Central Bank review of economy 2012
The following is an abridged version of the Central Bank of Barbados’ review of the economy for 2012 and prospects for 2013.
Barbados’ foreign exchange reserves increased during the year to $1 467 million, and the import cover at end-December stood at 18 weeks, even though there was no real growth in the economy in 2012.
Output and foreign exchange from tourism contracted, with a 6.2 per cent decline in long-stay arrivals and an increase of only 4.3 per cent in the average length of stay. However, import expenditure was contained, and the gap between import payments and foreign earnings was smaller than for 2011.
Foreign exchange inflows on the capital account held up, thanks largely to the receipt of $167 million from the sale of Barbadian shares in the former Barbados National Bank.
The flat growth performance resulted from declines in tourism, other traded services and manufacturing.
Output in the non-traded sectors grew by only one per cent because of fiscal spending limits and the reduction in the traded sectors. Several tourism-related projects were ongoing, but foreign investment in real estate projects was down about 16 per cent.
The fiscal deficit for the April-December period is estimated at 6.4 per cent of GDP, compared with 5.2 per cent in the same period of 2011. Revenue from personal taxes was down ten per cent and VAT receipts fell two per cent, but there was a nine per cent increase in property taxes.
Subsidies to Government entities rose by two per cent, and interest payments were higher by four per cent. Capital expenditure fell by four per cent.
There was no additional foreign market borrowing and external debt service absorbed 6.2 per cent of earnings on the external current account. The overall net debt of the public sector, after accounting for the financial assets of Government and statutory bodies, was 54 per cent.
The ratio of gross Government debt to [gross domestic product, or] GDP, when [the National Insurance Scheme or] NIS is treated as part of Government, stood at 83 per cent, and the ratio of external debt to GDP was 31 per cent.
Moderation in the rate of growth in international food prices brought some relief in the rate of inflation in 2012, from 9.5 per cent at the end of December 2011 to 6.5 per cent at the end of September. However, there was no alleviation [in] the rate of unemployment, which increased slightly to an average of 11.7 per cent over the nine-month period.
Banks maintained capital positions well above the statutory requirements and remained highly profitable, with adequate levels of liquidity.
However, there was further deterioration in credit quality, and loans not being fully serviced on time reached 12.7 per cent of total loans, compared with 11.1 per cent at December 2011. Actual losses on loans were no more than 0.2 per cent of total loans and advances.
Real economic growth for Barbados in 2013 is forecast at 0.7 per cent. This projection is based on the most recent IMF forecast of average growth of 1.7 per cent for Barbados’ major trading partners – the United States, [Britain] and Canada – as well as an improvement in consumer expenditure in these markets of 1.2 per cent.
In addition, private capital inflows of $600 million are anticipated for activity in the tourism and construction sectors.
No significant gain in employment is expected. Based on current trends in international commodity prices for food and the IMF’s projection for fuel, domestic inflation could fall to the region of five per cent for 2013.
Barbados ranks 44th in the 2013 Global Competitiveness Index on the strength of its well functioning institutions, good infrastructure, high quality educational system, high use of information and communication technologies, and a fairly sophisticated business community.
However, with regard to the speed with which Government and the private sector engage in new projects and in the facilitation of business activities by official institutions, Barbados does poorly, by international comparisons.
With respect to agro-processing, exports of quality rum that is aged, blended and bottled in Barbados account for 43 per cent of rum exports. This premium segment of the market will be less severely affected by the United States subsidization of commodity rum produced in the United States Virgin Islands.
Over the next five years, the potential exists for alternative energy sources to contribute more than 25 per cent of Barbados’ power needs through the implementation of distributed solar and wind power generation and the installation of waste-to-energy and bio-mass cogeneration plants. Together with more efficient energy usage, this could result in a 20 per cent reduction in fuel imports by 2017.
Barbados’ strategy for the international business and financial services sector is mounted jointly with the Barbados International Business Association and comprises intensified marketing in Canada, together with active penetration of new markets in Latin America and elsewhere.
Initiatives are designed to take advantage of Barbados’ network of double taxation agreements to leverage traditional and non-traditional markets in areas such as mining, oil and gas, renewable energy, wealth management, captive insurance, and medical services.
A regulatory system for the financial sector which meets internationally acceptable standards continues to be an essential plank of Barbados’ competitiveness in the IBFS sector.
The Central Bank and the Financial Services Commission, in collaboration with private financial institutions, are in the process of updating the regulatory framework in preparation for a Financial Sector Assessment Programme (FSAP) to be conducted by the World Bank and the IMF in 2013.
The FSAP provides a comprehensive overview of risk exposures and risk management in the financial sector.
The 2013 FSAP will be Barbados’ third.
The real economy
Tourism value-added contracted by an estimated 3.5 per cent. There were reductions of 8.8 per cent and 9.0 per cent in [American] and [British] visitors, respectively.
The closure of the Almond Resorts represented an estimated loss, on average, of about one-fifth of visitors preferring an all-inclusive vacation. This, coupled with [Britain’s] Air Passenger Duty which increased by over eight per cent and the decrease in the number of flights out of [the United States] and[Britain] by two major carriers, were the main contributing factors to this outturn.
