Olga Kalinina, director sovereign ratings, of international rating agency Standard & Poor’s on Wall Street, New York, which monitors the Barbados economy, spoke with the SUNDAY SUN’S North American correspondent Tony Best last Thursday about the state of the economy.
Q: What’s your reaction to the Barbados Central Bank’s latest report?
Kalinina: There are some mixed signals, some positive signals. There is the turnaround in tourist arrivals, a little bit lower unemployment levels, and a somewhat better fiscal position. At the same time, in terms of the dollar amounts, we see the tourism sector is recovering very slowly and the tourist expenditures still constrained.
We noticed that the current deficit is widening [and] higher commodity prices. Looking at the composition of the fiscal performance, we are concerned about the underperformance on the revenue side.
Q: What about the impact of the report and the economy’s performance in the first half of the year on Barbados’ credit rating?
Kalinina: We are maintaining the triple B (BBB)-minus rating with a stable outlook. That is a reflection of the strength that the sovereign [Barbados] continues to maintain, such as political stability and strong governance, two things that definitely support the ongoing policymaker’s effort to address the challenges, mostly on the fiscal side, and the continuously high surpluses of the National Insurance Scheme (NIS), which provide important financing to the Government deficit which remains quite high.
Q: You focused on the positive. What about the negative picture?
Kalinina: On the negative side, the BBB-minus credit rating reflects a very high fiscal deficit that has a structural component which will take a lot of effort to resolve. Nevertheless, we expect some narrowing down this year.
Then, there are the usual structural challenges such as the small and open size [of the economy], its dependence on the United States and United Kingdom, and weather-related vulnerabilities.
Q: What’s the bottom line?
Kalinina: We see the continuation of the mixed story, the ongoing challenges on the fiscal part and ensuring a more robust recovery. We see that the offshore sector is picking up in terms of the numbers, but that has not yet translated into [higher] dollar amounts which may be a little bit of a problem if it continues.
Besides a very difficult fiscal situation, we are also concerned about a very weak external liquidity situation in Barbados.
If the external factors continue to deteriorate, there may be a bit of risk on the currency peg [exchange rate] which we don’t see right now because the foreign exchange reserves continue to be more or less stable.
Q: What about the projection for growth in the economy?
Kalinina: We believe that the economic rebound that we saw in the first half of the year will continue. We have the same projection currently for 2011 as the Central Bank – two per cent for the year in GDP (gross domestic product) growth.
If we believe this number is changing to the worst and it impacts the fiscal performance and the revenue generation, then we would probably have a more negative sentiment towards Barbados’ creditworthiness.
But as of now the mix of the indicators supports the current stable outlook on the BBB-minus rating.
Q: How did you react to the fact that the foreign reserves didn’t grow in the first half of the year as some economists were hoping?
Kalinina: It is clear why they haven’t grown. The report explained what happened. What we see is that because of the discounting [in the tourism sector], it has taken time despite the growth in tourist arrivals to generate higher revenues.
So, it is really a question of how soon they can reverse it and how soon they can go back to historic prices and start generating more revenue.
We also see that the country has secured more airlift, so hopefully the positive change would be lasting and there would be greater revenue generation in the tourism sector.
Q: How about the unemployment picture? What did you deduce from it?
Kalinina: The unemployment number came down somewhat and for that we hope it can soon translate into a little bit better consumer confidence, a bit more spending and a bit more VAT and better corporate tax collection. That’s going to be an important point for the country’s BBB-minus rating.
Q: Turn your attention to the debt. What are the expectations?
Kalinina: The debt situation is a reflection of the continuously high fiscal deficit, so the fact that it has come down somewhat in the last fiscal year, and the fact that we are projecting it would come down somewhat more this year, it doesn’t mean the debt burden will reverse very soon.
If anything, in our own [recent] report we are saying we believe the Government’s high debt burden would likely remain at this level in 2012 before beginning to subside in 2013.
Q: What would happen to the fiscal picture if the Government gave an increase to public workers?
Kalinina: We see that the wages and salaries actually declined in the first few months of 2011 as presented by the Central Bank. If anything, we understand that the trade unions are quite understanding about the current difficult economic situation, therefore their wage demands are quite modest. Without that there would be another fiscal scenario.
Q: What’s your view of the proposal put on the table by other economists for a public sector wage freeze?
Kalinina: Whether it’s a wage freeze or a wider comprehensive measure affecting the public sector, looking at different subsidies and the payroll and public enterprises, that’s really a Government decision. From our point of view we are looking at where the fiscal rigidities are.
Now, we see a lot of money is being spent on transfers and subsidies to the public institutions and there must be ways for the Government to control it, or find a way to minimize the numbers while increasing efficiency of the spending.
