## _wp1231

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---

### I. Introduction — scope and main finding
- Study period: 2006–2009.
- Objective: Use the Balance Sheet Approach (BSA) to analyze macroeconomic vulnerabilities in Barbados between 2006 and 2009, highlighting:
  - the financial position of the economy and its subsectors;
  - financial links between sectors;
  - sector exposure to market risk (change in exchange rates);
  - possibility of transmission of payment difficulties between sectors via financial linkages.
- Main finding:
  - The balance sheet of the aggregate economy has been weakened by the recent deterioration in the balance sheet of the nonfinancial public sector.
  - The private sector appears healthy and resilient to shocks.
- Emerging vulnerabilities identified:
  - high level of public debt accumulated since 2006;
  - deterioration in the net financial position with the rest of the world;
  - growing exposure of the financial system to the central government.
- Fiscal and exchange-rate vulnerability notes:
  - The non-financial public sector has negative net financial and foreign currency positions.
  - The central government is highly vulnerable to exchange rate shock.
  - Debt rollover risks are likely to be limited because most external liabilities are long term and most domestic liabilities are held by the National Insurance Scheme and the domestic banking system.

### II. The Balance Sheet Approach: background and methodology
- Origin and motivation:
  - BSA developed to explain crises where earlier first- and second-generation models were insufficient; third-generation models emphasize balance-sheet weaknesses (currency, maturity mismatches, capital-structure mismatches).
- Conceptual framework:
  - Economy analyzed as system of sectoral balance sheets: public (central bank, central government, state and local government, public nonfinancial corporations), financial sector (deposit taking institutions and other financial institutions), nonfinancial corporations, other resident sectors (including households), and nonresidents (ROW).
  - Aggregate balance sheet results from consolidation of sectoral balance sheets; intersectoral claims net out leaving position vis-à-vis ROW.
- Strengths and limitations:
  - Strength: reveals mismatches and linkages that can transmit shocks across sectors; identifies foreign-currency-denominated debts between residents that net out in aggregate data.
  - Limitations: static framework; does not include real assets and off-balance-sheet liabilities; should be complemented with flow variables and methods such as contingent claim approach for forward-looking default probabilities.

### III. Macroeconomic developments (selected facts and figures)
- Structure and exposures:
  - Services (tourism, real estate, and financial services) account for about 75 percent of GDP and 80 percent of exports.
- Growth and labor market:
  - Pre-crisis growth: averaging between 3-4 percent.
  - Economic activity estimated to have contracted by a cumulative 5 percent between 2008 and 2009.
  - Unemployment increased from 7.4 percent in 2007 to 10.5 percent in 2010.
- External sector and reserves:
  - Current account deficit: 9.6 percent of GDP in 2008; narrowed to 5.5 percent of GDP in 2009.
  - International reserves: reached 4 months of imports at end December 2010.
  - Reserve support in 2010: SDR allocation ($85 million), placement of a US$120 million bond, and additional borrowing of US$145 million in 2010.
  - Counterfactual: foreign reserves would have halved in two years in the absence of the SDR allocation and foreign borrowing.
- Sovereign credit and fiscal response:
  - Barbados maintained an investment grade rating and one of the highest S&P foreign currency sovereign credit ratings in the region.
  - Public debt: stands at about 117 percent of GDP.
  - Authorities developed a medium term fiscal strategy in early 2010 aiming to reduce overall fiscal deficit and reduce debt-to-GDP ratio to 90.5 percent by 2014/15 while keeping growth at acceptable levels.
- Sectoral balance-sheet effects:
  - Increased public sector indebtedness associated with greater exposure of banks to the sovereign.
  - Liabilities of domestic residents to the rest of the world increased in line with widening current account deficit.

