The current state of the Barbados economy
The latest review of the economy from the Central Bank of Barbados (CBB) stated that real GDP in Barbados rose by 1.6% in 2016, compared to 0.9% in 2015, on the back of the tourism industry – long-stay arrivals rose by 6.3% for the year up to December 29. Industries connected to tourism – reflected in sectors such as transport, distribution, utilities, construction and other services – all performed modestly, and these performances contributed to a decline in the unemployment rate to 10.2% at the end of September 2016 from 11.3% at the same point of 2015. The story from the renewable energy industry was also quite promising, with the addition of a 10 megawatt solar photovoltaic farm. As a result of the improvement in economic activity and moderate growth in goods and services exports, the external current account balance improved.
Despite 2016 being the third consecutive year of real GDP growth according to the CBB, the Barbadian economy is still not out of the woods. In fact, it is probably in one of its most dangerous phases since the downturn began back in 2009. The foreign exchange reserves have dropped to 10.3 weeks of imports of goods and services – almost two weeks below the internationally accepted floor of 12 weeks – and the fiscal deficit remains high at a provisional 8.2% of GDP. The drain on the reserves has been caused by a severe reduction in net capital inflows – from $371.8 million in 2015 to $136.1 million in 2016 – while the government seems incapable of reigning in its current expenditure in line with the lower revenue collections. The CBB has been placed in the difficult position of printing money to finance the government’s operations, which has not helped the current low-confidence environment that is at least partially responsible for the fall in net capital inflows.
Policy debates have so far centred on devaluation of the Barbados dollar and/or entering into a financing agreement with the International Monetary Fund (IMF). Our view is that neither of these options would work without the supporting structural changes. Barbados is a net-importer of goods and has limited capacity to substitute imports for locally produced goods should the currency be devalued and imported goods become relatively more expensive. Devaluing the currency would simply make consumption more expensive in an environment where the population has little room to cut back. Already the levels of both personal consumption per capita and personal savings at banks and credit unions have remained relatively unchanged since 2014. For devaluation to work in this economy, the local production capacity would have to increase to such a degree that it seems almost impossible, even in the medium-term; at present, exports of goods represent a mere 16% of retained imports. Concessionary financing appears attractive, but when you consider that the IMF has been advocating for devaluation as one of its policy reforms, the luster starts to fade. Furthermore, the success of IMF programmes, when well-designed, hinges on timely and effective execution, and Barbados does not have a good track record in recent times when it comes to policy execution.
Barbados has to make some difficult decisions and commit to long-term structural change that is sustained beyond political cycles. Many of these changes are in the hands of the private sector. Yes, the government can improve business processes and take its role as a facilitator of business more seriously. We would all welcome more streamlined and transparent processes, with predictable turnaround times and efficient, productive staff. But the economy is the sum of the production of mainly businesses. If the economy is struggling, it’s because businesses are struggling.
Some have argued that Barbados is too tourism-dependent, so when arrivals are down, it affects too large a proportion of businesses in the country and makes the economy too vulnerable. Though there are some large, successful producers, the manufacturing sector is too fragmented, which does not lead to the economies of scale required to produce efficiently in most sub-industries. Agriculture has tremendous room for growth, but once again it may be too fragmented, which contributes to the acres and acres of idle land and inefficiencies that prevent strong, sustainable linkages with other large industries. Renewable energy has great potential for both reducing the amount of imported fuel as well as lowering the overall cost of energy, but the ability of this industry to propel the country out of its woes will hinge on the timing of investments. And the cultural industries, long lauded as the future of economies all across the Caribbean, are still too disorganized to even facilitate a reliable estimate of its size.
The short-term policy options can be boiled down to two interconnected themes: create some breathing room and raise confidence. In the public sector, government can reduce its deficit by reducing both the expenditure of state-owned enterprises and the government’s wage bill. Doing so should provide the government with the financial space to tackle its arrears and reform the entire public sector, both of which would go a long way to improving the public’s trust. Demonstrating that it is committed to fiscal responsibility would also assist with negotiations to gain low interest rates on any future debt.
The private sector is willing to lend its support and demonstrated this by its recently called for a return to active dialogue and cooperation under the Social Partnership. The Social Partnership is a series of protocols that commits the Government of Barbados, labour (represented by the Congress of Trade Unions and Staff Associations of Barbados) and business (represented by the Barbados Private Sector Association) to cooperating to develop the economy in the long-term interests of the country. The last protocol expired in 2013. A return of the Social Partnership would not only raise the confidence of residents, but could also assist the government with tackling arrears and ensuring a smooth adjustment of its wage bill.
