Published:
Tuesday, July 22, 2014
On July 15, the Central Bank of Barbados published its second-quarter 2014 press release showing that Barbados’ (B3 negative) economic and fiscal performance continued to struggle during the first half of 2014. The authorities revised their projection for the government’s already elevated budget deficit for the fiscal year that ended March 31, 2014, to 12.4 per cent of GDP from a first-quarter projection of 11.3 per cent. The upward deficit revision is credit negative for the sovereign because it increases the scale of required fiscal consolidation in the remainder of the current fiscal year to bring the budget shortfall to the authorities’ target range of six-seven per cent of GDP.
The fiscal first quarter ended in June was an important test for the government’s ability to deliver its ambitious deficit reduction programme introduced in August 2013, as the majority of measures are targeted to take effect in the current fiscal year. Given the larger budget gap in the last fiscal year, we now estimate that the authorities need a total adjustment of at least Bds$450 million (5.2 per cent of projected 2014 GDP) to reach their deficit objective in the current fiscal year. The central bank estimates that in the first quarter the consolidation programme yielded Bds$50 million through a combination of revenue and expenditure measures, which is about 11 per cent of the necessary annual adjustment.
On the revenue side, newly-introduced taxes were not sufficient to compensate for the continuing decline in indirect tax collection, especially value added tax, which is negatively affected by a subdued economic environment, leading to a decrease in total revenue. Public sector layoffs completed earlier this year have reduced the government wage bill by around nine per cent relative to the first quarter of the previous fiscal year. However, transfers and subsidies, the largest item on the expenditure side, have declined by only 1.6 per cent, and interest expense has increased by 14 per cent, limiting the overall decrease in fiscal outlays to just 1.3 per cent. In our view, this illustrates how difficult it is for the government to curtail socially sensitive expenditures and control interest costs.
“Although we expect fiscal consolidation to accelerate over the next three quarters, it will remain constrained by revenue underperformance, difficulty reining in transfers and subsidies and rising interest costs. Consequently, we are adjusting our 2014 budget deficit projection to 8.5 per cent of GDP from 8.0 per cent, about two percentage points above the government’s target, with risks firmly tilted to the downside. Exacerbating the credit-negative fiscal trends, Barbados’ economy continues to struggle, and was unable to achieve growth in the first six months of this year, extending its subdued performance over the past seven years. We expect ongoing challenges in the key industries of tourism and offshore services, as well as austerity measures to weigh on economic activity for the rest of the year; therefore, we project a 1.0 per cent year-over-year contraction in 2014.
Despite positive recent developments in tourism such as an additional chartered flight out of Europe, Barbados’ main industry continues to face significant headwinds. In the first half of 2014, total visitors declined 0.2 per cent year over year from the low base established last year,” the release stated. (moodys.com)