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The golden beaches and coral reefs of Barbados seem a world away from the Brexit debate, yet the tropical island may pay a high price for the U.K.’s decision last month to leave the European Union.
The former British colony, which gets more tourists from the U.K. than it does from the rest of Europe and the U.S. combined, became more expensive after the pound plunged 12 percent against the dollar following the Brexit vote. The Barbadian dollar has been pegged at 2 per greenback since 1975.
The palm-fringed island was already running low on foreign currency reserves as it struggles with a chronic current account gap and widening budget deficit. As hotel operators and travel agencies await the full impact of the U.K.’s decision, the central bank is urging the government to impose austerity measures to defend the currency. A decline in British tourism may push Barbados closer toward the “tipping point” at which people would rush to ditch the Barbadian dollar, said Marla Dukharan, Caribbean economist at Royal Bank of Canada.
“If people smell danger, they will probably try to get into U.S. dollars as much as possible,” Dukharan said. “Consumers in the U.K. will tend to lower discretionary spending, and expensive holidays to faraway places would likely be trimmed.”
Reserves were $442 million in June, down 9 percent from a year earlier, even as the country benefited from overall higher tourist numbers and cheaper oil imports. That’s enough to cover about 14 weeks of imports. If Barbados’ reserves fall below three months, that will be a warning light to investors, according to Dukharan.
The Central Bank of Barbados did not reply to phone messages and e-mail requests seeking comment. Bank Governor DeLisle Worrell has stressed the importance of the peg for the economy’s health, and said in a post-Brexit statement in July that fiscal austerity is needed to defend the value of the money.
“Foreign reserves are adequate, but in order to return to a comfort zone, further fiscal restraint is needed to arrest the drain,” Worrell wrote.
Since the British vote on June 23, searches for flights to Barbados from the U.K. have fallen 15 percent compared with the same period last year on Cheapflights, a London-based travel search engine, according to spokesman Phil Bloomfield. At the same time, lower cost destinations such as the Dominican Republic have gained, he said, in reply to e-mailed questions.
Susan Springer, CEO of the Barbados Hotel & Tourism Association, said it is too early to say if there will be an impact, and that tour operators haven’t yet reported any slowdown.
Barbados’ policy makers will do “everything in their power” to maintain the dollar peg, since they see it as an anchor that brings stability to the economy, said Franco Uccelli, an emerging market analyst at JPMorgan.
The economy’s annual growth rate has been less than 1 percent, or negative, every year since 2007, and the economy is smaller now than it was a decade ago. Tourism accounts for about 12 percent of gross domestic product, and dwarfs all the country’s other foreign currency earners.
In a May report, before the Brexit vote, the International Monetary Fund was already talking about “weak growth in key source tourism markets” as a source of risk for the island.
“While favorable external developments have provided some room for maneuver, Barbados remains highly vulnerable and may not realize its potential without deep-seated reforms to align revenues and expenditures, and reduce debt,” the IMF said in its report.
©2016 Bloomberg L.P.
This article was written by Ezra Fieser and Matthew Bristow from Bloomberg and was legally licensed through the NewsCred publisher network.