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Not all plain sailing for Barbados


BARBADOS BUSINESS AUTHORITY

Not all plain sailing for Barbados

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THE CARIBBEAN ECONOMIC OUTLOOK remains fragile. Growth prospects for 2016 are relatively muted and subject to considerable downside risk, given the region’s vulnerability to external demand shocks and internal challenges.

Exogenous risks include the ongoing slowdown in emerging market economies, weakness in commodity prices, and uncertainty surrounding the timing of US monetary tightening. Furthermore, given the Caribbean’s reliance on tourism from Europe, the United Kingdom’s (UK) in-out referendum on its European Union (EU) membership in June as well as still high unemployment could also weigh on European sentiment and travel spending at a time when the outbreak of the Zika virus poses a significant threat to growth in the Caribbean’s vital tourism sector.

Other regional headwinds include tighter global financial regulation, growing crime rates and security concerns, climate change and recurring weather related-challenges.

After years of regulatory pressures, the Panama Papers could have further adverse repercussions for Caribbean offshore financial centres. We expect real GDP growth in the Caribbean to ease to 3.25 per cent in 2016, after slowing to an estimated 3.9 per cent in 2015.

The overall outlook, however, masks large divergences in growth patterns across countries. The lower-for-longer energy price outlook presents significant difficulties for commodity exporting economies, such as Trinidad and Tobago, which in turn will likely have adverse effects on neighbouring trade partners.

However, oil importing nations should continue to benefit from a lower bill, while the Caribbean’s tourism-dependent economies are set to get an ongoing boost from firmer outbound travel demand in key advanced markets.

Higher remittances should also provide a boost to consumer spending. Indeed, these developments have engineered a notable improvement in Jamaica, The Bahamas, and Barbados’ external position at a time of lacklustre growth and fiscal consolidation.

Subdued oil prices have also helped reduce the current account deficit in the Dominican Republic, which is expected to remain the region’s fastest growing economy this year. Growth prospects in Jamaica, The Bahamas, and Barbados are forecast to modestly improve, but remain muted, alongside ongoing fiscal restraint and downside risks to tourism from the spread of the Zika virus.

The Central Bank of Barbados is committed to maintaining the Barbados dollar’s 2:1 fixed peg against the United States dollar. Barbados’ stock of foreign currency reserves stood at US$927 million at end-2015, which is slightly above the minimum threshold of sustainability at three months of import coverage.

After a series of downgrades from 2009 to 2014, the Government’s commitment to fiscal consolidation has kept major credit rating agencies on hold. However, given the country’s still high fiscal deficit and rising debt burden, as well as its high reliance on foreign tourism demand, Barbados remains highly susceptible to external shocks. 

Barbados’ economic growth is set to improve, although the outlook remains constrained by ongoing fiscal retrenchment and elevated unemployment, at around 11 per cent. We expect Barbados’ real GDP to advance 1.5 per cent in 2016 and two per cent in 2017, up from 0.5 per cent in 2015.

The tourism industry should continue to drive growth, with roughly US$1 billion of hotel investment in the pipeline over the next four years. This will be further bolstered by ongoing gains in port and airlift capacity at a time when tourist arrivals from the US, Canada and the UK have risen sharply.

While investment prospects and external conditions appear supportive of higher tourist arrivals in 2016, increased crime and several reported cases of the Zika virus pose downside risks to the outlook.

The UK’s in-out EU referendum could also weigh on British consumer sentiment and travel spending, which is particularly concerning for Barbados given that the UK is the island’s largest source of visitors. Still, the recovery in the tourism sector – accounting for ten per cent of GDP or up to 45 per cent if indirect spillovers are included – is forecast to continue, which bodes well for construction, real estate and retail activity.

Inflation remains subdued. Given the country’s position as a net importer of key commodities, such as oil and agricultural products, consumer price pressures in Barbados have been constrained by weakness in global commodity prices.

Inflation stood at -0.2 per cent year on year in October 2015. The headline print is expected to return to positive territory in the months ahead as the Government’s new value added tax (VAT) increases feed through to prices. Annual inflation is estimated to have averaged one per cent year-on-year in 2015 and is forecast to edge up gradually to 1.25 per cent this year and two per cent in 2017 as oil prices recover and base effects fade.

The Central Bank will likely maintain an accommodative monetary policy stance.

Barbados’ fiscal and external imbalances remain elevated, although the gap should continue to narrow on the back of ongoing austerity and low commodity prices.

Since surging to 11 per cent of GDP in financial year 2014, a series of corrective actions in the form of tax increases and spending cuts have helped reduce the central Government’s budget deficit to 6.7 per cent in financial 2015.

This, combined with additional consolidation measures planned, including widening the VAT base, and new taxes on casinos and mobile-telephone usage, is forecast to lower the shortfall to around 5.25 per cent of GDP this year and next.

This article was submitted by the Bank of Nova Scotia.

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