Caribbean & Central America - April 2012 (ISSN 1741-4458)

The Barbados economy is described as “stable” by the Central Bank of Barbados. However, a note issued by the international ratings agency, Moody’s on 26 March highlights the challenges for growth.

Barbados has suffered from five years of low growth or recession. Its last good year was 2006, when GDP grew by 5.7%. Since then it grew by 1.7% in 2007 and just 0.1% in 2008 before contracting by 3.7% in 2009. The return to growth in 2010 (0.2%) and 2011 (est. 0.5%) has been anaemic. Moody’s points to significant positives such as high institutional strength and “medium economic strength”, but it worries about low government financial strength. It is concerned that the country’s relatively high GDP per capita (US$19,200) is offset by low growth rates and a small sized economy (US$4.3bn) that relies excessively on tourism and international business services.

As Moody’s points out, “even during a period of very favourable global conditions from 2004 to 2007, Barbados real GDP growth averaged just 3%-4%”. It also points out that both the island’s main sources of revenue are likely to experience low growth for the foreseeable future.

There is a feeling that the island’s relative prosperity is making the government reluctant to enact the changes necessary to provide for faster growth. There are also worries about indebtedness. Persistently large fiscal deficits are being fed by a high level of entitlements and subsidies for loss-making state-owned enterprises. The Moody’s note says: “Moody’s has increasing concerns about the capacity of the domestic financial market to continue to absorb high levels of government debt, particularly in the light of the growing external deficit and lower domestic savings.”

It is possible that this concern is heightened by the apparent insouciance of the central bank, which argues that the fiscal strategy of achieving a balanced budget by 2016/17 is sustainable because: 1) the cost of servicing external debt will absorb less than 10% of foreign exchange earnings for the rest of the decade; 2) there is no need to refinance major borrowing on the international financial markets until 2021; 3) the annual interest cost of the total debt, domestic and foreign, is manageable at 22% of government revenues; and 4) maturing domestic debt may be refinanced without difficulty because there remains excessive liquidity in the economy. The overall ratio of government debt to GDP is 47.3%, down from 51.1% in 2010. However, the current account deficit was 8% of GDP in 2011, up from 6.1% in 2010.

Moody’s local and foreign-currency bonds rating for Barbados is Baa3, but the outlook is negative despite acknowledging that the worst of the economic deterioration is over and deficits should continue to decrease slowly in line with the government’s declared policy. However, the agency says, deficits “will remain large for the next few years unless the government takes more drastic action than currently expected”. The negative outlook also reflects that “pressures on Barbados’ fixed exchange rate could result due to an anticipated rise in the current account deficit”.