### IV. Balance sheet matrices: data and construction
- Data sources used:
  - Standard Report Forms (SRF) for monetary and financial data, the Quarterly External Debt Statistics (QEDS), the Joint External Debt Hub (JEDH), the Coordinated Portfolio Investment Survey (CPIS), the International Investment Position (IIP), and Central Bank of Barbados online statistics for short-term public sector debt.
- Constructed matrices:
  - Intersectoral balance sheet matrices for Barbados for 2006–2009, displaying intersectoral claims and liabilities by maturity and currency.
- Six main sectors in matrices:
  - Central Bank of Barbados (CBB);
  - Nonfinancial Public Sector (NFPS): central government, state and local governments, and nonfinancial public enterprises;
  - Financial Sector: deposit taking institutions and other financial institutions (nonbanks);
  - Nonfinancial Corporate Sector;
  - Other Domestic Residents Sector (including households);
  - Nonresidents (ROW).
- Consolidations:
  - CBB and NFPS roughly consolidated as public sector; remaining domestic sectors roughly consolidated as private sector.
- Summary matrices for December 2006 and December 2009 are presented (Tables 1 and 2 in source).

### V. Indicators of vulnerability used in the analysis
- Indicators employed:
  - Net financial position: total financial assets minus total financial liabilities.
  - Net foreign currency position: foreign currency assets minus foreign currency liabilities.
  - Net short-term position: short-term assets minus short-term liabilities at original maturities.
  - Capital structure: equity liabilities minus debt liabilities.
- Interpretation guidance:
  - Large negative net financial position can indicate solvency problems.
  - Large negative net foreign currency position indicates vulnerability to exchange rate depreciation.
  - Large negative net short-term position implies vulnerability to rollover risk and interest rate increases.
  - Large negative capital structure measure implies excessive reliance on debt financing.

### VI. Overview of key developments in balance sheets (selected findings)
- Aggregate balance sheet:
  - Vulnerabilities in the nonfinancial public sector have weakened the aggregate balance sheet.
  - New vulnerabilities: high public debt since 2006; deterioration in net financial position with ROW; negative net financial position of the aggregate economy.
- Gross financial assets:
  - Gross financial assets have trended upward, reflecting financial deepening and greater international financial integration.
  - Most sectors’ gross financial assets grew faster than GDP between 2006 and 2009, significantly changing financial structure.
  - Financial sector: increased gross financial assets by about 25 percentage points of GDP between 2006 and 2009.
- Net financial position with ROW:
  - Net financial position with the rest of the world trended downwards since 2006 as the current account deficit widened.
  - The public sector’s net financial position with nonresidents deteriorated by about 10 percentage points of GDP between 2006 and 2009, reflecting accumulation of public debt.
- Net foreign currency position:
  - Net foreign currency (FX) position declined from -0.2 percent in 2006 to -10.4 percent in [text ends here in source].

### Sectoral overview and selected sector findings
- Net foreign currency position of the public sector worsened from 13.4 to 27.4 percent.
- Private sector strengthened its net foreign currency position, reducing the sector’s vulnerability to foreign currency shocks.

Central Bank of Barbados (CBB)
- Gross financial assets increased from 14 percent of GDP in 2006 to 18 percent of GDP in 2009.
- Net financial position of CBB declined from roughly 16 percent of GDP in 2006 to about 12 percent at end-2009.
- Reserve position came under stress due to lower tourism receipts and high international oil and food prices.
- Net foreign currency position of the CBB declined from roughly 14 percent of GDP in 2007 to around 6 percent of GDP in 2009.

Nonfinancial Public Sector (NFPS)
- NFPS has negative net financial and net foreign currency positions and appears most vulnerable.
- Total liabilities increased from about 60 percent of GDP in 2006 to roughly 90 percent of GDP at end-2009.
- Domestic financial institutions held almost 33 percent of the NFPS’s liabilities in 2009, up from around 30 percent in 2006.
- As of end-2009, total liabilities exceeded total financial assets by about 80 percent of GDP compared with almost 55 percent of GDP at end-2006.
- Most NFPS liabilities are denominated in domestic currency; limited foreign currency assets have generated a net negative foreign currency position.
- Debt sustainability analysis:
  - Under current policies, debt ratios would be adversely affected by fiscal and revenue shocks.
  - Under the medium term fiscal strategy, the public debt outlook would improve and be more resilient to shocks.
- Despite negative financial position, NFPS debt is held by relatively stable investors (domestic financial system and the National Insurance Scheme).
- External debts are mostly long term and have a favorable amortization profile.

