BEHIND THE HEADLINES: Past the worst and seeing positives
YOU DON’T NEED an economic guru or a rocket scientist to figure out that Barbados has an ailing economy.
The facts of life are there for everyone to see and they range from a large and unhealthy fiscal deficit, a mountain of debt, a high jobless rate of at least 11 per cent and a declining Wall Street credit rating to anaemic economic growth.
As if those negative features weren’t enough, there is the concern about the fall-out from the disclosures in the Panama Papers which may force Canada, the United States and Britain to block some of the legal avenues available to mega-corporations and super-wealthy individuals who own shell companies in low-tax jurisdictions, like Barbados, Bermuda, the Cayman Islands, The Bahamas and the British Virgin Islands to avoid paying taxes back home. That would trigger a decline in the performance of the offshore financial services sector.
When that picture was painted for Prime Minister Freundel Stuart during a conversation at the United Nations in New York the other day, he saw the glass as being half full and not half empty.
“We went through a very difficult period over the last seven to eight years because of the impact which stems from external events, but fortunately we seem to have turned the corner,” said Stuart.
“The picture is looking a lot more positive now than has been the case in recent times. I was never uncertain that it wasn’t going to be positive. I knew there were certain things we had to do in order to get the economy back on track. I think we did them and from all that I am hearing, the results are already being felt.”
For instance, the economy, he said, may grow by two per cent this year, up from less than one per cent two years ago.
The Prime Minister readily conceded that unemployment, especially youth joblessness, was too high but he suggested the country had moved past the worst period of its economic trouble.
That may explain why he was adamant his administration wouldn’t take the bitter medicine some analysts in and out of Wall Street were recommending to lower the deficit and accelerate economic expansion. But why his strong stance? The Prime Minister said he didn’t plan to “devastate the lives of Bajans”.
Yes, he told BARBADOS BUSINESS AUTHORITY, the fiscal deficit needed to be tackled even more but, no, it wouldn’t be done in the way some experts, commentators and international institutions were recommending.
“Things in the economy became a little tight because issues like business services and so on, we had to impose some fiscal discipline in those areas of expenditure and the levels of comfort people were accustomed to had to be moderated a bit so we could get the economy back on track,” he insisted.
“Fortunately, we did not have to devastate households, as was being recommended to us. I know we still have a fiscal deficit that we have to try and narrow. But I certainly don’t buy into the logic that in the service of getting arithmetic right, you should devastate Barbadian households.”
Clearly, then, his administration wasn’t prepared to take specific harsh steps, such as withdrawing Government’s support for certain essential services, to bring down the deficit to one or two per cent, which would have had what he called “unwelcomed social consequences”.
It just wouldn’t be done that way, he insisted.
Next was the Prime Minister’s response to Moody’s, the Wall Street firm that recently downgraded Barbados’ credit rating, pushing it further into junk bond territory. He appeared defiant when it came to Moody’s.
“My position is that Moody’s can’t downgrade Barbados,” he argued. “Moody’s can only downgrade Barbados’ credit rating. Barbados still ranks very high on the [UN] Human Development Index; all of its children are still going to school; people are still accessing health care; people are still accessing public transport; our public servants are still being paid on time and the society is functioning. Our credit rating has been downgraded. But that’s all Moody’s can do. That’s all any rating agency can do.”
Interestingly, he thinks the importance of the Wall Street credit rating system was being overplayed.
“If credit rating is the issue, in practically every village in Barbados there are people who don’t have a credit rating at all and they had to live without a credit rating for their whole lives,” he said.
“My own mother never had a credit rating beyond going to the corner shop to trust [credit] a pint of rice or a pound of sugar. So I don’t get too carried away with all of that.
“They just downgraded Trinidad and Tobago and these are things that countries go through. Economies rise and they fall,” Stuart added. “Economies sway and they dip. But that’s not a permanent reality for any economy.”
While it’s true that, as Stuart suggested, economies go through cycles, his assessment of the importance of a Wall Street credit rating downgrade may be an over-simplification of what’s actually taking place in Barbados.
For one thing, the recent downgrades have made borrowing money on the international money market very expensive and that in turn can have a negative impact on Barbados’ foreign reserves.
For another, the downgrades are sapping investor confidence in the country’s economic future, making it less attractive to foreign direct investment, the lifeblood of economic expansion. The upshot: Barbados’ fixed exchange rate is facing increasing pressure.
Barbados has defied the odds when it comes to the prospects of a currency devaluation. It’s highly unlikely the country would take such a step before the next general election, which is due in 2018. Any ruling party that devalues the Barbados dollar would sow the seeds of its defeat at the polls. Both Stuart and Chris Sinckler, the Minister of Finance, understand that and are unlikely to tempt political fate.