THE GLOBAL FINANCIAL CRISIS – THE BARBADOS...

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THE GLOBAL FINANCIAL CRISIS THE GLOBAL FINANCIAL CRISIS THE BARBADOS EXPERIENCE THE BARBADOS EXPERIENCE by Mr. Harold Codrington Mr. Harold Codrington Ad i t th G Ad i t th G Adviser to the Governor Adviser to the Governor CENTRAL BANK OF BARBADOS CENTRAL BANK OF BARBADOS Prepared for the Symposium on Small States and the International Financial Crisis World Bank, Washington D.C June 2 – 3, 2009

Transcript of THE GLOBAL FINANCIAL CRISIS – THE BARBADOS...

THE GLOBAL FINANCIAL CRISIS THE GLOBAL FINANCIAL CRISIS ––THE BARBADOS EXPERIENCETHE BARBADOS EXPERIENCE

by

Mr. Harold CodringtonMr. Harold CodringtonAd i t th GAd i t th GAdviser to the GovernorAdviser to the Governor

CENTRAL BANK OF BARBADOSCENTRAL BANK OF BARBADOSPrepared for the Symposium on Small States

and the International Financial Crisis

World Bank, Washington D.CJune 2 – 3, 2009

IMPACT OF THE GLOBAL CRISISIMPACT OF THE GLOBAL CRISIS

Earliest indications of difficulty appeared in last quarter of

IMPACT OF THE GLOBAL CRISISIMPACT OF THE GLOBAL CRISIS

y pp q2008

Real GDP -0.3% compared to average th f 3 6% i 2005 2007growth of 3.6% in 2005-2007

of which Tourism -7.5% compared to average% p ggrowth of 1.3% in 2005-2007

Construction 0.6% compared to averagegrowth of 3.6% in 2005-2007

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IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont d)IMPACT OF THE GLOBAL CRISIS (Cont d)

HIGHLIGHTS OF 2008• Significant Slowdown in Growth of Real GDP• Significant Slowdown in Growth of Real GDP

%2008 2007 Ave. 2005-20070 6 3 4 3 50.6 3.4 3.5

Decline recorded for major traded and non-traded sectors (t i f t i t ti h l l d t il(tourism, manufacturing, sugar, construction, wholesale and retail trade)

• Increased Unemployment Rate%%

2008 2007 Ave. 2005-20078.1 7.4 8.4

(job losses in construction in particular)

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(job losses in construction, in particular)

IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)

HIGHLIGHTS OF 2008HIGHLIGHTS OF 2008Ri i I fl i• Rising Inflation

%2008 2007 2005-20072008 2007 2005 20078.1 4.0 5.8

Reflected (both directly and indirectly) the sharpi i f l i d i th fi t h lf f thincrease in fuel prices during the first half of the year

• Widening of the Fiscal Deficit as a ratio to GDP%%

2008 2007 2005-2007(5.9) (1.8) (2.7)

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IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont d)IMPACT OF THE GLOBAL CRISIS (Cont d)

HIGHLIGHTS OF 2008HIGHLIGHTS OF 2008The weak economy led to slower revenue growth andThe weak economy led to slower revenue growth andthere were also sharp increases in spending on transfersand subsidies

• Tightening Liquidity/Rising insolvencyHigher credit; Falling deposits; reflecting net

i hd l d f i h flwithdrawals and foreign exchange outflowsIncrease in non-performing loans and banks’ provisionfor bad debt as disposable income contracted and cashfl k dflows weakened

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IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)

HIGHLIGHTS OF 2008HIGHLIGHTS OF 2008

IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)

• Deteriorating External Sector(i) Larger external current account to GDP/ratio( ) g

%2008 2007 Ave. 2005-200710.4 5.3 8.9

Higher value of retained imports (especially for fuel)and slowdown in earnings from tourism sectorand slowdown in earnings from tourism sector

June 2009 Central Bank of Barbados 6

IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)

(ii) Slowdown in foreign capital inflows for first

IMPACT OF THE GLOBAL CRISIS (Cont d)IMPACT OF THE GLOBAL CRISIS (Cont d)