Financial System
- Financial system larger/deeper relative to most Caribbean countries; comparable to large emerging markets.
- Gross financial assets increased to about 180 percent of GDP from 150 percent of GDP in 2006.
- Trust companies, finance companies, and merchant banks supervised by the CBB have total assets equivalent to 19 percent of GDP.
- Securities markets remain illiquid and lack depth; market capitalization is around 150 percent of GDP.
- Financial sector had a positive net FX position of about 3.5 percent of GDP at end-2009.
- Financial sector’s exposure to NFPS accounts for around 20 percent of the financial sector’s assets.
- Household exposure in banking system increased to 42 percent of assets in 2009, from 38 percent in 2006.
- Conclusion: balance sheet of the financial sector appears sound with positive net financial and net foreign currency positions; regulatory liquidity and foreign exchange exposure requirements helped keep banks liquid and only modestly exposed to foreign currency risk.

Nonfinancial Corporate Sector
- Gross financial assets increased remarkably in 2007 but have since dropped due to declining profitability.
- Gross liabilities increased by about 5 percentage points of GDP between 2007 and 2009 due to large accumulation of debts.
- Net financial position remained positive but declined from almost 14 percent of GDP in 2007 to almost 7 percent of GDP in 2009.
- Sector has a positive net foreign currency position; net foreign currency position declined to around 12 percent of GDP in 2009 from roughly 18 percent of GDP in 2007.

Other Domestic Residents (Households and Other Residents)
- Total liabilities increased from 50 percent of GDP in 2006 to roughly 65 percent of GDP in 2009 as households increased debts with the banking system.
- Households improved their net financial position owing to accumulation of assets with the banking system.
- Indirect exposure to the sovereign increased as the banking system passed some household savings to cover government long-term financing needs.
- Foreign currency mismatches are limited; the sector’s net foreign currency position increased from about 0.6 percent of GDP in 2006 to 1.8 percent in 2009.
- Holdings of public sector liabilities by the sector increased from about 5 percent of GDP in 2006 to 8 percent of GDP in 2009.

### Sensitivity to Exchange Rate Shocks (30 percent nominal devaluation, results from 2009 net FX positions)
- Aggregate implications:
  - The net financial position of the country as a whole worsens by about 3 percent of GDP because the net foreign currency position is negative.
  - The balance sheet of all sectors except the non-financial public sector improves following the devaluation.
  - The public sector loses close to 10 percent of GDP and about 30 percent of the financial assets of the public sector.
  - The nonfinancial corporate sector gains about 4 percent of GDP from the devaluation because of its strong net foreign currency position.
  - The financial and the other domestic residents sectors improve their net financial position by about 1 percent of GDP.
- Sector-level (Millions of Bds$; Percent of GDP; Percent of Own Assets) — selected entries reported in source for a 30 percent devaluation:
  - Central Bank: Before the Shock 481.7 Millions of Bds$; After the Shock 626.3 Millions of Bds$; Loss/Gain 144.5 Millions of Bds$; Percent of GDP 1.8; Percent of Own Assets 10.4.
  - Non-Financial Public Sector: Before the Shock -2,615.3 Millions of Bds$; After the Shock -3,399.9 Millions of Bds$; Loss/Gain -784.6 Millions of Bds$; Percent of GDP -9.9; Percent of Own Assets -32.0.
  - The Financial Sector: Before the Shock 266.0 Millions of Bds$; After the Shock 345.8 Millions of Bds$; Loss/Gain 79.8 Millions of Bds$; Percent of GDP 1.0; Percent of Own Assets 0.6.
  - The Corporate Sector: Before the Shock 926.4 Millions of Bds$; After the Shock 1,204.3 Millions of Bds$; Loss/Gain 277.9 Millions of Bds$; Percent of GDP 3.5; Percent of Own Assets 9.0.
  - Other Domestic Residents: Before the Shock 134.0 Millions of Bds$; After the Shock 174.2 Millions of Bds$; Loss/Gain 40.2 Millions of Bds$; Percent of GDP 0.5; Percent of Own Assets 0.6.
  - Total: Before the Shock -807.2 Millions of Bds$; After the Shock -1,049.3 Millions of Bds$; Loss/Gain -242.2 Millions of Bds$; Percent of GDP -3.1; Percent of Own Assets -11.5.

