International ratings agency Moody’s has rejected the Barbados Central Bank’s growth projection of 0.3 per cent for this year.
Pointing to what it described as the island’s fiscal challenges and persistent economic weaknesses, Moody’s warned today that instead of growth, the local economy was expected to contract by 1.0 per cent in 2014. “Exacerbating the credit-negative fiscal trends, Barbados’ economy continues to struggle, and was unable to achieve growth in the first six months of this year, extending its subdued performance over the past seven years,” reported the global ratings agency.
It expects ongoing challenges in the key industries of tourism and offshore services, as well as austerity measures to weigh down economic activity for the rest of the year.
“Therefore, we project a 1.0 per cent year-over-year contraction in 2014,” Moody’s said.
Despite recent positive developments in tourism, such as an additional chartered flights out of Europe, it also pointed out that Barbados’ main industry continues to face significant headwinds.
“In the first half of 2014, total visitors declined 0.2 per cent year-over-year from the low base established last year,” stated the entity.
Moody’s also said that, given the larger budget gap in the last fiscal year, it was now estimating that the Freundel Stuart administration needed a total adjustment of at least $450 million (5.2 per cent of projected 2014 GDP), to reach its deficit objective in the current fiscal year.
“The fiscal first quarter ended in June was an important test for the Government’s ability to deliver its ambitious deficit reduction programme, introduced in August 2013, as the majority of measures are targeted to take effect in the current fiscal year,” said Moody’s.
The agency said that although it foresaw fiscal consolidation to accelerate over the next three quarters, Government will remain constrained by revenue underperformance, difficulty reining in transfers and subsidies and rising interest costs.
“Consequently, we are adjusting our 2014 budget deficit projection to 8.5 per cent of GDP from 8.0 per cent, about two percentage points above the Government’s target, with risks firmly tilted to the downside,”
Moody’s said that while public sector layoffs completed earlier this year had reduced the Government’s wage bill by about nine per cent relative to the first quarter of the previous fiscal year, transfers and subsidies – the largest item on the expenditure side – declined only 1.6 per cent.
It noted that interest expense had increased by 14 per cent, limiting the overall decrease in fiscal outlays to just 1.3 per cent.
“In our view, this illustrates how difficult it is for the Government to curtail socially sensitive expenditures and control interest costs,” Moody’s added.
The ratings agency also expressed concern over the state of the country’s foreign reserves.
“After recovering slightly during the previous three quarters, foreign exchange reserves have resumed their decline, and as of 30 June, remained around 25 per cent below early-2013 levels. This decline occurred, despite a slight recovery in long-term private financial inflows that traditionally help support the Central Bank’s international reserves,” Moody’s said, while cautioning that any further erosion in reserves would likely put added pressure on this country’s currency, which is pegged to the US dollar.