( ) g ptime since 2004

US$M2008 2007 Ave 2005 20072008 2007 Ave. 2005-2007179.2 475.1 321.9

(iii) Fall in Net international ReservesUS$M

2008 2007 Ave 2005 20072008 2007 Ave. 2005-2007(95.8) 178.8 59.6

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IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)

Situation deteriorated further during first quarter of 2009 –h fi i di i ll h l hi h i f h

IMPACT OF THE GLOBAL CRISIS (Cont d)IMPACT OF THE GLOBAL CRISIS (Cont d)

the first quarter is traditionally the seasonal high point for theeconomy.

a fall of 2 8% in real GDP (first such decline- a fall of 2.8% in real GDP (first such declinesince 2002; lower tourist arrivals/weak bookings)(continued decline in construction activity (majorprojects on hold)fall in registrations in the international business sector(the No 2 foreign exchange earner)(the No. 2 foreign exchange earner)slowdown in FDI – sale of some condos and winterhomes owned by high net worth visitors

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homes owned by high net worth visitors

IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont’d)IMPACT OF THE GLOBAL CRISIS (Cont d)IMPACT OF THE GLOBAL CRISIS (Cont d)

- higher inflation – still reflecting the large increases inpetroleum prices from early in 2008dditi l j b l- additional job losses

- lower consumption activity- virtual stagnation in lending by commercial banksvirtual stagnation in lending by commercial banks

(weak demand)- US$24.1 million decline in net international reserves

(NIR usually rises in 1st quarter)(NIR usually rises in 1 quarter)(possible lower remittances)

June 2009 Central Bank of Barbados 9

THE CL FINANCIAL CASETHE CL FINANCIAL CASE

CL Financial, a Trinidad and Tobago-based institution withsubsidiaries throughout the Caribbean, experienced cash-g , pflow difficulties and was taken over by the Trinidad andTobago GovernmentOutcomes:Outcomes:• The insurance business of the Barbados subsidiary was

found to be in statutory deficitA h b d b idi fi• Another Barbados subsidiary – a finance companyexperienced a run on deposits.

• The Barbados Response (damage control)p ( g )- Government of Barbados, Central Bank and the

insurance regulator gave assurances of theinstitutions’ soundness

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institutions soundness

THE CL FINANCIAL CASE (Cont’d)THE CL FINANCIAL CASE (Cont’d)

- Central Bank moved quickly to strengthen the

THE CL FINANCIAL CASE (Cont d)THE CL FINANCIAL CASE (Cont d)

deposits of the finance company- discussions initiated re: the sale of the insurance

portfolio to another insurance company (in whichportfolio to another insurance company (in whichGovernment is a minority shareholder)

- talks are also ongoing regarding the sale financecompany

- Government of Barbados has established an OversightCommittee to manage the sale of the group’s assetsCommittee to manage the sale of the group s assets

June 2009 Central Bank of Barbados 11

THE OUTLOOK FOR 2009THE OUTLOOK FOR 2009

Given the 1st quarter outcomes, the most recent WEO andthe developments in trading partner economies the Centralthe developments in trading partner economies, the CentralBank is forecasting the following for 2009:

R l GDP 2 0%Real GDP -2.0%Unemployment 9.0%Inflation 4.5% (lower inflation abroad)Inflation 4.5% (lower inflation abroad)Fiscal Deficit/GDP 6.6%External Current Account/GDP 4.7%Net International Reserves could decline by US$65.0millionReserve Cover (imports of goods and services): 16.6 weeks

June 2009 Central Bank of Barbados 12

Reserve Cover (imports of goods and services): 16.6 weeks

POLICY ACTIONS TO DATEPOLICY ACTIONS TO DATE

Policy actions in respect of these impacts have been of b h h d di

POLICY ACTIONS TO DATEPOLICY ACTIONS TO DATE

both a short-term and medium-term nature.

