COVID-19 and the Barbados Economy

I welcome this opportunity to address your Annual Pension Investment Conference. I commend Eckler on this initiative, particularly at this time when there is a dearth of new high yielding fixed income investment instruments on the local market and investment managers are being challenged to find investment opportunities that balance yield, safety and liquidity.

Over time, the local pension fund sector has become a significant but perhaps underestimated segment of Barbados’ financial system. It serves as an important element of the safety net, mobilising the savings of employees which are deployed into investments that translate into increased economic activity.  At December 2019, pension funds registered with the Financial Services Commission reported assets of $2.3 billion and accounted for approximately 9.5% of all financial sector assets.

Asset diversification limited the impact of government’s fiscal consolidation efforts on the pension funds industry. However, the sector did suffer some accounting losses as most of its direct exposure to the Government of Barbados’ restructured securities is now embedded in instruments that now have a life of 35 years compared to the traditional maximum life of 20 years.

The debt restructuring represents an integral part of the reforms introduced by government since mid-2018 to stabilise the public finances and create a platform for sustainable growth. The progress of these reforms has been encouraging but we have not yet returned to a situation where new domestic long-term instruments are readily available for investors.

Restoring vibrant activity on the domestic bond market remains a critical indicator that domestic investor confidence has returned and the pension funds industry has a role to play in this revival. I note that some pension funds have taken up some of the BOSS bonds on offer but the trading of restructured securities by pension funds and other investors on the secondary market remains limited.

The growth of the pensions sector ultimately hinges on the fortunes of the wider economy for it is successful businesses that will be best placed to establish and maintain pension funds for their employees. it is for this reason that I wish to focus the remainder of my remarks this morning on the economic impact of Covid-19 on Barbados.

At the beginning of the year, the Barbados economy appeared to be on the cusp of the long-awaited economic recovery. The tourism sector was buoyant and the prospect of substantial new private sector investments were on the horizon.

Government was set to maintain its fiscal consolidation efforts with a second consecutive primary surplus – the difference between revenue and non-interest expenditure – of six percent and further reductions in the stock of debt were anticipated. With modest support from the international financial institutions, the international reserves were expected to continue to strengthen, ensuring that reserve buffers remained adequate to support the exchange rate.

Sadly, Covid-19 has altered the outcome and the outlook. Over the past nine months, this pandemic has been disruptive, threatening some of the gains achieved from the reforms over the preceding 21 months, and morphing from a public health crisis into an economic crisis, with the potential to create negative long-term spill-over effects on business and individuals alike.  

Covid-19 has struck at the heart of the economy, derailing activity in the tourism sector. The need to close national borders so as to curtail the spread of the virus locally brought the economy to a virtual standstill. Even as our borders reopened and we welcomed visitors back to our shores, we have only been receiving a fraction of our usual tourists. Hotels have reopened in anticipation of a partial resumption of activity, but a new wave of the spread of the virus in key source markets is jeopardising a speedy recovery of the sector and the economy. Several planned investments have been delayed and overall domestic demand has weakened.

The economic decline estimated at 16 percent for the nine months ending September has been broad-based, emphasising the importance of tourism and its interconnectedness with the rest of the economy. The impact of these developments on the job market has been significant. Job losses, evidenced by claims on the Unemployment Insurance Fund, exceeded 32,000 at its peak. These workers came not just from tourism-related industries like hotels and restaurants, but from retail, manufacturing, construction etc.

Fortunately, some workers have subsequently returned to work, part time in some cases, but others remain unemployed. There has been no recent update on the unemployment rate as the lockdown and then COVID-related health concerns affected the conduct of the labour force survey by the Barbados Statistical Service in recent months. However, we do anticipate a resumption of these surveys in the near-term.

The fiscal costs have also been substantial. Lower incomes and spending reduced revenues by approximately $200 million during the first half of the fiscal year, despite an exceptional outturn for corporate taxes. The primary balance target of 6 percent was no longer sustainable and as a result, Government and the IMF staff have now agreed to reduce it to -1 percent in the current fiscal year.

