Time to sell
Economist issues warning to investors
A regional financial solutions firm is predicting that Barbados may soon be forced to turn to the International Monetary Fund (IMF) for a bailout, and has urged investors to dispose of their investments in Barbados “now rather than later”.
Jamaica Money Market Brokers (JMMB) Limited has also said the island could have a hard time keeping the current exchange rate of BDS$2 to US$1 in the face of heavy spending by Government, persistently high fiscal deficit and “unbudgeted/unplanned expenditure”.
Additionally, JMMB Senior Economist and Sovereign Research Manager Jermaine Burrell is predicting a further downgrade within the next six months to two years if urgent corrective economic measures were not taken.
Making reference to the number of downgrades the island has suffered since 2009, as well as anaemic growth and high fiscal deficits, which have combined to increase debt to about 110 per cent of Gross Domestic Product (GDP), Burrell said his company was particularly concerned that the Central Bank of Barbados had been directly financing Government programmes.
“This will likely erode investor confidence in the fixed exchange rate peg and if the peg no longer holds, there is the question of exactly where the Barbados dollar will settle. Rapid devaluation has its negative implications and this is definitely a threat to economic stability,” warned Burrell in a seven-page, November 11, 2016 investment and sovereign research newsletter titled, Barbados – Time to Sell.
The economist warned the island could soon have a balance of pay problem because “the surplus on the capital and financial account is not enough to close the current account gap.
“Where there is a [balance of payment] crisis, an IMF bailout is not far off,” he said.
Burrell warned that the continued printing of currency by the Central Bank, as well as deterioration of the external vulnerability indicator, posed addition threats to the value of the dollar.
“These factors suggest caution and we believe that given that prices have not fallen off a cliff, investors should look to reduce their holdings now rather than later. On the basis of the above, I am recommending a sell on Barbados at this time,” he said.
In the analysis of the Barbados market, Burrell said GDP growth had been poor –– below one per cent between 2010 and 2016, concluding that Barbados’ key income earners –– tourism and international business and financial services –– had been negatively affected by the financial crisis and ongoing geo-political issues such Brexit.
In September of this year, international ratings agency Standard & Poor’s lowered its sovereign credit rating on Barbados from “B” with a negative outlook to “B-” also with a negative outlook.
“The single ‘B’ rating is one which indicates that the sovereign is highly speculative grade and the negative outlook suggests that there is a strong probability that Barbados will be downgraded again to possibly ‘CCC+’ over the next six to 24 months,” Burrell said in the damning document.
In a further reference to the Central Bank, he said there were currency controls that helped to defend the peg, but with a fixed exchange rate, monetary policy was “effectively abandoned with heavy reliance on the fiscal to generate confidence. Barbados’ fiscal numbers [debt and fiscal balance] . . . are not encouraging at this time”.
The economist said the projected 1.3 per cent growth for this year was weak, despite being better than previous years, and that low private sector confidence, delays in the implementation of several tourism projects and lower UK visitor arrivals due to the uncertainties over Brexit could result in a worse than anticipated performance.
On the positive side, however, Burrell said Barbados had a number of important indicators in its favour, including high per capita GDP, high levels of education and social indicators, low levels of corruption and crime, combined with strong political institutions.
He added that steps had been taken to reduce the deficit, “though the actual implementation is criticized for coming in too late and being poorly executed”.
“Most of the original fiscal measures put forward by the Government also became effective in the second half of 2015, so it is hoped that with a full fiscal year to run in 2016, results should be better. There is also room for additional tightening to allow state-owned enterprises to meet failed 2015 targets,” he added.
The JMMB Group describes itself as one of the leading financial groups in the Caribbean, serving approximately 220,000 clients in Jamaica, Trinidad and Tobago and the Dominican Republic.