All The Rage

The current debate about the state of Barbados' international reserves is not just about statistical measures, but about the nation's ability to pay its way with foreign exchange. The latest salvo that I saw in the press was yesterday's piece in the Nation, with Albert Brandford trying to explain the two common measures cited--gross or net official international reserves (see report)--taking his cue from Clyde Mascoll's muscular arguments during the past week about how the central bank has moved the analytical goal posts in its latest economic review. I am not going to get into a bicep flexing contest about who knows more about these measures--I do know a bit, having worked on developing the methodology for measuring the concepts (take a look at the IMF's Monetary and Financial Statistics Manual, or the associated Compilation Guide) and also having worked on seeing how they are applied in many operational contexts.

The bottom line with any measure of international reserves is how much money does a country's central bank actually have available to meet the country's external financial needs. In some instances, we can stretch the official hand so that it has access to (gross or net) foreign assets held by commercial banks to help bolster the situation. But that is largely private money that is held for commercial operational needs.

Whether you take the current level of gross or net official international reserves, Barbados is seeing the level fall. Moreover, the activities that would help turn that situation around--mainly money coming from tourism--is clearly waning. The things that have to be paid for are not reducing fast enough, hence reserves are falling.

But, are they at a critical level, or approaching that, on any measure? As I cannot see all the cash flow needs that are facing the government and central bank, I cannot say for sure. But, what I do know is that some large needs are there and they will have to be covered in part, or in whole, by borrowing more foreign assets. The conditions for such borrowing are not good, and the sense given by international rating agencies is that they see Barbados as less worthy of being upgraded in their eyes, and more worthy of being downgraded. So, the question that arises is "Will Barbados have friends when it is in need?". If reserves are falling but you cannot borrow commercially (on acceptable terms) then you are in a bind. Something else will have to give in your policies or to whom you have to turn. You can argue about the when and the what and the how, but it has to happen. As an economist, I cannot take it for granted that most people understand this, but I am sure that policy makers do. So, what will they do to either explain that truth or start to deal with it? Lamaze breathing is not going to be enough to deal with the pain.

Fool Me Once, Shame On You. Fool Me Twice, Shame On Me

Several months ago, I wrote about some issues to do with the credibility of government and governing (search 'credit ratings', for example, and see Do Good Things Come To Those Who Wait? Economists Talk About Issues?). Much of that concern comes right back and hits me in the eye when I listen to what government spokespersons, mainly the Finance Minister/PM have been saying recently about things economic. I wont spend many words on them, because it appears to reflect much indecision, which has been costly, but just note the to-ing and fro-ing in four particular areas There's a reason to not spend too much time on the details of the Estimates that are now being thrashed over in Parliament, not least because they are estimates (and I know how to do that and it's more art at best than science), but also if the overall picture is a mess and unclear then what clarity can one get from the details that make that up? But looking at the problem areas where clear paths seem to have come and go like day and night.

Asset sales: First it was the plan to sell shares in BNB and ICBL to fund rebuilding/renovation of the QEH. Then it was talking about raising the governemtn ownership of BNB so that it could again become a 'national' bank. Then back we come to planning sell BNB and ICBL shares to fund QEH improvements. Is your head spinning yet. The Exorcist was a horrible movie.

Ratings downgrades and warnings and international borrowing: When Standard and Poor's made its downgrade of Barbados last November, one of the comments from the central bank governor was that Barbados was 'not going the route of borrowing on the international market, choosing to use less expensive sources of funding', and therefore concern about a worsening view from credit ratings agencies could be lessened. But here we are hearing from the Finance Minister yesterday that Barbados will go to the market to raise US$ 200 million at the maturity in June of a US$100 million bond. So, what was not a concern in the mind of the central bank governor may now be a concern as Barbados tests the international borrowing waters. But guess what? Several months ago concerns about high budget deficits and possible sovereign defaults was very muted, Since then, we have had the debacle of Dubai and very recently the greasy pole of Greece's financial and fiscal problems, and renewed talk that so-called solid sovereign borrowers like the UK and USA may see the loss of their AAA rating. Let's see what a welcome there is at the doorway for Barbados. If you want to think about happy ever after in the market place, remember The Beatles song, Oh-bla-di, Oh-bla-da, with 'Life goes on, bra. Lala, how the life goes on'.

CLICO/CL Financial: This is really something that may become a horror movie before our eyes. An unbelievable amount of time has been lost or wasted dealing badly with the affairs of this entity, and with about as much transparency as you get by looking through a wool blanket. During the Estimates debate the FM/PM told Parliament that the proposed sale of CLICO International Life has proven to be very difficult (see Advocate, March 16, page 3). I'm not really going to who has seen the Memorandum of Understanding between CLICO Holdings (Barbados) and the Ministry of Finance. If Parliament has not seen it then we have serious governance issues.

Supervision of nonbank financial institutions: The icing on the cake comes with the belated announcement/decision by the Supervisor of Insurance that CLICO and British American Insurance must now cease and desist from writing new policies and both be put under judicial management (see Nation report). Should have been done a year or so ago. You have a hole and don't know how deep it is and where it will hit water and you keep digging?

Till Debt Do Us Part: Down We Go Again

Last week I wrote that Standard and Poor's (S&P) were warning that another credit rating downgrade was coming for Barbados (see You Take The High Road...), and they did not lie. S&P lowered the island’s rating from stable to negative, on Friday, November 13 (ominous), citing “a worse-than-anticipated recession” in Barbados for the situation. It added that it believed that the timeliness and magnitude of the island’s fiscal consolidation “is uncertain because of a worse-than-anticipated (global) economic recession”. The rating agency forecast net government debt at 52 per cent of GDP this year, up from 42 per cent three years ago.

Standard and Poor’s said results for the first three quarters “underscore a rapid deterioration” in Barbados’ public finances and a “sharper economic contraction”. It revised its real GDP estimate to negative 4.8 per cent this year with a further decline of one per cent expected in 2010, before a return to growth in 2011. This underscores the IMF's earlier assessment and its focus on the unsustainability of Barbados' current debt profile.

This warning points to another worrying development looming on the horizon: Barbados' debt may be headed for the dread 'junk' status if it is downgraded another notch. Whether or not people like the term 'junk' is not material. What is means is that those people who look to lend will have to avoid Barbados as they face limits on how much debt they can carry that is not investment grade. To change things needs more than a shift in confidence. It needs policies that attack rapidly the size of the debt. The sands are drifting down the clock and I fear that Barbados may not have as much time to deal with this as it would like.