In addition, the cessation of flights by REDjet earlier in the year contributed to the reduction in regional visitors. Travellers from Trinidad and Tobago rose by almost 50 per cent between January and April but subsequently slowed to 1.5 per cent for the year as a whole, while visitors from other regional economies contracted by 8.1 per cent.
The decline of 15 per cent in cruise passenger arrivals over the January to December period stemmed largely from the shift of some cruise ships to other destinationsand a renewed focus on the Mediterranean region by some of the major cruise companies.
The downturn in cruise activity was evident particularly during the summer period (April to December), when cruise ship calls fell by 29.5 per cent.
Manufacturing and agriculture
The share of manufacturing in GDP over the past two decades declined from about nine per cent in the 1990s toabout five per cent at the end of 2012. During the last five years some improvement in the level of production was observed, mainly in food processing, electronic components, chemicals and beverages, and tobacco.
These areas, however, recorded lower output levels during 2012, with the exception of food processing, which improved by one per cent.
During 2012, output in the agricultural sector is estimated to have contracted by about two per cent, although sugar production increased by 4.4 per cent due to higher yields and favourable weather conditions.
Non-sugar agriculture was down four per cent, the third consecutive year of decline. In spite of uncertainty surrounding the quota system for farmers, the production of fresh milk rose by about five per cent for the year.
In contrast, chicken and fish production were lower by an average 23.4 per cent. Fish landings were significantly affected by the presence of decaying seaweed during the first half of the year.
Other real sector activity
Activity in the construction sector decreased by an estimated three per cent, a reflection of declines in the import of building materials and employment in the sector of six per cent and 7.7 per cent, respectively. Other major areas of non-traded activity recorded lower growth, subdued by lacklustre tourism performance and reduced spending.
The 12-month moving average rate of inflation, the main indicator of domestic price inflation, decreased to 6.5 per cent at the end of September, from 9.5 per cent at the end of last year.
The gradual decline in retail prices since the end of the second quarter has resulted from slower price increases mainly in the subcategories of housing (by 0.21 percentage points), fuel and light (0.14 percentage points) and household operations and supplies (0.15 percentage points).
VAT receipts fell by two per cent for the first nine months of the financial year 2012/13. There was a reduction of ten per cent in personal taxes during the year. Corporate tax receipts remained steady for the FY2012/13 period. Domestic interest payments and grants to individuals were up by four per cent and seven per cent, respectively. There was a four per cent reduction in capital outlays.
The majority of financing for the deficit was sourced locally from institutional investors, and external financing was reduced.
Balance of payments
The current account deficit narrowed to 5.7 per cent of GDP in 2012, compared to a deficit of 8.5 per cent for 2011. This ratio was below the eight per cent average over the preceding ten years (2001 to 2011) and the average of 6.5 per cent, since the reemergence of systematic current account deficits in 1995.
There was a 7.9 per cent reduction in retained imports, which resulted in the ratio of retained imports to GDP falling to 34.1 per cent (the average for 2001 to 2011) compared to 37.4 per cent a year ago.
Available data up to November of 2012 indicated that imports of consumer goods fell by $148 million, mainly as a result of reductions in imports of food and beverages, clothing and tobacco products. In addition, machinery imports were down by $89 million.
The intermediate goods category rose by $20 million, spurred by a 3.5 per cent increase in the imported price of fuel. Intermediate goods imports have risen from 40 to 50 per cent of total retained imports as a result of elevated oil prices since 2007.
Foreign earnings from tourism continued to slide in 2012, falling by 4.2 per cent as the ratio of travel credits to GDP fell to 20.9 per cent in 2012. Sharp declines in the ratio of travel credits to GDP have sometimes been associated with recessionary conditions in advanced economies, as was the case in 1991 and 2001.
Exports of goods grew by five per cent in 2012, primarily driven by increases in rum ($12 million). However, chemical exports fell by 6.8 per cent in 2012, after leading the expansion in exports over the past two years.
Merchandise exports to GDP has trended upward from 5.2 per cent in 2009 to 6.9 per cent in 2012. The performance in 2012 was only slightly above the 6.5 per cent average between 1986 and 2011.
The capital and financial account balance was estimated at $617 million.
Real estate flows, which are associated with villa and hotel development, were estimated at $290 million in 2012 (3.3 per cent of GDP), compared with $347 million in 2011. The average is 6.8 per cent of GDP in the boom period of 2006 to 2008.
The [nonperforming loan or] NPL ratio continued to be negatively impacted by two large loans extended to the hotel sector, but other sectors have also edged up during the period.
Domestic deposits were boosted during the months of October and November, bringing the year-to-date deposit growth to 5.8 per cent, or $441.3 million. There were increased deposit holdings by private financial institutions and the National Insurance Scheme in the fourth quarter.
Meanwhile, the underlying demand for credit remained weak, rising by less than 1.5 per cent. Liquidity in the system remained high. The excess cash-to-deposit ratio more than doubled, moving from 1.6 per cent in 2011 to 4.7 per cent in 2012, while holdings of excess Treasury bills also increased by $211.0 million.
The excess liquidity ratio rose to 14.7 per cent. Interest rates remained largely unchanged throughout the year.