Country Economic Review 2017: Barbados

BARBADOS COUNTRY ECONOMIC REVIEW 2017

Disclaimer Copyright Š Caribbean Development Bank (CDB). The opinions, findings, interpretations and conclusions expressed in this publication are those of the staff of CDB and do not necessarily reflect the official policy or position of CDB, its Board of Directors, or the countries they represent.

This work may be reproduced, with attribution to CDB, for any non-commercial purpose. The use of CDB's name for any purpose other than for attribution, and the use of CDB's logo shall be subject to a separate written licence agreement between CDB and the user and is not authorized as part of this licence. No derivative work is allowed.

CDB does not necessarily own each component of the content contained within this document and therefore does not warrant that the use of any third-party owned individual component or part contained in this work will not infringe on the rights of those third parties. Any risks of claims resulting from such infringement rest solely with the user. CDB does not guarantee the accuracy of the data included in this work.

Any dispute related to the use of the works of CDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. Nothing herein shall constitute or be deemed to constitute a waiver of the privileges and immunities of CDB, all of which are specifically reserved.

2

BARBADOS COUNTRY ECONOMIC REVIEW 2017

Dollars ($) throughout refer to Barbados dollars (BBD) unless otherwise stated USD1.00 = BD2.00

OVERVIEW The Caribbean Development Bank (CDB) estimates that the Barbadian economy grew by approximately 1% in 2017, compared with 1.8% in 2016. This growth was underpinned by increased economic activity in the tourism and construction industries, although tourism activity was noticeably stronger in the early months of 2017. The performance of all other sectors was subdued.

The average unemployment rate stood at 10.2% for the 12-month period ended September 2017, slightly higher than the corresponding period in 2016. Inflation levels remained relatively low, although it increased to 4% at the end of October, from 1.5% in the previous year.

The fiscal deficit was reduced, with the effort tilted on the revenue side, and expenditure remaining relatively unchanged. The fiscal authority continues to face pressures to finance its deficit in Fiscal Year (FY) 2017/18, partly because there have been delays in some of the financing measures announced in the Budget. At the end of September 2017, the public sector debt was approximately 157.1% of Gross Domestic Product (GDP).

The external current account deficit stabilised, but foreign exchange reserves continued to decline.

The stock of foreign reserves at December 2017 was estimated at $409.7 million (mn), representing 6.6 weeks of import cover. This represents a decline of $273.9 mn, when compared with the December 2016 stock of $683.6 mn, which was estimated at 10.5 weeks of import cover.

Commercial banks continued to maintain high levels of excess liquidity, improved asset quality, and high levels of capitalisation. Credit to the non-financial private sector increased by 2.7% in 2017. This represented the highest rate of growth since 2012, and was mainly driven by lending to the distribution sector.

Real GDP growth for 2018 is expected to be subdued. While the tourism industry will drive the growth prospects as economic activity recovers in major source markets, major challenges facing the industry pose considerable downside risks. It is expected that real GDP will grow by 0.7% in 2018.

3

BARBADOS COUNTRY ECONOMIC REVIEW 2017

1.

REAL SECTOR

1.01 The Barbadian economy grew by an estimated 1% in 2017 (See Figure 1). Economic activity was underpinned by positive but weak, growth in the tourism industry and the spill over effects on construction. The tourism industry expanded by 1.2%, compared with 4.8% in 2016. Although tourism activity was stronger in the early months of 2017, economic activity in tourism slowed in the second half of the year, according to the Central Bank estimates. Growth in arrivals from the United States and Canada was robust, amounting to 11.2% and 7.7%, respectively but the performance of the United Kingdom market was slightly below that of 2016. Regional travel contributed positively to arrivals, with visitors from Trinidad and Tobago and other Caribbean Community countries rising by 5.6% and 2.1%, respectively. The increased tourist arrivals into Barbados are being facilitated by additional airlift coming out of major source markets. For the first nine months of the year, the average length of-stay contracted by 4.3%, representing the third consecutive year of decline. This trend is in part related to the increased share of shorterË—staying North American visitors in the overall arrivals. Cruise passenger arrivals grew by 14.7% in 2017 as the home porting1 programme, along with the cruise tourism market, continues to perform favourably.

FIGURE 1: REAL GDP GROWTH 2007-2017 3.0

Real GDP Growth (%)

2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016p

2017e

Source: Central Bank of Barbados (CBB) p: provisional; e: estimates.

1.02 Growth in the non-tradeable sector slowed to 0.8%, compared with growth of 1.7% recorded a year earlier. The marginal growth in the non-tradeable sector was supported by construction activity. Despite continued delays in some major tourism-related infrastructure projects, activity in the construction industry grew by 6.3%, mainly attributed to the refurbishment and renovations of properties. The construction industry benefitted from increased activity 1

The home port is the port in which a vessel is registered or permanently based.

