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Barbados’ economy contracted by 3.0 percent during the first quarter of 2020, driven largely by the sharp decline in tourism and related activities during the second half of March. The manufacturing and agricultural sectors remained weak and commodity exports also registered a modest decline. The wholesale and retail and construction sectors achieved mild growth when compared to the contractions recorded a year ago but the demand for most other services softened. The impact of the imposition of a curfew late in the quarter was particularly acute for small businesses offering personal services (e.g. hair-dressers, spas, gyms, leisure), but this was cushioned by the ability of several firms to provide on-line services to their customers.
Unemployment trended upwards in the aftermath of the closure of hotels and restaurants during the second half of March. Some employers delayed layoffs by maintaining their staff complement, bringing forward vacation leave and implementing rotation schedules. However, unemployment claims for March rose to 7,793 compared to an average of 624 in January and February. During the first four weeks of April, over 20,000 new claims were registered as the curfew took effect These developments have significantly reversed the gains reported at December 2019 when the unemployment rate fell to 8.9 percent.
The tourism sector contracted by 16.2 percent, the result of declines in long-stay visitors (17.9 percent) and cruise passengers (11.5 percent). Rising fears surrounding COVID-19 led several potential visitors to cancel their travel plans and, as the pandemic spread, flights into the island from the main source markets ceased in the second half of March. Effectively, the last month of the winter tourism season was lost, resulting in the closure of most hotels and restaurants, with adverse effects on real estate rentals, car rentals, transportation services, duty free sales, visitor attractions and personal services.
Total agricultural output declined by 1.8 percent since improvements in vegetable crop and chicken production, as well as gains associated with an early start to the sugar harvest, were eroded by declines in root crop and production of other meats. Additionally, persistent drought conditions hampered milk production.
Domestic inflation increased to 5.2 percent on a 12-month moving average basis, principally the result of higher prices for select vegetables in the second half of 2019 and the impact on transportation costs of the one-time 2019 hike in bus fares. International energy prices declined during the first quarter in response to reduced global demand, but the sharp downward trend in prices have not yet been reflected in domestic electricity prices.
For fiscal year (FY) 2019/20, Government’s financing requirement was supplemented by its deposit holdings as well as a modest expansion in the overdraft facility at the Central Bank. Amortization during the fiscal year was approximately 3.6 percent of GDP exclusive of short-term requirements which are automatically rolled over.
Domestic arrears payments inclusive of tax refund arrears and outstanding liabilities to the private sector equalled 1.5 percent of GDP. At the end of March 2020, the gross public sector debt stock was approximately 118.0 percent of GDP compared to 125.5 percent of GDP at the end of March, 2019. The majority of the decline in debt was attributed to the reduction in amortization and arrears as Government continues to pursue its strategy to reduce gross public sector debt outstanding to 60 percent of GDP by FY2033/34.
The gross international reserves continued on an upward trend during the first quarter of 2020, reaching $1,575 million or 19.4 weeks of import cover. The increase in reserves of $94 million was stronger than the previous year, despite the first interest payment on the external restructured bond and increased foreign exchange demand by the private sector. Commercial banks were able to satisfy demand without recourse to purchases from the Central Bank.
The external current account balance deteriorated by an estimated $108 million compared to the previous year. This was primarily attributed to a significant slowdown in the growth of travel credits linked to the decline in tourist arrivals in March and an increase in the imports of goods.
Import growth was influenced by an expansion in intermediate goods, including fuels for resale to airlines, feeds, fats and crude materials, construction materials, chemicals and other manufactures such as facial tissues and bottles for soft drinks. Consumer goods expanded slightly as increased demand for food and beverages and motor vehicles was outweighed by the decline in imports of jewellery.
The financial account recorded a higher surplus than in 2019 as a decline in public sector inflows, resulting from lower disbursements, was offset by increased private sector inflows.
Activity in the financial system remained subdued, resulting in a rise in the excess cash ratio to 18.7 percent at the end of March 2020. Deposit-taking institutions[1] registered a modest uptick of 1.1 percent in domestic deposits, driven mainly by increased holdings of individuals and non-financial corporations. In addition, the foreign currency denominated deposits of the resident business sector rose, leading to an increased contribution of 6.4 percent of total deposits, compared to 5.3 percent at year-end 2019.
The interest rate environment remained benign but credit to the non-financial private sector declined by 1.3 percent, principally due to early repayments of some tourism-related loans. The average implicit deposit rate persisted at 0.1 percent for the first quarter of 2020, while estimated loan rates continue to gradually decline. These effects resulted in a small narrowing of the spread between deposit and lending rates.
Profitability in the banking sector continued to improve, with a 12-month return on asset ratio of 1.8 percent and banks remained adequately capitalised. However, non-performing loans edged up slightly during the quarter.
Adapted from the Central Bank of Barbados’ Review of Barbados’ Economic Performance: January-March 2020
[1] These include commercial banks, finance and trust companies and credit unions.