1 The Government established a Tripartite Working1. The Government established a Tripartite WorkingGroup to advise on possible policy measures(Part of the social contract between Government,Labour Unions and Employers)

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POLICY ACTIONS TO DATE (Cont’d)POLICY ACTIONS TO DATE (Cont’d)

The Working Group suggested and Government accepted

POLICY ACTIONS TO DATE (Cont’d)POLICY ACTIONS TO DATE (Cont’d)

The Working Group suggested and Government acceptedthe following proposals:

- The establishment of a Council of Economic Advisers (short/medium)

- A fiscal stimulus equivalent to 1% to 1½% of GDP.(This will be targeted on projects with a high social,and environmental impact and job creationand environmental impact and job-creationpotential. Suitable projects have been identified aslow-income housing and road improvements) (short)

June 2009 Central Bank of Barbados 14

POLICY ACTIONS TO DATE (Cont’d)POLICY ACTIONS TO DATE (Cont’d)

Foreign borrowing to support the foreign reserves

POLICY ACTIONS TO DATE (Cont’d)POLICY ACTIONS TO DATE (Cont’d)

- Foreign borrowing to support the foreign reservesand retire maturing foreign debt (a bond placement ofUS$100 million in the Trinidad and Tobago marketshould be finalized by end-June. Discussions are alsounderway regarding accessing the IDB’s new loanfacility) (short)y) ( )

- Intensified marketing of the tourism product,especially with a view to establishing niches(short/medium)

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POLICY ACTIONS TO DATE (Cont’d) POLICY ACTIONS TO DATE (Cont’d)

The Budget presented on May 16 included the following

POLICY ACTIONS TO DATE (Cont d) POLICY ACTIONS TO DATE (Cont d)

g p y gproposals:- giving employers a loan in the form of a deferment

f f l t ib ti t thfor one year of employer contributions to theNational Insurance Scheme (repayable over fiveyears at 3% interest) (short)

- a waiver of half of outstanding interest and penaltiesin respect of national insurance, income tax, propertytax and value added tax (short)tax and value-added tax (short)(These two proposals are intended to help thecashflow of businesses)

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)

POLICY ACTIONS TO DATE (Cont’d)POLICY ACTIONS TO DATE (Cont’d)

- the establishment of a facility at the Central Bank tobl ll b i i i li f

POLICY ACTIONS TO DATE (Cont d)POLICY ACTIONS TO DATE (Cont d)

enable small businesses to receive timelier payments forwork done for Government (short)

- establishment of a fund for training and retraining ofestablishment of a fund for training and retraining ofworkers (short/medium)

- the construction of additional low-income housing units(short/medium)

- the removal of VAT on building materials for first-timehome owners (short/medium)home owners (short/medium)

June 2009 Central Bank of Barbados 17

POLICY ACTIONS TO DATE (Cont’d)POLICY ACTIONS TO DATE (Cont’d)

- a new regime of incentives concessions credits and

POLICY ACTIONS TO DATE (Cont d)POLICY ACTIONS TO DATE (Cont d)

a new regime of incentives, concessions, credits andexemptions to help boost the cultural industry (medium)

- the amendment of certain legislation which would makeBarbados more attractive as an international financialcentre (medium)

- a proposed increase in rates for water consumption (should- a proposed increase in rates for water consumption (shouldencourage conservation and increase revenues) (medium)

June 2009 Central Bank of Barbados 18

POLICY ACTIONS TO DATE POLICY ACTIONS TO DATE

In Barbados the Central Bank fixes the minimum deposit rate

POLICY ACTIONS TO DATE POLICY ACTIONS TO DATE ––CENTRAL BANKCENTRAL BANK

In Barbados the Central Bank fixes the minimum deposit rateof interest which is the benchmark for the monetary system

In order to help reduce the cost of credit to businesses theCentral Bank has undertaken the following:

l d th i i d it t b 150 b i i t- lowered the minimum deposit rate by 150 basis points(to 3%) between April 2008 and February 2009

- reduced the bank rate from 12% in November 2008 to7% in June 2009. (With tightening liquidity it isexpected that some financial institutions may resort toborrowing from the Central Bank)

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NOT MUCH ROOM FOR MANOEUVRENOT MUCH ROOM FOR MANOEUVRENOT MUCH ROOM FOR MANOEUVRENOT MUCH ROOM FOR MANOEUVRE