4

BARBADOS COUNTRY ECONOMIC REVIEW 2017

associated with the Sandals project, as well as commercial estate projects. The performance of all other sectors was subdued.

1.03 The average unemployment rate stood at 10.2% for the four quarters ending September 2017, slightly higher than the 9.7% in the corresponding period one year earlier (See Figure 2).

Inflation remains at a relatively low level, but is trending upward. Inflation levels, as measured by the retail prices index, increased to 4% at the end of October 2017, from an increase of 1.5% in the previous year. The main category driving this upward movement was food and non-alcoholic beverages. In particular, the implementation of the National Social Responsibility Levy (NSRL), which became effective in September 2017 and the tax measures included in the Budget 2017/18, contributed to the uptick in domestic price levels.

FIGURE 2: UNEMPLOYMENT RATE

Unemployment Rate (%)

14 12 10 8 6 4 2 0 2013

2014

2015

2016

2017

Source: CBB

Social Sector 1.04 The composition of poverty changed in 2016, with a significantly lower share of indigent poor2 (3.39%) compared with 2010 (6.9%), and an increased incidence of non-indigent3 poverty of 13.82% compared with 8.1% in 2010. The total poverty rate (resulting from the addition of the indigent and non-indigent poverty rates) was estimated to be 17.21%, above the rate in 2010, which was 15% of Barbadian households. The Gini coefficient in 2016 was 0.32, which is below the coefficient estimated for 2010 (0.43), and suggests that inequality among households fell between 2010 and 2016. The 2016 Survey of Living Conditions (SLC) data also highlighted a disparity in poverty and vulnerability between genders, as female poverty and vulnerability rates were above that of males in all categories of households (e.g. extreme poor, non-extreme poor, and poor).

The 2016 SLC computed the extreme poverty or indigent poverty line based on a 2,104 kilocalorie per day diet equivalent to $297.28 per month per person.

3 The non-indigent poor represents households with monthly per capita consumption above the indigent poverty line, but below the overall poverty line.

2

5

BARBADOS COUNTRY ECONOMIC REVIEW 2017

2.

CENTRAL GOVERNMENT OPERATIONS AND DEBT

2.01 During the first nine months of FY 2017/18 the fiscal authority recorded a reduced deficit, with the fiscal effort tilted on the revenue side and expenditure relatively unchanged. The estimated deficit of $399.5 mn (approximately 4.3% of GDP) for the period April to December 2017, was 33% lower than the corresponding period in 2016. The primary balance on the fiscal accounts also improved to a small surplus equivalent to 2.2% of GDP (See Figure 3). This, however, is not large enough to cause a meaningful change in the unsustainable debt trajectory.

2.02 The reduced fiscal deficit can be attributed to enhanced revenue collection, particularly from NSRL. In addition, excise duties rose on account of higher collections on fuels. Corporation taxes grew by $34.7 mn, and there were similar gains in the collection of Value Added Tax ($30 mn).

The Budget for FY 2017/18, like Budgets in the previous three years, focused on increased revenue generation to improve the outturn on the fiscal accounts, reduce the debtË—toË—GDP ratio, and strengthen the foreign exchange reserves. While this may cause some immediate improvement in the fiscal outturn, there remains scope to rationalise Government expenditure.

FIGURE 3: DEBT/GDP AND PRIMARY BALANCE

180.0

Primary balance as % of GDP

160.0

Debt as % of GDP

140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 2011

2012 2013 Debt to GDP Ratio

2014

2015 2016p Primary Balance (Right Axis)

2017p

Source: Accountant General, Ministry of Finance (MOF), and CBB

6

BARBADOS COUNTRY ECONOMIC REVIEW 2017

2.03 Recurrent spending remained relatively stable in the nine-month period in FY 2017/18, compared with the previous year. Meanwhile, there was a noticeable reduction in capital spending, which fell by 29.1%, compared with 2016. This was the result of delays in some major capital projects that were expected to commence in the FY. Most of the pressure in recurrent expenditure remains in the categories of transfers and subsidies and interest payments, which comprise approximately 60% of total expenditure.

2.04 The fiscal authority continues to face pressure to finance its fiscal deficit in FY 2017/18, partly because there have been delays in some of the measures announced in the Budget, such as the planned divestment of public assets. The fiscal deficit for the nine-month period was financed mainly by domestic commercial banks, comprising 74.6% of the total financing required. This was mainly because of the requirement for banks to increase their holdings of Government securities.

As a result, CBB financing was limited to 24.2% during April to December 2017, compared with 144.1% of total financing in the corresponding period in 2016. At the end of December, public sector debt4 was approximately 157.1% of GDP, slightly lower than the 161.5% of GDP in the previous year. The decline in debt was due to the improved primary balance (2.2% of GDP), compared with the primary deficit of 0.08% in the same period in 2016 but was offset slightly by the lower GDP growth in 2017, compared with the previous year.

