Caught Between A Rock And A Hard Place: The IMF Reports On The Regional Economic Outlook

The IMF's latest quarterly regional report on Latin America and the Caribbean has just been released (see report). As for the world as a whole, growth is occurring in the region, but it is uneven. Much of the growth in the region depends on external developments, and here we have a cleft stick for tourist dependent countries, like Barbados, which have seen tourism and associated foreign investment suffer (see more on this below). The IMF analysis is clear and speaks much for itself, but a few points are worth highlighting. The press release notes that the outlook for smaller economies remains difficult:

“But within that regional picture, countries with strong ties to global financial markets are likely to stage a more vigorous recovery, helped by their access to ample external financing and by strong prices for their commodity exports. On the other hand, some of the smaller economies will experience more sluggish growth, and some of those will even contract. Accordingly, policy approaches will have to vary considerably to ensure a sustainable recovery across countries.”

In assessing the varied outlook, the IMF comes up with a grouping named 'net commodity importing countries with large tourism sectors'. This group comprises Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. These countries depend primarily on tourism for their current account revenues. In general, they have high external debt burdens but otherwise are not closely integrated with external financial markets. They experienced sizable terms-of-trade losses during 2000–08, given their limited goods exports base and their reliance on imported fuels.

'Growth in the commodity importing tourism intensive countries has been marked down and is expected to perform worse in the current cycle than in previous episodes of global stress. The relevant external conditions are less benign for these countries. Reflecting strong links to weak employment in advanced economies, shocks to tourism have not fully reversed, and elevated commodity import prices are weighing on activity. Moreover, in some of these countries, high levels of debt constrain the room for policy maneuver. Although some countries managed to implement countercyclical fiscal policy in 2009, the payoff in growth was limited, probably reflecting small multipliers. And fiscal stimulus efforts may be short-lived, given financing constraints in forthcoming periods.' This general picture has its clear image in Barbados.

The report adds: 'Policy challenges in the coming years will correspondingly vary across countries. For many of the financially integrated commodity exporters, the challenge will be managing the upswing of the business cycle. A main theme will be the timing and sequence of exit from the macroeconomic stimulus implemented in 2009, and the adjustment to a more benign external environment. In turn, for many of the tourism intensive commodity importers, the sluggish recovery, coupled with high external and fiscal imbalances, will require difficult policy choices.'

Many of these countries are the filling in a sandwich that is hard to stomach: dependent on growth and strong employment in developed countries that should generate tourists, and push the flow of foreign direct investment (FDI, often also in the tourism sector). The report highlight graphically how that situation is looking bad for many of the region's small economies. 'Estimates of tourist arrivals to the tourism intensive commodity importers suggest that the impact of a 1 percent increase in OECD unemployment implies a contemporaneous decline of 4 percent in arrivals, on average (Box 2.6). For the current downturn, the approximate 3 percentage point increase in U.S. unemployment squares with the average 10 percent decline in Caribbean tourism. Longer-term investments in the form of vacation real estate and other forms of tourism fell concomitantly with short-term vacation arrivals, as household wealth declined in the aftermath of the financial crisis. This is particularly costly for the tourism intensive importing countries, as median FDI (in percent of GDP) had tripled, from below 4 percent in 1996 to more than 16 percent of GDP by 2008. The importance can be observed in the concurrent declines in median unemployment in the region, from more than 16 percent in 1996 to single digits in the most recent years. With the onset of the crisis, FDI fell sharply to 10 percent of GDP in 2009. Employment in advanced economies is expected to improve only gradually, with weak prospects for tourism in the coming years.'

The nail is driven home with 'The weak recovery in the tourism intensive, commodity importing countries will pose a great challenge to policymakers, as elevated debt levels and limited access to financing impose difficult policy tradeoffs.'

The recent concerns about debt and financing could indirectly affect the region through market confidence effects or directly via Spanish banks but also due to general concerns about high debt and deficits levels.

It is worth remembering that one of the mainstays of many of the region's small economies has also been one of its constraints. 'Moving toward more flexible exchange rates, where possible, would serve as a cushion against potential future external shocks.' Holding onto fixed exchange rates has become sacrosanct in many territories, but without proposing that this be dropped one need only look at Greece's plight to see what happens when you cannot devalue your currency in light of severe economic problems.

