RIGHT OF CENTRE: Key role for Central Bank
The recent S&P downgrade of Barbados is extremely damaging to its hard-earned reputation as a well managed economy.
Countries in the top tier of economic management with high investment-grade sovereign credit ratings (provided by Standard & Poor’s, Moody’s, Fitch and so on) attract the greatest interest from investors, the ultimate source of wealth creation.
Countries with low ratings, including Barbados, are shunned and as a result attract high borrowing rates from financial markets. This phenomenon worsens a country’s fiscal position as higher interest rates eat up more national revenues that would otherwise be available for expenditure on social services, infrastructure, health and education and so forth.
The important observation by S&P is that Barbados’ problems are not solely related to the very weak global economy.
To quote S&P:
“The downgrade reflects our opinion that Barbados’ economic fundamentals continue to weaken. We believe this weakening stems, in part, from rising competitive challenges and other structural factors that the Government can address only in the long term.
“In the short to medium terms, the difficult external environment will hamper the economic and investment outlooks.
The resulting lower economic growth will hurt Barbados’ fiscal and external accounts and will likely lead to further debt accumulation.
“Moreover, in our opinion, despite the Government’s focused efforts to bring down fiscal deficits, the fiscal stance remains qualitatively weak – as rising debt, off-budget spending and contingent liabilities (in particular, CLICO) demonstrate.”
As with individuals, reputation (your brand) is everything. Barbados has now been relegated to the third division, in football parlance.
Fewer will want to extend credit to us and those that do will ask a higher price.
We must all keep a close lookout now for the sharks that swim in such murky waters with promises of pots of gold. There are some memorable recent examples.
Unless we focus on tackling long-term structural changes to make ourselves globally competitive, Barbados will continue to decline, unemployment will rise, investors will look elsewhere (as some are doing already), we will see a flight of human and financial capital, and social instability will ensue.
At some point, too, this lack of confidence will translate into pressure on our exchange rate.
The role of the Central Bank of Barbados in all of this is important. That institution must be credible and seen to be independent of political interference.
For some time now, National Insurance Scheme Funds have been used inappropriately by Government to fund recurring expenditures. Both the International Monetary Fund and S&P have alluded to this in recent reports.
The S&P downgrade will only encourage Government to borrow even more from the NIS to pay its bills at artificial rates unobtainable in financial markets.
This is bad policy and is unsustainable.
The NIS fund is a fiduciary fund and should be managed independently of politicians by professional investment managers appointed on behalf of the fund’s beneficiaries – that is, contributors to the fund – and in compliance with appropriate Investment guidelines.
Barbados’ Social Partnership and other key stakeholders – NGOs, the Opposition and so on – should consider this a priority pillar of future confidence and stability.
• Peter N. Boos FCA is a retired business executive.