Political economy - Thursday, April 9, 2009 12:56
Standard & Poor’s: Barbados economic outlook negative, US dollar peg in jeopardy
By Antillean,Sovereign ratings agency Standard & Poor’s (S&P) has downgraded its outlook on the Barbados economy from “stable” to “negative”¹.
The announcement comes just over a year into the Democratic Labour Party administration led by Prime Minister David Thompson.
Debt and an uncertain Barbados to US dollar peg
In explaining the ratings agency’s decision, S&P analyst Olga Kalinina cited the island’s growing fiscal deficits and the consequent increase in the government debt burden, which she says does not bode well for Barbados’ long-standing commitment to maintain the currency peg.
The Barbados dollar has been pegged to the US dollar at 2:1 since 1975.
Bleaker outlook for 2009 as debt reaches 44% of GDP
S&P expects a bleaker outlook for the remainder of 2009 as real GDP contracts by 2.1% this year, compared to a modest growth of 0.5% in 2008.
Meanwhile, central government’s deficit will reach 5.7% of GDP, and net general government debt will increase to 44% of GDP this year.
The analyst also warns that although the current account deficit will shrink to 6% of GDP in 2009 (down from 11% in 2008, a decline mainly attributable to savings from oil imports), Barbados’ low foreign direct investment and financial account inflows are expected to put pressure on Central Bank reserves.
In this regard, the financing gap is expected to climb to 169% of current account receipts and useable reserves, and the gap is expected to hold at more than 165% for the next three years. The financing gap last stood at 143% in 2007.
Government’s inconsistencies, CLICO and further reserve depletions do not rule out another downgrade – and further pressures on currency peg
Standard & Poor’s stresses that the negative outlook on Barbados reflects the sum total of these growing imbalances, caused primarily by government’s inconsistent fiscal and monetary policy.
Citing the state’s “accommodating fiscal policy” amid the worsening economic situation, Kalinina cautions that the deterioration of the government debt dynamic will necessitate a combination of public sector borrowing, which in turn will lead to international reserve depletion. Ratings will come under further downward pressures if the loss in reserves is higher than expected, which will “intensify pressure” on the currency peg.
S&P will also consider a further downgrade if the economic deterioration puts a strain on the strength of social cohesion, or if the fiscal deterioration (including possible pressures from the CLICO issue²) is more severe than expected.
S&P’s warnings seem eerily similar to those expressed in March by former Prime Minister Owen Arthur, who described the Barbados economy today as a “perfect storm”³.
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I have noticed over the years that the use of the term deficit can cause some anxiety in certain circles. I have also noticed that the response from thoes that should know better is to borow with the usual explanation about low interest rates and good credit ratings being used. In my opinion the subject is complex, what is missing however is the basic application of not spending more than you earn and placing all of what is earned t the disposal of the house hold or in this case the Government. They are to many barbadians contributing to this situation withh their imported spend now worry later mentality. To many are not paying taxes but use their gains to purchase in us dollars, I believe the term used is the poor black man. If left unchecked these people can put to waste the best economic policy, it is not only about the academics it is about the buyer ehaviour, you are essentially competing against 295000 mini economist. Get out into the field and allow these free spenders to know they are checks and balances and the debt must be paid and not renegotiated.