Barbados Voices Concerns About US Economic Slowdown

by Amanda Banks, Tax-News.com, London

26 September 2008

Dr Marion Williams, the Governor of the Central Bank of Barbados, has spoken out this week to voice her concerns over the implications of the current financial turbulence in the US.

Dr Williams began by explaining:

"While the current turbulence in the US financial markets is unlikely to have a significant impact on Barbados immediately, as the US economy slows or goes into recession as it copes with these difficulties, the result could be a slowdown in the growth of the Barbados economy going forward. Recession in the UK and some European economies would also impact adversely on our tourism prospects and our investment inflows.

"However, the Barbados financial system should remain sound although there may be some loss in value (realised and unrealised) on US dollar fixed income securities held by financial institutions, including the Central Bank, as securities’ prices in the US markets tumble," she added, going on to remark:

"For some institutions in the international financial business (or offshore) sector who trade more aggressively in US stocks and in fixed income securities and more especially in derivative instruments, particularly those who may have been doing active business with those US financial institutions involved in the US financial meltdown, realised losses may be recorded.

"This is likely to be mitigated by the actions of the US Government to bail out these institutions.

"In the interim, investors in overseas markets should be cautious about the external financial advisers, consultants and custodians they choose. Barbadian investors holding direct deposits with commercial banks in the US can take comfort from the fact that the Federal Reserve Bank appears to be taking a protective stance and is unlikely to allow any large US commercial bank to fail," Williams added.

Continuing, Dr Williams explained:

"In the US system, ordinary depositors are assured USD100,000 in federal deposit insurance per depositor per bank. In Barbados, deposit insurance is also in place up to an amount of BDS25,000 per depositor per bank. This was put in place in 2007. It applies to Part III companies, as well (that is, Merchant Banks, Trust and Finance Companies).

"In the meanwhile, the business of local financial institutions with their overseas correspondent banks continues. Such overseas correspondent banks are assured of liquidity support from the Federal Reserve Bank in the US. The Central Bank of Barbados also provides liquidity support to domestic banks but there is no reason to expect that this will be called upon as our banks (except for possible losses in value on their US dollar securities) have not been directly impacted by the developments in the US market.

"It is expected that investors may turn to safe havens. Barbados is generally viewed as a well regulated domicile."

Looking to the future, Williams concluded:

"Over the longer term and into 2009, given the size of the bailout by the US government, we can expect larger US fiscal deficits, possibly a further depreciation in the US dollar and a likelihood of a longer US recession than was anticipated.

"The likelihood of a global slowdown also becomes greater. The international credit markets are likely to be hesitant to lend for a while until markets settle. However, given the healthy level of Barbados’ foreign exchange reserves, this is unlikely to be significant for Barbados at the level of official borrowing at this time, but foreign investors into Barbados who were depending on borrowing on the international markets may be put on pause.

"The one positive outcome of all this is that if there is a global slowdown as expected, and therefore lower demand for oil, oil prices should contract," she finished.

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