### Barbados’ balance sheet in international perspective (selected comparisons)
- Barbados’ gross financial assets stood at 400 percent of GDP in 2009 compared with 148 percent for Jamaica.
- In both countries, the public sector is the most vulnerable sector because of high levels of liabilities; vulnerability appears smaller in Barbados with a net foreign currency position of 35 percent of GDP versus Jamaica’s 95 percent of GDP (source text preserves this comparative statement).
- Both countries have a negative net financial position with the rest of the world; Barbados’ net financial position with the ROW is lower (around 10 percent of GDP) than Jamaica’s (almost 60 percent).
- Financial claims on nonfinancial corporates in 2009 were 32 percent of GDP in Barbados and 13 percent of GDP in Jamaica.
- Financial system liabilities to nonresidents are higher in Barbados (12 percent of GDP) than in Jamaica (10 percent of GDP).
- Conclusion: Relatively strong balance sheets of the financial and nonfinancial corporate sectors make a crisis originating from the private sector less likely in Barbados.

### Summary and Conclusions
- Aggregate economy:
  - The balance sheet of the aggregate economy has been weakened by the recent deterioration in the balance sheet of the nonfinancial public sector.
  - The private sector appears healthy and resilient to shocks based on 2009 balance sheet matrices; this conclusion would not be much altered if 2010 and 2011 matrices could be constructed.
  - Rising current account deficit has led to a deterioration in the net financial position of the economy with respect to nonresidents.
  - The country has a negative net foreign currency position mainly due to accumulation of external liabilities by the public sector; aggregate economy has insufficient foreign currency assets to cover foreign currency liabilities.
- Sectoral resilience and risks:
  - The private sector has a positive net foreign currency position and could withstand a large foreign exchange shock easily.
  - NFPS balance sheet deteriorated significantly; net financial and foreign currency positions are negative, exposing the sector to solvency and exchange rate risks.
  - Risks to NFPS are moderated by the fact that NFPS is a debtor mostly to domestic creditors and the largest share of public debt is denominated in domestic currency.
  - A devaluation of the Barbados dollar would hurt the public sector; a sovereign debt crisis would critically affect the banking system and the other domestic residents sector.
  - Vulnerabilities are limited in the nonfinancial corporate sector and the household sector because of strong net financial and net foreign currency positions.
  - The financial system has a positive net foreign currency position and its balance sheet would improve following a devaluation; indirect effects are possible if debtors face liquidity problems.
  - Increasing credit exposure to the nonfinancial private sector and households bears watching, but financial health indicators are robust.

### Policy Recommendations (from analysis)
- Reduce the level of public debt to decrease sector vulnerability and limit exposure to the financial system and the household sector; push ahead and aggressively implement the medium term fiscal strategy.
- Continue to accumulate foreign reserves in both the central bank and the commercial banks while monitoring and containing reserve money growth.
- Strengthen regulation and supervision to limit foreign currency mismatches in the financial sector and promote market based hedging mechanisms to manage foreign exchange exposures.
- Promote development of domestic securities markets to allow the other domestic residents sector and the financial system to diversify away from the non-financial public sector.

### Appendix highlights (selected matrix totals and entries from source)
- Intersectoral Net Financial Positions, December 2006 (Percent of GDP) — Total (by column, percent of GDP): 7.6, -63.1, 0.0, 6.5, 8.0, 23.4, 5.7, 11.6, 0.2.
- Intersectoral Net Financial Positions, December 2009 (Percent of GDP) — Total (by column, percent of GDP): 8.8, -94.5, 0.0, 15.4, 6.2, 20.6, 7.4, 25.7, 10.4.
- Intersectoral Asset and Liability Positions, 2006 and 2009 (Millions of BDS $) — source provides detailed fragmented matrices (Tables A3 and A4) with domestic and foreign currency breakdowns and totals as presented in the source.

