Central Bank review of economy
The first half of the year witnessed a contraction in the main foreign exchange sectors – tourism and international business and financial services. At the same time, private foreign capital inflows were less than a quarter of the figure recorded in the same period last year.
Foreign exchange levels were relatively unchanged for most of the first three months, but weakened considerably during the second quarter. As a result, the foreign reserve cover fell from 19 weeks of imports as at March to 16 weeks at the end of June.
Overall economic growth is estimated to have contracted by 0.6 per cent in the first half; the inflation rate is estimated at 2.7 per cent to June, and the rate of unemployment was 11.5 per cent at end-March.
Long-stay visitor arrivals decreased by seven per cent for the first six months of the year and earnings fell three per cent. Declines in arrivals were recorded from all major markets – the Britain, United States, Canada and the Caribbean. The average length-of-stay was higher by about four per cent, but airline seating capacity and hotel room occupancy rates were below last year’s levels.
The number of new licences issued to international business and financial services entities increased by eight per cent up to May, but renewals fell by 14 per cent. Measures to stimulate this sector included amendments to the tax structure and intensified marketing in Canada and Latin America. Exports of rum fell by 37 per cent and exports of sugar were down significantly in the first four months. Similar declines were recorded for exports of chemicals and other beverages. Activity in the construction sector declined by an estimated nine per cent.
The Government deficit-to-GDP ratio for the April to June period widened to an estimated 9.4 per cent, up from 6.2 per cent during the first quarter of fiscal year 2012/13. Tax receipts fell by 6.6 per cent ($36 million) due to declines in VAT and personal income tax of $20 million in each case. Expenditures rose by three per cent ($18 million).
Interest payments rose by $12 million and transfers to state-owned enterprises rose by $7 million.
The Government’s deficit of $198 million was financed by commercial banks ($65 million), non-bank financial institutions ($74 million), the National Insurance Scheme ($40 million) and the Central Bank ($70 million).
External indebtedness fell by $22 million. The overall public sector debt, net of public sector financial assets, increased by $148 million to the equivalent of 58 per cent of GDP.
During the first six months of the year, it is estimated that the financial sector remained highly liquid, with no increase in loans. Non-performing loans continued to increase, but most were in the “substandard” category.
Banks continued to maintain enhanced levels of provisioning. Commercial banks and other deposit-taking institutions remain profitable and well capitalized. The resolution of the CLICO insolvency is proceeding, and the judicial manager has presented a plan for the restructuring and sale of the company to the High Court in Barbados.
The external current account deficit worsened to 6.3 per cent of GDP. Retained imports increased by three per cent ($37 million), although fuel imports declined by $36 million. Private long-term capital inflows were only $75 million for the first six months, compared with $318 million a year earlier.
The economic priorities are firstly, to reduce spending in the economy so as to balance the inflows and outflows of foreign exchange, and secondly, to revive economic growth, led by tourism, international business, agro-processing and alternative energy.
On June 27, Government held a National Consultation with the social partners with a view to addressing these priorities. Based on investment projects that have been identified by private sector enterprises, and infrastructural and other projects which Government plans over the next five years, growth rates rising from about one per cent in 2014 to over three per cent in 2017 are achievable.
The fiscal adjustment which is contemplated will restore the balance of foreign exchange inflows and outflows, and promote investor confidence.
Private enterprises are expected to advance investment projects in tourism, agro-processing and green energy. Government is negotiating foreign finance to contribute to major infrastructure in support of the tradable sectors, as well as collaborating with the private sector on commercial projects, including initiatives for green energy.
Following a lacklustre performance during the peak winter season, the tourist industry continued to underperform as tourism output declined by an estimated 1.4 per cent for the first half of 2013.
Total long-stay arrivals fell by seven per cent during the first six months, marking the second consecutive January to June visitor decline. Arrivals from the United States dipped by 11 per cent, a reflection of the cancellation of flights originating from the Dallas gateway in August 2012.
Similarly, the cutback in seating capacity from Toronto and the loss of REDjet led to reductions in the Canadian and CARICOM markets of nine per cent and 16 per cent, respectively. On the other hand, the European market (Germany and Other Europe) continues to show signs of recovery, with arrivals from this region growing by 13 per cent, though the British market remained flat over the same period. Cruise passenger arrivals were higher by five per cent.
The fall-off in long-stay arrivals has meant a decline in average occupancy rates, which fell by ten basis points to 62 per cent relative to the previous year. At the same time, the reduced occupancy rates have been somewhat offset by a four per cent increase in average length of stay during the same period.
