Earlier this year, I had the pleasure of discussing the importance of foreign exchange hedging with an Optimist group. I discussed the importance of protecting oneself or business from volatile foreign exchange moves.
The example I gave at the time –– and with some irony (before Brexit) –– was why and how hoteliers could protect themselves from a decline in the British Pound. It was a hypothetical and more educational exercise as to the best of my knowledge no hoteliers were present at the time.
In my previous research and as presented at the gathering, I found a correlation between a change in the percentage of British visitors to Barbados correlated to the expectations of a change in the dollar value of the British Pound. To put it another way, more visitors came when the trend in the pound was up and less came when the trend was down.
A very simple conclusion of my presentation would have been that the country (Central Bank of Barbados) should enter the Forex markets (like many other Central Banks do) and hedge against their major risk for the year. The major risk, as we are all well too aware, would have been a Brexit leave vote which has transpired. Hence, the Central Bank should have been selling the British Pound to hedge our Forex reserves (our Central Bank should actually be making record profits on this hedge).
I take a calculated risk whenever I speak about these things because backlash from government entities can be a reality for citizens and businesses. So, at this time, I point to my rationale for writing this:
1. The selfish need to clear my conscience
2. The desire for the Central Bank to think outside the box in terms of its investment strategy/ roles and responsibilities.
The US bond selling off, i.e. yields going up, is the next big risk for Barbados and our Central Bank. Simply saying we will not provide foreign exchange to businesses or persons in Barbados isn’t the answer. Our reserves will just simply continue to slide slowly (by $100 million per year).
Yes, it is a good defensive measure, but it simply wouldn’t work in isolation. Interest on our international debt and any future debt is going up even if local buyers don’t demand a premium.
V Shaped Recovery
Would you rather be killed by a single deep stab with a knife or by a thousand knife cuts? Barbados for whatever reason has chosen the latter to its detriment. One stark example has been our international debt which we did not refinance when international interest rates were low.
Barbadians need to understand this; we can either have a painful cut and recover or have a series of slow painful cuts and just continue to bleed out. For all of America’s problems, they do understand how to take hard medicine and then dust themselves off and recover.
(Craig Harewood is Investment Director at OurInterest Advisers Inc.)