Friday, September 7, 2018

Barbados' Debt Reaches 170 Percent of GDP? Say It Ain't So!

Barbados tourist tax

The youtube video sent to Janice's cell by a friend in Barbados alarmed us as the commentator spoke of Barbados'  National Insurance system having been plundered by the previous (DLP) administration and raiding other govt' coffers. This included spending 20 percent more than they were taking in and running up the island nation's debt to 170 percent of GDP.

Alas, this was only learned after the May 24 general election when the new BLP government  (and Mia Mottley as the new P.M.)  won in a  30- 0 blowout, i.e. taking all 30 House of Assembly seats. For perspective, this would be roughly equivalent to a 538- 0 electoral win victory in the U.S.

What precipitated this huge win? Well, most likely Bajan citizens saw how their nation was being slowly unravelled by increasing debt and ever lower bond ratings. See e.g.

Soon after the election win, the new BLP - with access to all financial records - truly grasped the parlous state of the nation's finances. Prime Minister Mia Mottley indeed delivered a "mini-budget"  speech outlining the belt tightening ahead.   She also telegraphed a warning message over the opposition party's bow in her first post-election presser, averring:

"It is a woeful state of affairs, and anybody who presided over this really needs to answer to the country for what in my view is a dereliction of duty that is unparalleled since independen­ce.

This country is in need of serious, urgent action with respect to its economy and its government. Our foreign reserves are at a tenuous stage … We have a state of affairs where our deficit is unacceptably high. Indeed our debt represents the third highest in the world after Japan and Greece”.

Mottley in her post -election media briefing went on to note that the island's statutory corporations owed tens of millions as of September, 2017 when the books were updated.  Specifically, the Barbados Water authority was $70m in debt, and the Caribbean Broadcasting Corporation (the state-owned service) was $125 m debt. Mottley also referenced $621.4 million in wire transfer outflows, which clearly led to the island's coming within 6 weeks of exhausting its funds (e.g. to pay wages, pensions) by the end of June.
Within a week of PM Mottley's budget speech we realized how serious the situation in Bim had become when Janice called our bank (Scotia) in Barbados and asked why her  pension money had not been sent to the U.S. We were informed that new foreign exchange rules prohibited any further wire transfers  of National Insurance pensions (equivalent to Social Security in the U.S.) and the beneficiary would have to show up in Barbados each month to claim that month's pension. Of course this was totally unrealistic and impossible for a number of reasons, not the least of which is that the airplane fare alone would cost more than the monthly pension!  Janice fumed for a bit, but understood this was for the country's welfare and if we had to cut back a tad - like on charitable donations or eating out - so be it.

But this clearly showed us that Barbados' debt problems were as real and serious as a freaking heart attack.  Not long after this we read in the UK Daily Telegraph:

"The Caribbean island’s debt-ridden Government is introducing the new surcharge this weekend to raise money in reducing its deficit worth 170 percent of GDP.
Hotels were only given less than a week’s notice of the new tax, with additional fees ranging from £1.90 to £7.60 per room per night, depending on their accommodation class.
This follows a £53 “airline travel and development fee” that will be imposed on travellers leaving the country from October 1, while VAT in the tourism sector will double to 15 percent in 2020.
Tourism is vitally important to Barbados as it contributes up to 40 percent of its GDP - the 14th highest percentage in the world. The new taxes will hit the 200,000 Britons that visit the Caribbean island each year but are seen as essential by Prime Minister Mia Mottley who is trying to overturn its huge deficit.
Amanda Matthews, Managing Director of Designer Travel, which runs luxury holidays to Barbados, slammed the introduction of the new taxes.
Speaking to Travel Weekly, she said: “It’s an outrage.
“I could understand if it was on new bookings but we have clients who booked up a year ago. 
“We now have to tell them there is a tax. They are not happy.

“This is already a premium-priced island and this will make it so expensive.”

But Sandals said its two resorts on Barbados would absorb the new costs and wants to contribute to the island’s economy, adding they will have no impact on its future plans.

Fellow luxury operator Kuoni vowed to cover the cost for those currently in its resort but has told customers booked to travel in the near future that they will have to pay the new tax in the resort.

A spokesperson told the Daily Telegraph: “In a price-sensitive market, anything that adds cost is a risk but we need to work together so communications are clear and there are no surprises for customers when they check out of their hotel.

"Barbados is our most popular Caribbean island - it's well loved and has a loyal customer base - but it's a competitive landscape so Barbados needs to do what it feels is right to develop its tourism infrastructure and industry."

What a difference from May, 2010 when the island still seemed to be more or less on an even financial keel though there were warning signs. For example, in a May, 2010 post I noted foreign exchange problems then were  largely exacerbated by increasing petroleum use and auto purchases. These were significant problems. but could be dealt with. Meanwhile, we detected  robust tourist influx especially gauged by the numbers who flocked to the Oistins fish market for fresh roasted fish, fixins' and beer.  
                                             But let's get real here. Ominous  warnings were sounding that the then government (DLP) was spending too recklessly and "printing money".  This was after displacing the BLP in 2008.  Sure enough within several more years after our visit bond downgrades began, reaching a low on May 3, 2016 when Moody's downgraded Barbados government bonds to below junk level or Caa1+.  and talk of currency devaluation began in earnest. See e.g.    the earlier link.
This accompanied assorted leaks the DLP gov't was raiding the National Insurance program to the tune of $60m and using printed money to replace it. No surprise all during the 2018 campaign Barbados Labor Party leader Mia Mottley had been talking about financial mismanagement in public office.  But even she couldn't have imagined the horrors she beheld on becoming the island's first female Prime Minister.   The major discovery being that the national debt stood at $1.7 billion as of Sept. 30, 2017 -  a figure never before disclosed in any DLP budget speeches. 

Mia at times must have wondered whether what she inherited was worth the trouble in terms of  now having to deal with the monstrous debt. Starting with a repayment of $100 m for a 2013 Credit Suisse loan for U.S. $225 m with a higher than normal interest rate. This because the lenders has no confidence in Barbados' credit rating.   

The top priority now, of course, is to repay the $459m the government owes to the National Insurance Scheme which the DLP gov't used as its personal piggy bank. Unlike in the U.S. of A. where the Reeptards and their libertarian allies regard the monies borrowed from Social Security as fake loans (from the Social Security Trust fund), Barbados regards its borrowed funds from its National Insurance as real.   The other job for the new government is to reclaim  financial respect and honor on the global stage.

Right now, no one can tell which of those objectives will be the most difficult to achieve. But we are hoping that on our next visit we will see Bajans walking proudly once more, with heads held high, no longer regarded as indentured peons and peasants in the realm of global finance.

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