Barbados.
Leadership and agility will be needed.
Barbados is poised to move to a higher more competitive and sustainable state. The alternative is not worth contemplating.
Peter N. Boos FCA
18 November 2009