*Source: _wp1231 - References.*

### References .............................................................................................................

### _wp1231 - References .............................................................................................................

### I. Introduction — scope and main finding
- Study period: 2006–2009.
- Objective: Use the Balance Sheet Approach (BSA) to analyze macroeconomic vulnerabilities in Barbados between 2006 and 2009, highlighting:
  - the financial position of the economy and its subsectors;
  - financial links between sectors;
  - sector exposure to market risk (change in exchange rates);
  - possibility of transmission of payment difficulties between sectors via financial linkages.
- Main finding: The balance sheet of the aggregate economy has been weakened by the recent deterioration in the balance sheet of the nonfinancial public sector. The private sector appears healthy and resilient to shocks.
- Emerging vulnerabilities identified:
  - high level of public debt accumulated since 2006;
  - deterioration in the net financial position with the rest of the world;
  - growing exposure of the financial system to the central government.
- Fiscal and exchange-rate vulnerability notes:
  - The non-financial public sector has negative net financial and foreign currency positions.
  - The central government is highly vulnerable to exchange rate shock.
  - Debt rollover risks are likely to be limited because most external liabilities are long term and most domestic liabilities are held by the National Insurance Scheme and the domestic banking system.

### II. The Balance Sheet Approach: background and methodology
- Origin and motivation:
  - BSA developed to explain crises where earlier first- and second-generation models were insufficient; third-generation models emphasize balance-sheet weaknesses (currency, maturity mismatches, capital-structure mismatches).
- Conceptual framework:
  - Economy analyzed as system of sectoral balance sheets: public (central bank, central government, state and local government, public nonfinancial corporations), financial sector (deposit taking institutions and other financial institutions), nonfinancial corporations, other resident sectors (including households), and nonresidents (ROW).
  - Aggregate balance sheet results from consolidation of sectoral balance sheets; intersectoral claims net out leaving position vis-à-vis ROW.
- Strengths and limitations:
  - Strength: reveals mismatches and linkages that can transmit shocks across sectors; identifies foreign-currency-denominated debts between residents that net out in aggregate data.
  - Limitations: static framework; does not include real assets and off-balance-sheet liabilities; should be complemented with flow variables and methods such as contingent claim approach for forward-looking default probabilities.

### III. Macroeconomic developments (selected facts and figures)
- Structure and exposures:
  - Services (tourism, real estate, and financial services) account for about 75 percent of GDP and 80 percent of exports.
- Pre-crisis growth: averaging between 3-4 percent.
- Crisis impact:
  - Economic activity estimated to have contracted by a cumulative 5 percent between 2008 and 2009.
  - Unemployment increased from 7.4 percent in 2007 to 10.5 percent in 2010.
- External sector and reserves:
  - Current account deficit: 9.6 percent of GDP in 2008; narrowed to 5.5 percent of GDP in 2009.
  - International reserves: reached 4 months of imports at end December 2010.
  - Reserve support in 2010: SDR allocation ($85 million), placement of a US$120 million bond, and additional borrowing of US$145 million in 2010.
  - Counterfactual note: foreign reserves would have halved in two years in the absence of the SDR allocation and foreign borrowing.
- Sovereign credit and fiscal response:
  - Barbados maintained an investment grade rating and one of the highest S&P foreign currency sovereign credit ratings in the region.
  - Public debt: stands at about 117 percent of GDP.
  - Authorities developed a medium term fiscal strategy in early 2010 aiming to reduce overall fiscal deficit and reduce debt-to-GDP ratio to 90.5 percent by 2014/15 while keeping growth at acceptable levels.
- Sectoral balance-sheet effects:
  - Increased public sector indebtedness associated with greater exposure of banks to the sovereign.
  - Liabilities of domestic residents to the rest of the world increased in line with widening current account deficit.