3.

EXTERNAL SECTOR

3.01 The external current account deficit improved slightly, but foreign exchange reserves continue to decline. The external current account recorded a deficit of 4.4% of GDP in 2017, slightly lower than the deficit of 4.5% in 2016. Improved earnings from the tourism industry helped to stabilise the external account, although higher fuel prices contributed to increased costs of imported goods.

3.02 The stock of foreign reserves at the end of December 2017 was estimated at $409.7 mn, representing 6.6 weeks of import cover. This amounted to a decline of $273.9 mn, when compared with the December 2016 stock of $683.6 mn which was estimated at 10.5 weeks of import cover (see Figure 4). This represents the sharpest decline in the foreign exchange reserves since 2011.

3.03 In September 2017, Standard & Poor’s downgraded Barbados’ local currency sovereign credit rating to ‘CCC’ from ‘CCC+’, while affirming its long-term foreign currency sovereign rating at ‘CCC+’ and held a negative outlook on both its local and foreign currency ratings, citing its relatively limited policy adjustment. The major policy challenges cited by the rating agency are the Government’s high fiscal deficit; general Government debt and debt servicing requirements; limited appetite for private-sector financing; and low level of international reserves.

Includes Domestic Debt (inclusive of the National Insurance Scheme), External Debt and State-owned Enterprises Debt.

4

7

BARBADOS COUNTRY ECONOMIC REVIEW 2017

FIGURE 4: INTERNATIONAL RESERVES 6.0

Months of Imports

5.0 4.0 3.0 2.0 1.0 0.0 2011 Source: CBB.

4.

2012

2013

2014

2015

2016

2017

FINANCIAL SECTOR

4.01 Commercial banks continued to be characterised by high levels of excess liquidity, at 14.1% of domestic deposits, improved asset quality (non-performing loans declined slightly to 8.2%) and high levels of capitalisation at the end of December 2017. Credit to the non-financial private sector increased by 2.7% in 2017. This represents the highest rate of growth since 2012 and was mainly driven by lending to the distribution sector.

4.02 CBB announced a further tightening of its monetary policy stance. The policy change was applied to the Barbados dollar securities reserve requirement ratio for commercial banks, and was implemented in two phases. Effective December 1, 2017, commercial banks were required to hold 18% of their domestic deposits in stipulated securities and from January 1, 2018, were required to hold 20%. This was the second increase for the year, and complemented the fiscal initiatives introduced by the Minister of Finance in his Financial Statement and Budgetary Proposals earlier in the year. The cash reserve requirement for commercial banks remained unchanged at 5%. The reserve requirements for deposit-taking trust and finance companies, and merchant banks also remained unchanged.

5.

OUTLOOK

5.01 Prospects for higher tourist arrivals bode well for growth and improvement in the foreign reserves position. However, persistent fiscal deficits and high debt levels have the potential to overshadow the gains from tourism and negatively affect the outlook. The Government of Barbados has designed a home-grown economic reform programme that aims to unlock growth; attract foreign direct investment; improve access resources to close the financing gap; and place the Barbados economy on a more sustainable path. This programme should be accompanied by mechanisms to strengthen implementation.

8

BARBADOS COUNTRY ECONOMIC REVIEW 2017

5.02 Real GDP growth for 2018 is expected to be subdued. While the tourism industry will drive the growth prospects as economic activity speeds up in major source markets, major challenges facing the industry pose considerable downside risks. Infrastructure deficits have the potential to constrain growth and pending general elections could delay the implementation of critical reforms.

Such delays could weigh on the business environment and cause delays to major investments, which would affect growth prospects. Imbalances in the fiscal and external accounts will severely constrain the Government’s ability to raise capital spending.

5.03 The trajectory of public debt remains unsustainable and sensitive to a number of macroeconomic shocks. CDB’s Debt Sustainability Analysis shows that risks remain elevated over the medium term. Reducing debt to levels more conducive to macroeconomic stability and lowering country risk will require greater fiscal effort. Further, a path towards fiscal sustainability and higher growth will call for fiscal consolidation and debt restructuring, as well as structural changes that could unlock growth and address supply-side constraints.

TABLE 1: SELECTED INDICATORS Real GDP Growth (%) Average Inflation (%) Unemployment (%) Primary Balance (% of GDP) Public Sector Debt (% of GDP)

2013 0.0 1.8 11.6 (3.8) 139.4

2014 0.0 1.8 12.3 (0.6) 147.3

2015 0.7 (1.1) 11.3 (2.1) 155.2

2016 1.8 1.5 9.7 2.4 161.5

2017 1.0 4.0 10.2 2.2 157.1

Source: CBB and MOF.

9