But the devil is in the details and that’s where all planning discussions start to fall apart.
Aim of the Project
Caribbean countries are largely dependent on fossil fuels to supply most of their energy needs. In Jamaica fossil fuel imports account for 28 percent of merchandise imports, and for 27 percent in both Guyana and Cuba. One of the main consumers of energy imports in the region is the transport industry.
Having regard to this, a study – “Greening Vehicular Transport in the Caribbean” – was commissioned by an international donor organisation. The main goal of this project was to conduct a cost-benefit analysis to assess whether the electrification of transport in a small island economy – Barbados – could reduce dependence on fossil fuels, boost economic growth and enhance sustainability.
Antilles Economics was engaged by the organisation to conduct the study and present the results at a regional workshop involving policymakers.
What We Did
This project required a number of research approaches. First, stakeholder interviews were conducted with individuals in transport, finance, and electricity generation and distribution. Second, a survey of consumers was conducted to assess their willingness to use and pay for electric vehicles as well as their general opinions and views on greening transport. Finally, the primary data collected was combined with secondary data to provide an assessment of the potential impact of greening transportation on foreign exchange reserves, business investment, the environment, fiscal balances and economic growth.
The study found that greening the transport industry could hold a number of macroeconomic and environmental benefits, such as having a national store of renewable energy. The paper also reported that there is demand for electric vehicles but the current incentive structure is somewhat perverse.
Impact of Project
The results from the project were presented to a regional group of stakeholders and policymakers interested in transportation. Since the dissemination of the report more countries in the Caribbean have begun the electrification of their transport industry, particularly in the OECS. In addition, many of these countries have reformed their tax and duty structure to make electric vehicles more economically feasible.
The Insurance Industry is indisputably one of the most important financial sectors in the Caribbean, managing US billions of dollars in assets. The fact that the ripple effects of the collapse, between 2009 and 2011, of two of the largest insurers in the region – British American Insurance Company Ltd. and Colonial Life Insurance Company Ltd. – are still being felt today, is but one example of how intertwined the insurance industry is with Caribbean business and the society at large. Insurers are increasingly involved in other industries, such as consumer finance, real estate, agriculture, manufacturing, distribution and communications. They represent one of the largest institutional investor groups in the Caribbean, and are one of the most popular choices for individual investors looking for retirement savings plans and other long-term investments.
As insurers become more complex and their operations span more industries, the challenge that is becoming more apparent is the need to better anticipate long-term changes. Ageing populations and the accompanying health risks, as well as climate change and the increased frequency of weather-related disasters, are two of the most pressing issues being faced by this generation of insurers. It has also become more critical that insurers understand trends in consumer markets. Consumers, especially millennials, are increasingly demanding online services, faster response times and more knowledgeable financial advisors.
Innovative insurers are already allowing online and automated premium payments and digitizing their claim procedures, but more can be done. Mining their datasets would potentially uncover lucrative insights that could lead to the creation of more innovative products and services, as well as assist financial advisors with selecting the right products and services for the right clients. If insurers are to compete credibly in non-insurance industries, they also have to ensure that they understand the ‘nuts and bolts’ of how these industries operate. As the CLICO failure, in particular, highlighted, insurers must learn to successfully read these industries in order to make smart, sustainable investments. Antilles Economics can help. From intelligence gathering to big data to economic and industry forecasts, we provide a wide range of services that insurers can access to navigate their increasingly complicated business environment.
2016 was a weird year, wasn’t it? As I reflect on last year and start executing our plans for 2017, I’m a bit surprised at how fast 2016 went. We had a busy year, and time flies when you’re having fun, but it seems like 2016 flew by! But then again, I also said that last year, so maybe my perception of time is warped.
We made good progress towards one of our driving mantras: fostering fact-based decisions in regional businesses. We collaborated with a number of companies across various sectors to understand their customers and incorporate these insights into their strategies and tactics. And we’re pleased at how many have already started reaping the benefits of these insights. We did much of the foundation work for one of our most ambitious projects to date (you’ll hear more about that as the year progresses). We improved our internal processes around forecasting developments in our focus countries and industries. And, we spent some time understanding the internal blockages corporate decision-makers face when trying to ground their decisions in fact.