The IMF report also highlights the burden on the region of the still unfolding financial difficulties of the CL Financial Group and the pending Securities and Exchange Commission fraud charge case against Allen Stanford and three of his financial companies fro running fraudulent investment schemes. The Fund, ever the master of understatement comments 'Both experiences point to the need to improve financial regulation and crossborder cooperation.'

Are The People All Doddery Or Just Imprisoned By Their Points Of View?

The little tempest that has begun to swirl on the island over the past week since the central bank governor published comments and figures about the wider financial cost of building a new prison at Dodds has become more blustery today.

The Advocate leader says 'Gov't should know better' (click link to read or click image to enlarge) and argues that the previous Barbados Labour Party Government showed 'poor reasoning and bad judgment' in its choice of options to rebuild the prison and its selection of a contractor, alluding to the fact that the contractor, Alaskan company, Veco Corp., had executives who were under criminal investigation from 2007 and the 'former chairman and former vice president pleaded guilty to conspiracy, bribery and tax violations'. It draws the connection between a new home for criminals being constructed by those who were themselves involved in 'serious irregularities'. Naturally, it touches on what has confused many: that the cost of the new prison has shifted from B$200 million, to B$289 million, to B$749 million. That is not so hard to understand, as the first figure was an initial estimate of 'general costs'; the second figure was agreed contract amount; the third figure is the total contract figure plus interest to be paid as part of the BOLT (build, operate, lease, transfer) arrangement.

The Nation is on its rival's heels, with an editorial entitled 'Let's reason in prison debate', which talks about how issues can get both emotional and get mired in political point scoring. Its slant is to not question the arithmetic but to plead that 'critical elements went into the decision to build Dodds have been ignored'. It argues that these were made for 'safeguarding the economy from the deleterious fallout' from the fire that destroyed Glendairy prison. Cricket World Cup was in the offing; the security of Barbadians and tourists were 'equally paramount'. It's probably right to argue that 'we do not feel there could have been many Barbadians...who would have disagreed that new prisons (sic) had to be built'. But that does not excuse what appears to have been a case of being economical with the truth about what the country would have to deal with financially. If public comments flying around now are a gauge, it is the case that a good part of the population had no idea that the final cost would be more than the capital sum to build the prison. That reflects a certain attitude on the part of those who govern: we know best what should be shared with the populace and the less, the better. But it also betrays a certain attitude on the part of those governed: not to press for disclosure and to be content with flimsy arguments about major decisions. It has nothing to do with 'a modicum of reason and common sense'. My understanding is that the matter was not pressed that hard by those who were in opposition politics at the time, and are now in government, so it's an awkward falling knife to dodge.

Finally, Clyde Mascoll's weekly column in the Weekend Sun, 'What Matters Most', talks about 'Dusk or dawn'. He, too, talks about the governor's report and the discussion on how economic trends were portrayed. On Dodds, he feels that the treatment of payment of debt service on the lease agreement for Dodds 'justifiably triggered' a response from the leader of the opposition (Ms. Mottley) and the former PM (Mr. Arthur). I wont argue about the governor being selective in his treatment of debt obligations: he was. What I would have preferred to read from Mr. Mascoll (whom we should not forget was Minister of State in the Ministry of Finance in the previous government during important decisions on the matter) was more than 'It has apparently fallen on me to give the public a perspective that offers an alternative understanding of the economic issues confronting Barbados'. He could have said something like the partial treatment needs to be complete and that transparency in the fiscal affairs of government was less than it could and should have been. This is not just my view, but has been written publicly by the IMF in its Fiscal Transparency Report on Barbados. The country needs to see and understand what its forthcoming debt obligations look like, and for how long. We could then have a useful public discussion about how it is envisaged that these will be met.

What Position Do You Play? The Central Bank Governor Faces Some Tough Tackling

Since presenting his review of the first quarter last week, the central bank Governor has been assailed by several leading members of the opposition Barbados Labour Party about what he did and did not say and how he presented the economic picture, claiming that it was not 'fair and balanced' (see, for example, Nation report 'Economic report missed the mark, says Mottley' and Advocate, April 16, page 3). I'm not really getting into what is brewing up to be some top level political fight, with the current PM/Finance Minister quickly rebutting the claims (see Advocate report). I would not wish to take away the chance for some opportunistic opposition politicking, though it's worth noting that there is a lot that could have been said about many economic developments in many previous quarterly reviews. The discussion has a number of points of interest, most notably the highlighting of the overall cost of the building of a new prison. It's good that past government ministers feel that a fuller picture should now be given of this obligation, which begs the question in my mind why that was not insisted on earlier. That information, which is in the purview of the PM, Finance Minister, and Cabinet, should not be coming to the population now. The country has limited resources and good husbandry of those should be a paramount point in the minds of politicians, together with clear explanations of what the decisions mean at a given time and in the future. Without knowing whether discussions were ever held between previous PMs, finance ministers and central bank governors about the tone and content of the central bank's publication, I will take it that the latest comments will be duly noted, with or without the Governor raising an eyebrow.

