Monday, February 18, 2013

Is Barbados Soon To Go the Way of Greece?

Tourists and Bajans flock to a vendor's stall to buy fresh grilled deep sea fish and "fixins" at the Oistins Fish Market. Will they still be able to enjoy this simple pleasure in the near future?

The recent news that Barbados bonds were downgraded to junk by Moody's - this six odd months after Standard and Poor's did the same -was disturbing in the extreme. It elicits the question of where the island nation is headed, and indeed if its future is one of profound austerity like that of Greece.

The downgrade lowered the country’s foreign and local currency bond ratings to Ba1 from Baa3. (note: a junk bond, is defined as one that is “below investment grade” due to a heightened risk of default, is any bond with a rating of Ba1/BB+ or lower, according to the system used by Moody’s.)

Standard and Poor’s lowered Barbados’ rating to junk in July. (The country’s S&P rating is BB+).

Moody’s  accompanying statement held that Barbados’ outlook remained negative, and cited two factors in the downgrade: Barbados’ “continuing lackluster economic performance,” and “ongoing deterioration in the government’s debt metrics.”

Barbados’ economy grew by 0.6 percent in 2011 and 0.2 percent through September of 2012, well below expectations, according to the New York-based ratings firm. (The United Nations Economic Commission for Latin America recently projected  the country’s GDP to improve in 2013 with a rate of 1 percent . Much of this obviously can be traced to the U.S. recession which hit the islands with the force of a hurricane). The Moody's statement went on:

Moody’s believes that the country’s growth prospects remain very limited due to its deteriorating competitiveness and declining productivity coupled with heavy dependence on tourism, particularly from the United Kingdom and the United States. Given the prospects for continued low economic growth in those countries, discretionary spending on travel is likely to remain subdued.”

Over the last 10 years, according to Moody’s, Barbados has grown at a compound average annual rate of just 1.2 percent, among the slowest for countries rated by the firm.

The firm also said that Barbados’ offshore business sector, the country’s second-most important industry, “also faces greater competition and is coming under increasing pressure from changes in tax laws in the US, Canada and the UK.” Adding:  Barbados’ negative outlook considered that economic performance is likely to remain weak.".

This ought to be obvious to anyone who knows the island and its employment situation, lack of resources and depending largely on the one trick pony of tourism. Also that although offshore banking had helped with diversification, attacks by minions of the OECD nations (i.e. on any offshore banking as somehow disreputable and 'unlawful')  caused harm to Barbados' economic health.  Few of these attacking nitwits learned or knew that many of us had lived in Bim over decades, and hence had set up and kept banking accounts there- even after we departed. Not to get secretly rich, but to use the $$$ whenever we visited - for beach house or hotel accommodation, car rentals...and just to purchase freaking expensive groceries at the food marts! Anyway, Moody's goes on:

While the worst appears to be behind Barbados both in terms of fiscal deficits and economic deterioration, Moody’s anticipates that the government’s deficits will remain large for the next few years and its debt levels will continue to rise, albeit at a slowing pace. Even if the country is able to consolidate its finances and stabilize its debt metrics, they are unlikely to improve meaningfully for the foreseeable future given its poor economic prospects.”

The credit rating agency said that Barbados’ government faces “difficult choices” in its stewardship of the economy. Well, uh yes! Choices much like Greece's: to make serious cuts on top of existing high VAT (value added taxes) and send the populace into a furore, or try to keep a slow steady but small growth pace and offend the high and mighty rating kings. (The same lot that awarded AAA ratings to bonds laden with credit default swaps back in 2007-08)

Anyway, we who once lived there and continue to visit also  hope that doesn't mean a currency devaluation or worse! We hope Bim doesn't go the way of Jamaica and Trinidad!(One TT$ is now worth 1/6 of a U.S. $)

Moody's statement ominously goes on:

In the absence of significant corrective measures, debt metrics will continue to rise, and if the government does take such measures, it risks putting the economy back into recession, On the other hand, many of the proposals to boost economic growth carry the risk of continued deterioration of the government’s financial position, at least in the near term.”

More distressing, in terms of currency issues,  Moody’s announced that it had additionally revised Barbados’ local currency bond and deposit ceilings to Baa1, its long-term foreign currency bond and deposit ceilings to Baa2 and Ba2 respectively, and its short-term foreign currency deposit ceiling to NP.