Looking ahead, arrivals are expected to show modest growth in the latter half of 2013. Additional airlift is expected out of Manchester and Germany this winter while the Barbados Island Inclusive marketing campaign has been launched in an effort to boost arrivals from major source markets. Growth in cruise arrivals is projected to continue.
Manufacturing and Agriculture
Manufacturing output was virtually flat, following a seven per cent contraction recorded between 2011 and 2012.
Activity in the agricultural sector remained depressed during the first half of the year. Sugar production is estimated to have declined by 29 per cent this season due to reduction in hectares reaped and yields per hectare.
Although fish production increased compared to the previous year, it was insufficient to offset declines in other agricultural industries. As a result, overall non-sugar agriculture fell per cent.
Other Non-Traded Sectors
Activity in the construction sector declined by about nine per cent by the end of June 2013, following a decline of seven per cent at the end of December 2012. Locally produced building materials as well as imports of construction materials fell by 16 per cent and 19 per cent, respectively.
It is estimated that at the end of June 2013, the 12-month moving average rate of inflation slowed to 2.7 percent, in comparison to 8.4 per cent from the previous year. Some of the main categories declining over the same period included food, housing, fuel and light, household operations and supplies and transportation.
The operations of Central Government during the first three months of FY2013/14 resulted in the overall fiscal deficit widening to the equivalent of 9.4 per cent of GDP compared to 6.2 per cent in the similar period of FY2012/13. The expansion of the deficit stemmed from both a continued weakening of the revenue base partly owing to the weak economic performance and a further expansion in current and capital expenditure.
For the period April to June, 2013, total government revenue is anticipated to fall by 8 percent, compared to relatively flat growth in the same period of FY2012/13. This decline in revenue was driven mainly by the reduction in tax receipts of seven per cent.
Personal income tax collections are projected to fall by 19 per cent, this decline is on top of a 17 per cent fall-off observed during the first three months of the last fiscal year, and partly reflects the adjustment of the effective income tax rates and threshold implemented in 2012.
Corporate tax receipts are expected to remain relatively flat compared to an expansion of $12 million in the similar period of the last fiscal year. Indirect taxes are projected to decline by six per cent as the expected reductions in VAT receipts and excise taxes are anticipated to outweigh a modest increase in import duties.
Current expenditure is expected to climb by a further three percent following an expansion of seven per cent in the corresponding period of 2012/13. Higher interest payments and spending on goods and services of approximately seven per cent and ten per cent are anticipated to be the main contributors to this growth.
Outlays on transfers and subsidies and wages and salaries are expected to remain relatively flat. Capital expenditure is expected to be marginally above the similar period one year ago as several projects continued.
With a larger April to June deficit to finance this fiscal year, Government increased its domestic debt issuance, as external financing inflows remained negligible. Private non-banks, commercial banks and the Central Bank were the main financiers, with most of the credit they provided coming through the purchase of Treasury bills. Together they met 84 per cent of Government’s domestic financing needs. The NIS had a greater appetite for longer-term instruments and provided 16 per cent of Government’s domestic financing.
While external debt continued to decline, domestic indebtedness rose such that gross public sector debt as a ratio to GDP amounted to 102 per cent at the end of May.
Balance of Payments
During the first six months of 2013, the external current account deficit was estimated at $267.8 million, approximately $153.1 million worse than the value of the comparable period of 2012.
The main factors of the deterioration of the current account position were a $28.1 million decline in domestic exports, a $37 million increase in retained imports and a $25 million fall in tourism receipts.
As has mostly been the case since 2008, the decline in visitors’ expenditure was a product of the underperformance of the tourism sector, which continued to be affected by flat arrival numbers and reduced occupancy rates.
Exports of sugar, electrical components and food and beverages declined by $6 million, $4 million and $27 million, respectively. In the food and beverages category, rum exports declined by $17 million after rising by $13.0 million during the first six months of 2012.
A combination of lower prices for fuel imports and volumes were evident in the $41 million reduction in intermediate goods imports.
However, there were increases in the other major components of retained imports. Imports of consumer goods, led mainly by food imports, increased by $47 million and imports of capital goods rose by $22 million.
Credit to the non-financial private sector fell by four per cent or $236 million, reflecting broad-based declines across the various subsectors.
Domestic deposits were flat, and excess liquidity in the financial system remained high. At the end of the review period, the excess cash-to-deposit ratio was 3.5 per cent
and the excess liquidity ratio was 18.5 per cent, primarily as a result of increased holdings of Government Treasury Bills.
Weak loan demand combined with further deterioration in the tourism and real estate sectors led commercial banks’ non-performing loans ratio to edge upward to reach 14 per cent at March 2013. However, the majority of nonperforming loans continue to be classified in the least critical category.