Barbados Leads Bond Rout as Dollar Peg Means Pricier Sunbathing

  • Bond drop since U.S. election was deepest in emerging markets
  • Tourist destination pegs currency to U.S. dollar at 2:1

Barbados dollar bonds are the biggest losers in the recent emerging market rout as investors question the Caribbean island’s ability to compete for tourist dollars while it continues to peg its currency to the soaring greenback.

The yield on the nation’s dollar bonds maturing in 2022 has risen 146 basis points since the Nov. 8 election of Donald Trump triggered a sell off in emerging market assets as traders bet his policies will lead to higher borrowing costs in the U.S. As the falling currencies of rival destinations such as Jamaica and Mexico have made them cheaper to visit, Barbados’ palm-fringed beaches have become relatively costly.

“The country is not competitive due to an over-valued exchange rate,” said Sean Newman, who helps manage $1.4 billion in emerging markets debt at Invesco Advisers Inc., “The rest of the region is more competitive. Mexico’s peso depreciation makes going there for vacation cheaper.”

The dollar strengthened to a 13-year high on Thursday, taking the Barbadian dollar along with with it, as the Federal Reserve signaled a steeper path for U.S. interest rates. That’s come at a bad time for Barbados, which was already bracing for hard times due to the slump in sterling following the Brexit vote.

The former British colony of 285,000 people gets more tourists from the U.K. than it does from the rest of Europe and the U.S. combined. Tourism accounts for about 12 percent of gross domestic product and supplies the bulk of foreign currency earnings. The peg of 2 Barbadian dollars per greenback has been in place since 1975.

Headwinds

International reserves held by the central bank fell to a 16-year low this year and, at $442 million are now equivalent to about 2.6 months of the country’s import bill, according to an estimate by Royal Bank of Canada. Anything below the 3-month “precautionary benchmark” is cause for concern, according to RBC economist Marla Dukharan.

Finance Minister Chris Sinckler in October said a currency devaluation was not being considered because it would raise the cost of imports. The Finance Ministry and the central bank didn’t return calls and e-mails seeking comment.

The economy has also been hit by the rising price of oil in recent months, which has raised its import bill, as well as a sewage spill that has affected some of its beaches.

The easternmost island in the Caribbean has seen its $4.5 billion economy shrink slightly over the past decade, according to the International Monetary Fund. The IMF projects GDP will expand 1.7 percent this year, which would be the fastest growth since 2007. That compares to growth of 4.3 percent in Costa Rica and 5.9 percent in the Dominican Republic.

S&P Global Ratings in September cut its rating on the country to B- from B with a negative outlook, saying it doesn’t see economic growth in Barbados picking up during the next two to three years. The country’s debt of 105 percent of gross domestic product is among the highest in the Americas.

— With assistance by Richard Richtmyer

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