Despite this progress, I’m still a bit disappointed that we had to pause article publication, which was one of our avenues to support fact-based decisions by providing independent analysis. This was a deliberate decision on our part. We wanted to spend more time understanding the type of information our readers really needed to make decisions. After conversations with both current subscribers and people who’d never even heard of us, we have revamped our articles and will now publish two content streams:
- Our Blog will focus more on what we do here at Antilles Economics. We have had quite a few requests for more detail about our work, which has always been a challenge given the need to preserve the confidentiality of our clients and the fact that our work spans so many different fields. Nonetheless, we can definitely provide more insight into what we do. Our Blog will focus on our research areas and the industries and functions we support, our thoughts on economics developments throughout the region, case studies about previous work and updates on current projects (where feasible). We hope that this will give you not only a greater appreciation of the scope of our work, but also provide you with useful information about developments in your industry/country as well as practical suggestions on making better decisions in your functional role.
- Our AE Quarterly newsletter will contain research articles on our core industries, functions and research areas. Previously, our articles were accessed through our Blog, and you never knew when a new article would be published. We will now publish articles in March, June, September and December, and only subscribers will be able to access the full article. Subscription is free, and if you haven’t already subscribed to receive our articles, click here to sign up.
Another area we’re going to improve on in 2017 is keeping you informed of our work in economics. Although our roots are in economic analysis and we spend the bulk of our time working on projects that have national or regional impact, you’d never know if you visit our website. So we will fix that this year by sharing more about our economic policy work. We will also be sharing more about our industry tracking and forecasts. I bet you didn’t know we have built a forecast model of the entire Barbados economy, including all of its key industries, and we have a macroeconomic forecast model for Trinidad and Tobago. We also have tourism forecasts models for almost every tourism-dependent country in the English-speaking Caribbean and tracking models for regional consumer finance and the economies of Jamaica and Guyana. Our clients access updated information and forecasts on the indicators within these models through our dashboards and custom reports. We have hinted about this in the past (see here and here) and there’s even a link to our dashboards on our website (see here), but this year we will feature this type of work more.
So that’s it for how we’re welcoming 2017 here at Antilles Economics. What are your plans for the year?
Antilles Economics co-founder, Professor Winston Moore, will be hosting the Facebook discussion of the Central Bank of Barbados’ 3rd Caribbean Economic Forum under the theme What’s Next for the Global Economy? at 8:05pm EST.
Join featured presenter Dr. Simon Johnson, Distinguished Visiting Fellow Professor of Entrepreneurship and Senior Fellow at the Peterson Institute, in a live discussion on CBC TV8, Q 100.7 FM, VOB 92.9 FM, CMC, Trident 10 TV or www.centralbank.org.bb.
Media and Entertainment has long been recognised as one of the industries that could drive Caribbean economies. But traditional media – newspapers, cable TV providers, radio stations and TV stations – are in danger of becoming obsolete. The rise of free online newspapers, Netflix, Pandora and their ilk have threatened ad revenue of traditional media. Even social media, previously not thought to be a direct competitor to traditional media, shares stories faster than traditional media alone ever could.
In the entertainment industry, the challenge appears not to be embracing the new – many of these companies were born online. Rather, entertainment companies struggle to incorporate the structure required in a successful business and to attract financing, while maintaining the flexibility needed to remain relevant in arguably the fastest changing industry in the world.
While smart companies are embracing alternative distribution and marketing channels and becoming more business-oriented, there’s work still to be done and Antilles Economics can help. Click here to read how.
Co-founder of Antilles Economics, Winston Moore, has been appointed to the rank of Professor at the University of the West Indies Cave Hill campus. At 37 years old, he is one of the youngest professors at the UWI, publishing more than 80 referred articles, books and book chapters. In addition to his role here at Antilles Economics guiding our work in economic modelling and statistics, he is also the Head of the Department of Economics, Faculty of Social Sciences at the Cave Hill campus of the university. This new appointment is well-deserved and we at AE are proud of his achievement.
Congrats Professor Moore!
Aim of Project
The growth of national incomes in the Caribbean and Central America suggest that poverty rates in the region should be falling and that a larger proportion of the population is moving into the middle-income and higher income classifications. As such, a larger proportion of the population within these countries should be able to afford certain goods. If this is the case, this region would have represented a significant growth market for our client.
Antilles Economics was commissioned to estimate the size of the middle class, its expected growth rate, the average monthly expenditure by middle-income household, and the proportion of that expenditure that was dedicated towards the category of items our client sold.
