If Barbados’ economic fix with the International Monetary Fund (IMF) does not work, Barbados may have to consider the dreaded devaluation of its currency, which could leave all Barbadians “poor from day one”, according to a visiting fiscal analyst.
The sobering observation has come from Nathalie Marshik, Managing Director and Emerging Market Sovereign Analyst at investment firm Oppenheimer.
The New York-based analyst said that it was critical to shrink the island’s massive public debt to a more sustainable level by earning a primary surplus.
Government announced on September 8, that it had reached a staff-level agreement with the IMF to borrow US$290 million through an extended fund facility to prop up its balance of payments, subject to approval from the Fund’s executive early in October.
This four-year IMF programme is to support the Barbados Economic Recovery and Transformation (BERT) programme.
Government, through its economic recovery team, has already announced that it was expecting an approximately six per cent primary surplus over the life of the adjustment programme.
Addressing a Royal Fidelity investor forum at the Hilton resort on Thursday under the theme, Proceed with Caution – Investing in Uncertain Times, Marshik said while devaluation would allow for imports to decline and the current account deficit to fall, a lot of economies in the region simply did not have the foreign exchange reserves to support this.
She insisted that fiscal sustainability was what was necessary.
“Having pegs is hard,” she said, referring to the fixed exchange rate of 50 US cents to one Barbados dollar. “Having pegs mean that the Government cannot overspend. So the danger is that if the Government does not hold to the IMF programme and hold to its fiscal targets, the danger is that the current account deficit is not going to be reduced as much and then you find yourself in a position where the external market may still be closed to you and the IMF may not be willing to continue a programme or continue to lend to you. So that then becomes the question,” she said.
Explaining that “hard targets and soft targets” would be set at the beginning of the IMF programme, Marshik said it was up to Barbados to meet those targets so the programme could be completed.
“Hard targets are the actual number of targets that are set around your revenues: your expenditure cuts, your primary surplus deficit, debt levels. Then you have softer targets, which are generally privatization [and] the kind of laws they want you to pass for competitiveness. So if you miss some soft targets it is okay, if you miss the hard targets that becomes a problem,” she warned.
“The payments are done after each review and you generally have a review every six months and then if they agree with the review they go to the board and the board approves the disbursement of the piece of the loan,” she said, adding that there were other factors and considerations including the size of the country.
Using as an example Suriname, which entered into an IMF programme in 2016 and then cancelled it almost a year later owing to the conditionalities, Marshik suggested it was critical that Barbados did its homework on what terms it could live with.
“The Government should have done a lot of its homework and can hopefully hit what it set down as targets,” she said, while praising Barbados for coming up with its homegrown programme.
“Now, what happens if this does not work? I am not saying you are going to have to de-peg, but clearly you have very low levels of reserves. If you look at the size of your reserves versus the size of your monetary base, which gives you a sense of where your exchange should be, your devaluation would be massive. So it is not going to work,” she said.
“The problem with devaluation is that it makes everybody poor from day one.”
Marshik continued: “A government would not take that [devaluation] decision lightly. They would prepare. They would be very careful if this was going to happen. The programme is for four years. So let it run for three years and … hopefully we see that primary surplus, smaller deficit, means overall a smaller current account deficit which really shows the external market that you mean it . . . but let’s give it three years and see what happens and then maybe the conversation around the peg needs to really happen,” she added
Acknowledging that the ongoing debt restructuring – details of which was revealed by the Central Bank this week for local holders of government paper – would be “hard no matter what”, Marshik said Barbadians should “just take the pain straight away”.
She said once targets are met and are met quickly then Barbados should have no problem going back to the international market for affordable financing.
“The Barbadian dollar-denominated debt restructuring that was just published is a good exercise to look at to figure out what is going to be done on the dollar side,” she said.
“That tells me the Government want to be fair across debt holders. For US bondholders, what we should expect is fairly large coupon cuts and no haircuts,” Marshik speculated. “We don’t know yet.”