A Moody's threat perhaps?

The rating will face further downward pressure unless the government is able to successfully navigate the current situation such that a clearly visible and easily achievable path to stabilizing debt metrics is established within the next 12-18 months, in which case the outlook could be revised to stable. The rating could also be downgraded if pressures on the currency peg mount significantly.”

The Central Bank of Barbados itself added, however, that Barbados' economic strategy "remains unaffected by the downgrade," and continues to focus on conserving foreign-exchange reserves and growing the foreign exchange-earning sectors.

"Thanks to a sufficiently tight fiscal stance, foreign-exchange reserves of BDS$1.4 billion on December 19, 2012, have been maintained at about the same level as at end-December last year."

See e.g.

Meanwhile the claim that Bajans are “heading back into poverty” (Barbados Sunday Advocate, p. 3, yesterday) , is disconcerting to say the least. This is especially pertaining to the statement (by one political rep, Trevor Prescod) that people are “begging in the street for bare necessities.” One hopes not!!

My personal barometer, meanwhile, remains the status of de-mutualized Barbados insurance shares. Their value has plummeted more than 50% in the past five years and this brings the whole “junk” meme into a whole new immediate realm! To clarify, de-mutualization of an insurance company, in this case the Barbados Mutual Life Assurance Association (after being taken over by Sagicor Financial Company), meant a component of life insurance policy value was transferred into stock shares (in this case of Sagicor). The process itself is termed “de-mutualization” and there is no choice by any insurance holder to accept them or not. (Though a 'policy holder's meeting' usually determines the decision.)

These aren’t like normal stocks because: 1) The total amount of shares distributed doesn’t vary. Thus, there is no ‘buying on the dips’ to increase the number of shares owned nor can one 'buy' more shares in any case. One is issued a fixed allotment based on the value of the original policy. All that happens is your total stock value on paper continually goes down if the share value goes down. 2) The losses are REAL, i.e. as per a (2008) federal claims court ruling, there does exist an original cost basis (not 'zero' as the IRS once claimed) , and if one sells at a value below that cost basis a real capital gains LOSS is realized.

Basically, in the past five years I have watched as the total value of those demutualized shares  has‘melted down’ to appallingly low levels, vaporizing - at least on paper - what might have helped for a rainy day. But perhaps I ought to have seen this coming. Back in 2010, I sounded an alarm on Barbados’ growing debt (see e.g.

Noting that at the time that while Greece had a debt of roughly 10% of GDP, Barbados’ debt was 53% of its GDP. At such a significant debt ratio it has become obvious in hindsight that the country has had to borrow to sustain itself, eventually reaching the point that both S&P and Moody’s downgraded its bond status.

In a followup blog:

I warned that Barbados had to strive to keep the quality of its tourism product high,  given the recession had caused potential tourists from the U.S. especially to be much more selective. Barbados wasn’t the only great beach destination in the Caribbean after all! In that blog I pointed out a number of customer ‘breakdowns’ that didn’t help advance Bim’s rep, or its tourist capital. For example, one service worker quarreling when I asked for an ice cold Diet Coke plus a cup of water with ice. Then at a TGIFridays, a waitress sending assorted platters spinning off her hand nearly toppling over the drinks of my guests, after having been asked why – after 35 minutes- our ice cream sundaes had not been delivered.

Beyond that, in the two plus years since, I’ve been distressed to read in online papers of Barbados continued noise problems, as voiced by numerous tourists. They complain of everything from loud music going way past midnight, to dogs endlessly barking. Make no mistake that NO tourist has to travel so far to tolerate such ‘botheration’ when they can find a relatively quiet beach hotel near St. Lucia’s Pitons and at lower rates.

Hence, in some ways it’s been no surprise that Barbados’ economy has grown so meagerly the past two years, given tourism remains the central foreign exchange earner. (Offshore banking also has been, but has suffered somewhat by being tarred by assorted Neoliberal Loons, like former French Premier Sarkozy, imputing nefarious “tax dodging”  at OECD conferences and Banking confabs.)

Will the outlook improve? One can only wait and hope! The island is holding its general elections this year and perhaps the outcome will spur change in the right direction. This although ominous warnings have circulated regarding impending privatization, including of the water authority, pensions etc. Let us hope that's not the case!

When I next visit the island I certainly don't want to behold a Caribbean version of Greece!

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