What should not be in contention is that the Barbadian people should not be in the dark about the nation's obligations, and it feeds confusion to give no clear or only partial information about these, sometimes in a drip fashion. The details of the Build, Operate, Lease, Transfer (BOLT) agreement for Dodd's Prison may be contentious in some eyes, especially if the options for building of a new prison and its financing were not fully aired in a manner that the public could understand. But the details of this and other BOLT arrangements and other obligations should be known: it's the public's business to know what they have been committed to by elected officials. Looking forward, it should be standard to show the forthcoming government obligations to repay principal and debt service on a loan-by-loan basis, and the underlying terms of the loans should not be any big mystery.

I have also been interested by reports about the Governor's comments about two red flag issues for Barbados. One is the country's foreign reserves and the other is the level of central government debt.

On reserves, the Governor is reported to have said that the current level of reserves (about 20 weeks of imports) is "enough" when compared with an international norm of 12 weeks for 'our kinds of economies'. He added that raising this level would "not be in Barbados' favour". He did argue that "adequate" reserves were needed to protect the value of the exchange rate, but holding reserves are not a good thing as "reserves are ... funds that you have earned and are lending back mostly to the US government". He seemed to dodge the issue of letting reserves fall so that more could be used for domestic purposes, saying that the "issue of credibility needs to be considered" and letting them dip too much would worry people. But, he has opened the door to speculation about that possibility that there is going to be repositioning on the matter and that too may lead to his having to face more heavy bombardments.

The second intriguing repositioning being undertaken by the Governor appears to be in the context of 'constructive dialogue with rating agencies' on how to view Barbados' public debt. The press report suggests that he has been arguing that because much of the central government debt is held by the National Insurance Scheme (NIS), it is not at risk of not being repaid because NIS is only interested in the income from the debt and will roll over the principal because they need the income to pay national insurance claims. He also added that because government and statutory corporations hold bank deposits these should somehow be netted against the debt outstanding, and the position of general government and debt held by non-general government (which would be under 50% of GDP) is perhaps more appropriate. Clearly, the international markets are very sensitive right now to the prospects faced by heavily indebted countries so trying to put your national position in the most favourable light is a good strategy. I don't know if the NIS shares the Governor's views about its holdings of government debt and whether they are not concerned about getting back that principal. Bad news if they are. I'm not clear where the line of argument about cash in the bank takes you: it is not there to deal with debt obligations and has plenty of claims on it for every day operations. In similar vein, foreign assets in commercial banks are not part of the country's reserves, having other calls on them, so the country would not throw those in to show that it has adequate import cover. Nice that it exists but it has another role to play.

Well, Dr. Worrell is not ducking controversy, and opening up a raft of issues for discussion makes for more interesting times.

Bridging The Crediblity Gap

If a government says it has no problem but constantly acts as if it has a certain problem, then what is the problem? The problem is that it is hard to believe what it and its Ministers are saying. In politics, truth is a commodity, using any of its definition. But it is also a scarce commodity, whose value has risen enormously because of its too frequent absence or dilution.

I have listened to and read comments from the government in Barbados in recent months and wondered whether it is just me--I am admittedly a cynic--or if there really is a gap between my ears. I hear that the government says that it has no cash flow problem--hard to believe when the budget deficit is supposed to be widening, but cash could still be flowing in. Then I read that payments from the Inland Revenue were delayed and there was some problem in mobilising resources--albeit with some fuzzy logic (see Advocate December 3 report).

I've followed the debate about the country's credit ratings, knowing that one of the factors that impinge on that is whether stated policy actions are consistent with actual decisions and if expected outcomes are matched by reality.

I read this weekend of the claims by contractor Al Barrack that the government (not necessarily this administration) in the form of the National Housing Corporation, owed him around B$60 million: a court ordered he be paid B$34 million and with interest accrued this is now supposedly B$62 million. The PM was quick to acknowledge the money was due and that some money had been paid.

