Friday, Apr 19, 2019

Barbados economic growth in 2019 will be flat

Barbados economic growth in 2019 will be flat
18 Mar
2019

The Barbados-based Caribbean Development Bank (CDB) says it expects real gross domestic product (GDP) growth to be flat in 2019.

“Economic activity is premised on favourable tourism performance due to growth in major tourism source markets, the opening of Ross University School of Medicine (RUSM), and an anticipated expansion of airlift,” the CDB said in its “Country Economic Review 2018 Barbados” released here as the bank prepares to host its annual board of governors meeting in Trinidad and Tobago in June.
The CDB said that the influx of medical students associated with RUSM may also positively impact other industries such as distribution and transport.

“This will more than offset the expected drag on economic activity related to the commencement of the next phase of the Barbados Economic Recovery and Transformation Plan (BERT) and the continuation of fiscal austerity measures.

It said there is notable upside risk to the forecast depending on the timing of planned private sector projects and possibly higher external demand for financial services as investor confidence strengthens. If the planned private sector projects materialise in the first half of 2019, growth is likely to be positive.

“On the downside, tensions in the United States of America and Europe (BREXIT) could dampen growth prospects. Also, the Barbados economy remains vulnerable to changes in the price of international commodities and the adverse impacts of climate change and sea level rise. The negotiation of the external debt restructuring is also important for external financing flows,”’ the CDB added.

In 2018 Barbados strengthened its reform impetus to start addressing its precarious balance of payments and fiscal situations. In response to the worsening fiscal and external liquidity position, the government announced BERT, which aims to restore macroeconomic stability and place the economy on a path of strong, sustainable and inclusive growth, while safeguarding the financial and social sectors.

Included in BERT was the suspension of payments due on debt owed to external commercial creditors and a comprehensive domestic and external debt restructuring.

The CDB said that fiscal austerity measures related to BERT and the challenging macroeconomic situation negatively impacted the non-traded sectors.
“These effects more than offset modest gains in tourism and led to economic contraction of 0.6 per cent in 2018. Inflation fell, but remains above its long-term trend, while public sector layoffs may have contributed to rising unemployment in the fourth quarter of the year.

“The public finance outturn improved due to deeper fiscal austerity measures, and contributed to a decline in public debt. Gross international reserves returned to the international benchmark of three months of import cover,” the CDB noted.

It said real GDP contracted by an estimated 0.6 per cent last year and despite modest gains in the tourism sector, where activity grew by 0.6 per cent, the decline in overall GDP was due to a seven per cent fall in construction output and declines in other non-traded sectors such as distribution; business and services; transportation; storage; and communication.

The number of overnight arrivals was 2.8 per cent higher than in 2017, due to increased marketing and additional airlift. However, growth in tourism was constrained by reduced length of stay as more visitors arrived from the United States and Canadian markets compared with the longer-staying visitors from the United Kingdom (UK).

“This may be due in part to slower economic growth in the UK and a weaker Pound sterling. Cruise ship passenger arrivals were down, as the number of ship visits fell by almost 10 per cent, after the re-routing of vessels in 2017, related to the impact of Hurricanes Irma and Maria.’

The CDB said that fiscal austerity measures related to BERT and concerns about the challenging macroeconomic situation adversely impacted the performance of the non-traded sectors.

Large-scale public and private sector projects were delayed, and the public sector layoffs in the final quarter of 2018 impacted domestic consumption with negative pass-through effects to the rest of the economy.

The average unemployment rate fell to 9.2 per cent for the four quarters ending September 2018. However, public sector layoffs in Q4 may have contributed to a higher unemployment rate in December 2018.

The CDB said that the fiscal outturn improved as a result of deeper austerity. The primary balance strengthened to 3.4 per cent of GDP for the nine month period to December 2018, above both the targeted primary balance of 3.3 per cent for fiscal year 2018/19 and 3.1 per cent in the previous fiscal year.

“The fiscal austerity programme was underpinned by lower interest payments associated with the sovereign debt restructuring2 and reduced transfers and subsidies, particularly to state˗owned enterprises (SOEs). Broad-based reforms to SOEs are underway, on a phased basis, to streamline their operations.”

On the revenue side, the CDB said increased collections, due mainly to a boost in corporate tax receipts, also contributed to better fiscal performance.

New taxes were introduced to widen the tax base and the NSRL was removed. Corporate tax rates were also revised as a result of the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative.

The CDB said that the improved fiscal performance contributed to the public sector debt declining to 126.9 per cent of GDP at the end of December, from 148.4 per cent in March. BERT targets a public sector debt to-GDP ratio of 100 per cent by fiscal year 2022-23 and 60 per cent by 2033/34.

The Central Bank of Barbados (CBB) eased its monetary policy stance by lowering the reserve requirement. Improvements in the government fiscal position in 2018 prompted CBB to ease its monetary policy stance.

“This was a reversal of the December 2017 phased increased in the Barbados dollar securities reserve requirement ratio, which had been intended to provide liquidity support to government. CBB reduced the securities reserve requirements ratio for commercial banks from 20 per cent to 17.5 per cent, effective November 2018.

“The debt restructuring came in the immediate aftermath of the adoption of the new accounting standards ‒ International Financial Reporting Standard (IFRS) ‒ with implications for the balance sheets of institutions that held government securities.

“In particular, IFRS9 requires financial institutions to make loss provisions against all exposures with inherent credit risk, rather than against only those assets that have actually defaulted. These implications have been reduced somewhat following recent improvement in the country’s credit rating,” the CDB said.

CMC

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