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HomeInsightsHow global events can affect financial stability in Barbados

How global events can affect financial stability in Barbados

By Central Bank of Barbados

BRIDGERTOWN, Barbados – International geopolitical developments might seem far removed from everyday life in Barbados, but they can have real and sometimes significant impacts on the country’s economy and financial stability. From trade tensions and slowing global growth to rising interest rates and investment risks, these global shifts ripple through our small open economy in several ways. Here’s how:

Slower global growth means fewer tourists

Barbados relies heavily on tourism, and most of our visitors come from countries like the UK, USA, and Canada. If their economies slow down, as global projections suggest they might in the next few years, people in those countries might cut back on travel and vacations. Fewer tourists mean less money flowing into the economy, which directly affects not only hotels and restaurants, but also transport services and retailers. This slowdown can lead to reduced working hours or even job losses, lowering incomes for many Barbadians.

With households and businesses finding themselves with reduced income, they might be unable to repay their loans on time. An increase in non-performing loans – loans that have gone unpaid for more than three months – can impact banks’ and other financial institutions’ profitability and reduce their ability to lend, which in turn can stall economic activity even further.

Rising global prices affect local costs

International trade disputes, higher tariffs, and disrupted supply chains are driving up the global cost of goods. For a country like Barbados that imports most of its food, fuel, and other goods, this translates into higher prices at home. Households may find their money doesn’t stretch as far, while businesses have to pay more for the materials they need.

As operating costs rise, small businesses in particular may struggle to stay afloat or repay their debts, again increasing pressure on banks and the financial system. For consumers, higher food and energy prices can reduce their ability to save, invest, or repay loans, further weakening financial stability.

Interest rates and investment pressures

In the event of an increase in interest rates to combat inflation, borrowing could become more expensive everywhere, including for the Barbadian government and businesses. Higher borrowing costs may slow down new investments and infrastructure projects and make refinancing existing debt more costly.

While exchange controls can limit the movement of private capital abroad, consistently higher interest rates in places like the US could tempt local investors to move their money to foreign accounts or assets offering better returns. Over time, this could put pressure on the island’s foreign reserves, which are critical to maintaining the fixed exchange rate.

Investment risks are rising

Many financial institutions in Barbados, including insurance companies, pension funds, and mutual funds, invest in international markets. When geopolitical tensions or economic uncertainty shake global markets, even safe investments can lose value. For example, recent credit rating downgrades and fiscal uncertainty in the US have made global bond markets more volatile.

When the value of these investments falls, it can affect the returns earned by pension funds or insurance companies, impacting the long-term financial security of individuals and institutions alike.

Barbados is a small open economy. It depends on imports to meet many of its daily needs and relies on tourism for revenue and employment. Because of this, developments in major economies and financial markets can have a meaningful impact at home. Global macroeconomic events may seem distant at first glance. However, they are closely linked to our economic and financial stability, as well as the lives and livelihoods of our citizens and businesses.

The 2024 Financial Stability Report, a joint publication by the Central Bank of Barbados and the Financial Services Commission, identifies global economic uncertainty as one of three key risks to financial stability in Barbados. 

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