Of itself, the story is poignant--with tales of Mr. Barrack borrowing other people's life savings and risking his own life saving. But it highlights many weaknesses in a society that is supposed to be law abiding and rules driven--views that I have said often do not fit the national reality. It also betrays a certain dismissiveness by public officials--whom some have called 'wealth destroyers'. Someone in government must believe that owing a business some $60 million will not ruin the business or the person. Or, if they suspect that ruination may happen, that this will be for the national good and/or can be dismissed without much popular comment: the loss of the business and the possible fall of associated businesses and jobs with it is more likely when economic conditions are weak. Or they hope that the payee will just forget about the debt or die and his heirs also forget about it. Or some other nonsensical wishes.

There is a ton of writing available about public policy making and credibility of institutions. Some of it is highly readable but much of it is blindingly obvious. What has always intrigued me is how a government sees itself when it or one of its agents is being 'economical with the truth'. For those not familiar with the phrase or its more modern rendition in the mid-1980s, we are talking about lying, but for some lies are on a spectrum. As sources indicate, the phrase was first recorded from the 18th century, but rarely used. It was brought into the contemporary language by the UK Cabinet Secretary, Sir Robert Armstrong, who used the phrase during the Australian 'Spycatcher' trial in 1986. I remember it vividly, working for a government agency as I was and dealing with another set of economic untruths in the form of the Mexican debt crisis. The exchange went as follows:

Lawyer: What is the difference between a misleading impression and a lie?
Armstrong: A lie is a straight untruth.
Lawyer: What is a misleading impression - a sort of bent untruth?
Armstrong: As one person said, it is perhaps being "economical with the truth".

The 'one person' was Edmund Burke, who wrote in 1796: "Falsehood and delusion are allowed in no case whatsoever: But, as in the exercise of all the virtues, there is an economy of truth."

Governments and politicians love to give misleading impressions and some love to lie. Parliamentary proceedings should help us get to the truth, but I am not holding my breath for that to happen. Courts often help us get to the bottom of things, but as we know too well, courts may stipulate but individuals may not dispose and there seem to be all gums when it comes to getting financial redress from court orders.

Mr. Barrack's case is particularly bad, originating as it did in 2002, and involving government as the payer. But there are several other cases where courts have adjudicated and yet payments have not been made. That to me is truly contempt of court.

But, my concerns roll to the economics. When the PM/Finance Minister reminds people that Barbados has never not repaid its debts should that be taken as 'and always will'? If borrowing abroad will be avoided in preference for borrowing from domestic sources, I would always shiver because not repaying international loans has a very different taint than not paying domestic ones.

When, in late November, the PM said there was “no cash flow problem” I was not convinced and it made no sense given that economic conditions were turning out to be worse than expected. When he explained why the Inland Revenue Department (IRD) was not paying refunds my head spun. He said: “What may happen is that spending priorities may often change in times of economic difficulty, so that departments may find that the bulk of their resources may have to go towards the payment of wages and salaries and can’t be used for other programmes because departments are watching their pennies until the end of the financial year.” Why does rearrangement of the IRD's spending priorities affect the issuance of tax refunds? Don't tell people that return of their overpaid taxes are being delayed to pay the over-taxers their wages! I'm still not clear on what the PM was really saying, and may never be.

But I am clear that being economical with the truth does not change realities. Fool me once, shame on you; fool me twice, shame on me

Another Rung Down The Ladder: Barbados' Debt Rating Cut Again

Barbados' debt woes continue to weigh on its international credit rating. Today, Moody's lowered its government bond rating by one notch to Baa3 (from BBB, given in June), or just one notch into investment grade (i.e., one notch above 'junk' status; see Wall Street Journal report). The ratings outlook is stable.

In a succinct assessment, Moody's analyst, Alessandra Alecci, said "Barbados' key debt indicators have been on a deteriorating path over the past decade, and are now at levels that compare poorly with other countries in the same rating category." Moody's cited the steep rise in the country's government debt, which Moody's expects to exceed 100% of GDP, compared with 65% in 1999.This is consistent with the views in the IMF's recent assessment of Barbados. Moody's noted that the recession has reduced business and leisure travel, on which Barbados relies heavily. Despite those concerns, Moody's isn't worried about the government's ability to finance its short-term needs or about a balance-of-payments crisis.