Month: October 2013

Recession and Falling Reserves: 2013Q3 Review


The Central Bank of Barbados (CBB) released their review of the economic performance of Barbados for the first nine months of 2013. As expected, the country slid deeper into recession and the CBB estimates that economic activity declined by 0.7% so far for the year. The key drivers of economic activity – tourism and construction activity – continued to struggle, the unemployment rate remains high and the level of reserves continued to plummet. The only good sign is the continued ease in inflation, though one could argue that the low inflation rate (2.1% at July 2013) may partially reflect low demand, especially in an import-dependent country, such as Barbados, where high levels of consumer confidence are often accompanied by a rising inflation rate.

Confidence and the Foreign Exchange Reserves

Perhaps the most worrying trend is the continued leakage in the foreign exchange reserves, which fell by Bds$220.2 million in the third quarter of 2013 and is now at its lowest since 2000. To be prudent, countries with fixed exchange rates are encouraged to maintain foreign exchange reserves equivalent to at least 12 weeks of imports of goods and services. This level is believed to provide sufficient foreign exchange coverage to successfully defend the exchange rate and thus provides a signal to international investors of the strength of the Balance of Payments position and, by extension, the entire economy. At 13.3 weeks, Barbados is only 1.3 weeks above this international benchmark. Unlike the last period of significant drain on the reserves, the reduction in the reserves is not due to a fast-growing import bill. In fact, retained imports have grown by a mere 0.05% so far for the year since domestic demand is quite weak.

The main obstacle to arresting the slide in the reserves has been attracting capital inflows. The CBB estimates that net capital inflows at the end of the third quarter are roughly one-quarter of what was recorded by the same point in time in 2012. Capital inflows, especially foreign direct investment, are good indicators of the level of confidence in an economy. In times where confidence is high, inward investment grows, as both domestic and foreign investors are comfortable making the long-term investments that attract capital inflows, such as major construction projects, buying real estate and starting/expanding companies. On the flip side, when confidence is low, not only do foreign investors become increasingly reluctant to make long-term commitments, but domestic investors also go into a holding pattern, since low confidence in the future of the economy increases the risk of these types of investments.

The CBB believes that 2014 should be better year for foreign direct investment due to the construction of a cruise pier and the implementation of government infrastructure and tourism-related projects. Furthermore, it anticipates that capital inflows will strengthen even further in 2015. This outlook hinges on major projects coming fully on stream and the success of initiatives to strengthen Barbados’ international competitiveness.

There are clear downside risks to this outlook. Private-sector projects have been subject to above-average financing constraints in recent years, partially due to the uncertainty surrounding long-term investing in Barbados. The government is also in the middle of a major fiscal contraction, which could prevent or significant slow the implementation of major infrastructural projects. There are signs that confidence may returning, however, with the major commitment recently made by Sandals Resorts International and the addition of another Jet Blue flight to Barbados.

Operating with Economic Uncertainty

Operating with this level of economic uncertainty is a major challenge for businesses operating in Barbados and presents a catch twenty-two situation for the country. Without investment and confidence in the future of the country, it would be difficult for the economy to rise out of recession. On the flip side, it is risky to invest in a country that has been in recession for a prolonged period of time, especially when the economic outlook is somewhat unclear. Nevertheless, we may be at a turning point in the country’s history where the timing may be right for the private sector to firmly take the reigns of the economy and lead Barbados to sustainable growth.

Caribbean Economics, More Than National Policy

As an economist I’m often faced with many misconceptions about the profession and the scope of work that economists do. Everyone expects all economists to be following GDP, inflation, monetary policy and fiscal policy. We’re supposed to be experts on national debt and trade policies. And, we’re supposed to be very critical of policymakers, unless of course we are the policymakers. Notice that I haven’t mentioned anything to do with the corporate world. It’s as if everyone simply ignores the fact that all economists – and all social scientists for that matter – must study both macroeconomics and microeconomics. Somehow in the Caribbean we’ve reached a point where economists have been pigeonholed into only one subsection of the vast field that is economics.

Do we do that to accountants? I don’t think so. We don’t think twice about the large accounting firms publishing fiscal budget reviews, even though that really is a job for economists. They also offer management consultancy, even though we have thousands of persons that are specifically trained in that area. They even branch into law. There’s nothing wrong with what they’re doing. In fact, I applaud them. As a profession, accountants have realised that they have transferable skills and they are broadening their scope. Good for them.

So why are economists expected to stick to macroeconomics and development policy? Why are our only career opportunities either in some form of macroeconomic or development policy or academia? I believe that there are a number of reasons for the narrow scope of our field.

The independent economies of the Caribbean are young. At our birth in the 1960s we needed macroeconomists more than any other kind. We were now starting central banks and running our own governments and we needed economists versed in these areas. As students, most of the Caribbean economists of note are macroeconomists, so naturally we start to believe that to make it in this profession, you should focus on macroeconomics. Fast forward 50 years and I think we’re still stuck here.┬áThe current environment reinforces this focus because the Caribbean economies are struggling and the onus is on macroeconomists to solve the problems. But there are only so many positions in macroeconomics and not all economists are passionate about this area of economics.

Another challenge is that other professions do not understand economics enough to recognise how someone trained in the field could add value to a private company. It’s easy to recognise when you need an accountant or a lawyer. Those fields have rules that only accountants or lawyers can navigate. But most people can read a central bank press release so they believe that they understand the implications for their companies or the country at large. Whether they do or they don’t is irrelevant. It’s their belief that they do that limits the opportunities for economists.

Most social scientists have been exposed to Introduction to Microeconomics/Macroeconomics but outside of social science, we do not expose our students to the formal study of economics. As these non-economists start companies or rise in companies, their lack of exposure and understanding hinders their ability to recognise when they need an economist for strategic purposes. Game theory, war games and competition policy are not introduced in first-year introductory courses. Yet, they play a pivotal role in guiding strategic decisions in corporations. In fact, in large companies all over the world, they anchor strategic decision-making. Economists in these companies may be called Strategy Directors or Division Managers, or they may sit on the legal, marketing or finance teams. What they bring to the table is their unique way of looking at choice.

And what about statistics and business analytics? Is there any other field in Caribbean social science more suited to researching, interpreting and analysing vast volumes of quantitative and qualitative data of any kind than economics? Yet we ask our creative teams to analyse market trends. We ask our accountants to forecast revenue. We ask our lawyers to fight our battles on competition policy. And we ask all of these people to do all this work without the support of someone trained in these areas, and we crucify them when they get it wrong.

I believe it is time to re-educate our people on the value of economics and it is beyond time we already in the field push the boundaries that have enclosed our profession.