This adjustment provides breathing room for Barbados to fight the pandemic, by enabling increased purchases of medical supplies and medicines, by implementing social care initiatives such as the Household Survival Programme and the 12-Month COVID Relief Programme and by accelerating capital works. In addition, it supports hotels and other tourism related services that sign up for Government’s Barbados Employment and Sustainable Transformation plan, which is intended to minimise layoffs and bankruptcies in the tourism sector and to enable businesses to invest in green initiatives, digitise their systems, and support local suppliers.

The shift in fiscal policy has altered the debt trajectory as Government has had to engage in foreign borrowing to cover the financing gap created by the adjusted fiscal outturn. This is what is needed to manage these exceptional circumstances. Reversing this trend will require large primary surpluses as the economy returns to normalcy. The increased borrowing has helped to support the foreign reserves which have performed much better than expected, given the substantial loss in foreign exchange earnings.

The central questions now are when will the recovery start and how quick will that recovery be. What will be impact on businesses and on individuals in the short to medium term?

The border closure and economic lockdown deepened the economic contraction this year. However, Barbados has as of now largely been spared a full-blown public health crisis. We have been able to do so because of the measures that were put in place, the protocols that have been implemented and mostly observed, and the healthcare investments that have been made.

Given the double-digit fall-off in economic activity, the Bank anticipates that when recovery starts, the initial growth rates will tend to be larger than normal. We should not read too much into this, however, as we are simply trying to get back to where we were before the pandemic.

At the Bank, we recognise that forecasting in the current environment has a higher margin of error than normal. We remain cautious in our expectations because of the uncertainty that this pandemic has created, the unpredictability surrounding the return to normalcy of global travel and the degree of reliance on the tourism sector. The recent spikes in cases in our major source markets, and in particular the current lockdown in the UK, mean that a return to anything approaching normal activity will be further delayed.

The emerging news about vaccines is an encouraging sign, but the speed with which these vaccines are taken up and the confidence that they engender are critical to the resumption of economic activity. Recovering the loss of output from this year could therefore take at least two years.

In the interim, preserving viable businesses and livelihoods is crucial. In the early stages of the crisis, government extended its safety net while financial institutions offered cash-flow relief to their clients, both businesses and individuals, whose livelihoods were directly affected by the pandemic. For many of these clients, the moratorium period is over and they have begun to repay; however, there are others who are not yet able to re-start payments, because they are still not back to work, or their business has not yet picked up.

Individuals and firms experiencing on-going difficulties need to have urgent discussions with their financial institutions to see if and how existing facilities can be restructured or where it is reasonable to provide new financing. This has to be done on a case by case basis as each situation differs in nature and complexity.

It is through dialogue that financial institutions can support the efforts of government to minimise the potential loss of jobs and enable firms to emerge from this crisis more resilient. It will likely also help firms to ensure that pension plans remain fully funded, thus safeguarding the pensions of today’s employees.

COVID-19 was the last thing any of us wanted – the sheer number of 2020 memes will attest to that. It has sickened some of our loved ones, created additional challenges for our economic recovery, impacted our citizens’ livelihoods. But I want to end on a more optimistic note because COVID has also created opportunities by forcing us out of our comfort zones. It has exposed us to alternative ways of doing things, and made us do things and adopt behaviours that we have long talked about but were slow to implement.

During the lockdown, for many businesses to continue to operate, they had to attempt remote work... and it worked. Now some are embracing it. People who had never used e-banking or e-commerce have become pros at both. Many businesses are paying their staff via direct debits and government has virtually phased out the use of cheques. We are becoming more accustomed to using the technology we have at our disposal. In fact, I am almost certain I would not be delivering my remarks to you today via Zoom were it not COVID making videoconferencing the new tool of choice.

Leveraging the new ease we have with digital systems, and applying them to other aspects of our business processes can be a boon to our operations. To protect our staff and our customers during the lockdown, the Central Bank offered and encouraged online processing of exchange control applications and, by doing so, we were able to be more efficient.

Very shortly, we will roll out a purpose-built platform for this, making the online system permanent. This will provide faster application processing and improved data analytics. Such changes at a national level could significantly improve our ease of doing business, which will be even more critical to our economic stability going forward.

We all want this to be over. We want to get our economy firing again. We want to be able to go out and socialise without concern again. We want to see everyone’s entire face again. But when we do throw away our masks, let’s not throw away the lessons we’ve learnt, the new perspectives we’ve gained. Instead, let’s use them to make our economy and society stronger and more resilient.