What We Did
Unfortunately, there was no single database that would have allowed us to answer all of these questions for all of the countries under consideration. Furthermore, the definition of ‘middle class’ varies according to the unique income distribution characteristics of each country. As such, we compiled data from multiple reports in both English and Spanish. The data was standardised to ensure comparability and the required estimates were computed using various statistical techniques.
The client used the information to determine whether to increase its investment in the region; to identify the countries that could propel growth in revenues; and, to inform its medium-term strategy for the region generally.
Forecasting, in its most basic form, is the practice of making predictions about future values of a variable, outcome and/or decision. The question is whether forecasting is necessary, and why. The answer to the first is a resounding yes, mainly due to the need for businesses to plan ahead and anticipate various events. For instance, firms use forecasts of independent variables (such as sales) to help guide decisions about dependent variables (such as the required level of inventory) or to estimate the impact of events that may be out of their control (e.g. a new competitor, a change in tax rates or the impact of a hurricane). Forecasting thus facilitates the formulation of rational and consistent strategies that help firms achieve their objectives. Indeed, if the future can be predicted, it can be controlled and leveraged by the business to provide an advantage over competitors. Given the importance of forecasting to businesses, good forecasts are therefore a necessity.
What is a ‘good’ forecast?
A logical question at this point would be how do we determine whether a forecast was ‘good’? Generally, the public judges a forecast solely on its accuracy: a good forecast is assumed to be one that is equal (or very close) to what actually happened (or the realised value). But forecasting should never be confused with prophecy. The chances of forecasting the exact value of a random variable is almost zero. Rather, good forecasts:
- incorporate all available information and are as accurate as possible given this information;
- are unbiased, neither consistently higher nor consistently lower than realised values; and,
- are timely, i.e. they are developed early enough to inform adequate planning and allow sufficient time to adjust.
How do we attain “good” forecasts, science or art?
‘Good’ forecasts usually emerge from striking a balance between art and science. The scientific aspect of forecasting usually refers to the quantitative methods used; this approach often gets the most attention. In fact, in the early stages of my career, I held a common, but misguided view that good forecasts came from statistical methods and powerful computers. I theorised what I considered to be a brilliant forecasting approach. I would collect a host of data; inspect the data; build a few models; compare the forecasting performance of these models; and, choose the best performing one. However, as time progressed, one thing became abundantly clear: business forecasting should not use such a simplistic approach! Naïve quantitative methods help us to identify existing relationships and/or established patterns; however, they almost exclusively assume that the future is like the past.
On the flip side is forecasting using judgment, what many people refer to as their gut instinct. Humans possess unique knowledge and insight that provide a great deal of value in business decisions. However, like quantitative methods, relying on the judgment alone can be detrimental. Judgments forecasts are subjective, vary due to psychological factors, and can be clouded by personal or political agendas.
The ideal approach
The ideal solution would be to utilize an approach that merges the science (i.e. quantitative methods) with the art (i.e. the forecaster’s insight and knowledge of the market). This approach is known as scenario analysis and has been used by forecasters since the Second World War. It was arguably best applied in the business world by Shell Oil Company, which used this approach to consider the rise and fall of oil prices and effectively plan for its business consequences. Scenario analysis provides a consistent approach to incorporating this human insight into forecasting and also allows the researcher to produce an image of the future under various potential outcomes.
Scenario analysis starts from the premise that the future is unlikely to be like the past: human choice and other unexpected events need to be factored into the equation. The aim of scenario analysis is to map the so-called possibility space (i.e. identify potential alternative outcomes) and evaluate the impact that these outcomes could likely have on the business. Rather than simply forecasting sales using a naïve method, one considers sales under different market conditions, e.g. marketing campaigns of varying degrees of success, new entrants into the market, industrial strikes, mergers, etc. Scenario analysis therefore allows the business analyst to mix the science with the art to derive competitive advantages for the enterprise.
More often than not, forecasts are put together using either quantitative methods or judgement alone. At AE, our forecasting methods integrate the two, merging art with science. Our approach is conceptually very simple. We use historical data to generate statistical forecasts as well as a map of the possibility space taking into account human insight and judgment. It is important, however, that forecasts are internally consistent, are based on logical storylines, are plausible and are associated with certain sign posts that can be used by managers to identify when this scenario is likely to occur. We have only touched the surface of the concept of forecasting in this post, but we hope that you have gained a better understanding of the state of the art when it comes to business forecasting.