1. LITTLE FISCAL SPACEThe fiscal space has been gradually shrinking for sometime

Fiscal deficit to GDP ratio rose from an average ofaround 2% in the five years ending in 2000 to an averagearound 2% in the five years ending in 2000 to an averageof 2.7% in the five years ending in 2007- there was rising expenditure on necessary capital

projects in lead-up to Cricket World Cup in 2007; in2005 and 2006 capital outlays grew by 9.3% and46.5%, respectively

June 2009 Central Bank of Barbados 20

46.5%, respectively

NOT MUCH ROOM FOR NOT MUCH ROOM FOR

increased transfers and subsidies for transportation

NOT MUCH ROOM FOR NOT MUCH ROOM FOR MANOEUVRE(Cont’dMANOEUVRE(Cont’d))

- increased transfers and subsidies for transportationand education, in particular, as well as forgovernment-run real sector programmes

- salary settlement for public sector workers- personal income tax collections stagnated because of

th i d ll d l t tthe increased allowances and lower tax rates

The fiscal deficit to GDP ratio was 5 9% in 2008 and isThe fiscal deficit to GDP ratio was 5.9% in 2008 and isprojected to be sticky downwards in the medium-termbecause of counter-cyclical measures

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NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE (Cont’d)(Cont’d)

There is little room to restructure expenditure• Overall constraint is expectations for the maintenance of

high living standardshigh living standards- GDP per capita in 2007 was just over US$10,000- consistent ranking among the first 35 on the Unitedconsistent ranking among the first 35 on the United

Nations Human Development Index

• Commitment to universally-free education, free healthcareand social security.

June 2009 Central Bank of Barbados 22

NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE (Cont’d)(Cont’d)

expenditure on education and health accounts formore than one-third of the budgetG t f d d ti f th i tGovernment funds education from the primary totertiary levels and provides free healthcare atpublic health facilitiesgood healthcare has contributed to increased lifeexpectancy and to higher outlays for pensions

• Commitment to low user fees for public transport, waterusage and low-income government housing

June 2009 Central Bank of Barbados 23

NOT MUCH ROOM FOR MANOEUVRE(Cont’dNOT MUCH ROOM FOR MANOEUVRE(Cont’d))

Current Structure of Expenditure has- built up good stock of human resources p g

human resource development has been important to economic and social development by raising

d ti itproductivity- human resource development has helped to maintain

social consensus by preventing extremes in income y p gdistribution

June 2009 Central Bank of Barbados 24

NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE (Cont’d(Cont’d))

2. DEBT PROFILE- There has been a gradual rise in the debt burden

during the last decadeduring the last decade- debt/GDP Ratio now exceeds 90% and could reach

100% by 2010y- a bullet loan repayment of US$100 million is due in

mid-2010 (the borrowing in the regional marketshould help to repay this)should help to repay this)

- the higher the debt ratio the more likely is adowngrade by the rating agencies

June 2009 Central Bank of Barbados 25

g y g g

NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE NOT MUCH ROOM FOR MANOEUVRE (Cont’d)(Cont’d)

- most debt is domestic in nature, thereby making nodemand on foreign exchange reserves; much of thefinancing of government’s deficit during the last threeyears has come from domestic sources

- the external debt is still modest around 42% of GDP- the external debt is still modest around 42% of GDP- debt servicing is not an issue, well below 10%- debt schedule is well-spread 2010, 2015, 2021, 2035p , , ,

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SHORTSHORT--TERM CHALLENGESTERM CHALLENGESSHORTSHORT--TERM CHALLENGESTERM CHALLENGES

•• To diversify the economyTo diversify the economy•• To diversify the economyTo diversify the economy•• To be more productive and competitiveTo be more productive and competitive•• To be fiscally prudentTo be fiscally prudent•• To reduce the debt burdenTo reduce the debt burden•• To promote sound regulatory practicesTo promote sound regulatory practices

T b f t h fi i l i tiT b f t h fi i l i ti•• To be wary of too much financial innovationTo be wary of too much financial innovation

June 2009 Central Bank of Barbados 27

THANK YOU