### IV. Balance sheet matrices: data and construction
- Data sources used (as referenced): Standard Report Forms (SRF) for monetary and financial data, the Quarterly External Debt Statistics (QEDS), the Joint External Debt Hub (JEDH), the Coordinated Portfolio Investment Survey (CPIS), the International Investment Position (IIP), and Central Bank of Barbados online statistics for short-term public sector debt.
- Constructed matrices: intersectoral balance sheet matrices for Barbados for 2006–2009, displaying intersectoral claims and liabilities by maturity and currency.
- Six main sectors in matrices:
  - Central Bank of Barbados (CBB);
  - Nonfinancial Public Sector (NFPS): central government, state and local governments, and nonfinancial public enterprises;
  - Financial Sector: deposit taking institutions and other financial institutions (nonbanks);
  - Nonfinancial Corporate Sector;
  - Other Domestic Residents Sector (including households);
  - Nonresidents (ROW).
- Two consolidated groupings: CBB and NFPS roughly consolidated as public sector; remaining domestic sectors roughly consolidated as private sector.
- Summary matrices for December 2006 and December 2009 are presented (Tables 1 and 2).

### V. Indicators of vulnerability used in the analysis
- Indicators employed (Lima et al., 2006):
  - Net financial position: total financial assets minus total financial liabilities.
  - Net foreign currency position: foreign currency assets minus foreign currency liabilities.
  - Net short-term position: short-term assets minus short-term liabilities at original maturities.
  - Capital structure: equity liabilities minus debt liabilities.
- Interpretation guidance:
  - Large negative net financial position can indicate solvency problems.
  - Large negative net foreign currency position indicates vulnerability to exchange rate depreciation.
  - Large negative net short-term position implies vulnerability to rollover risk and interest rate increases.
  - Large negative capital structure measure implies excessive reliance on debt financing.

### VI. Overview of key developments in balance sheets (selected findings)
- Aggregate balance sheet:
  - Vulnerabilities in the nonfinancial public sector have weakened the aggregate balance sheet.
  - New vulnerabilities: high public debt since 2006; deterioration in net financial position with ROW; negative net financial position of the aggregate economy.
- Gross financial assets:
  - Gross financial assets have trended upward, reflecting financial deepening and greater international financial integration.
  - Most sectors’ gross financial assets grew faster than GDP between 2006 and 2009, significantly changing financial structure.
  - Financial sector: increased gross financial assets by about 25 percentage points of GDP between 2006 and 2009.
- Net financial position with ROW:
  - Net financial position with the rest of the world trended downwards since 2006 as the current account deficit widened.
  - The public sector’s net financial position with nonresidents deteriorated by about 10 percentage points of GDP between 2006 and 2009, reflecting accumulation of public debt.
- Net foreign currency position:
  - Net foreign currency (FX) position declined from -0.2 percent in 2006 to -10.4 percent in [text ends here].

*Source: _wp1231 - References.*

### 2009. There are again important

### _wp1231 - 2009. There are again important

### Sectoral overview
- Net foreign currency position of the public sector worsened from 13.4 to 27.4 percent.
- Private sector strengthened its net foreign currency position, reducing the sector’s vulnerability to foreign currency shocks.
- Charts presented (percent of GDP, 2006–2009) show:
  - Barbados: Net Foreign Currency Position (Percent of GDP) — series for Net foreign currency position, Public sector, Private sector (2006–2009).
  - Barbados: Net Financial Position with the Rest of the World (Percent of GDP) — series for Net financial position, Central bank, Public sector, Financial sector (2006–2009).

### The Central Bank of Barbados
- Gross financial assets of CBB increased from 14 percent of GDP in 2006 to 18 percent of GDP in 2009.
- Net financial position of CBB declined from roughly 16 percent of GDP in 2006 to about 12 percent at end-2009.
- Reserve position came under stress due to lower tourism receipts and high international oil and food prices.
- Net foreign currency position of the CBB declined from roughly 14 percent of GDP in 2007 to around 6 percent of GDP in 2009.
- Figure referenced: Central Bank of Barbados: Indicators of Vulnerability (Percent of GDP).

### The Nonfinancial Public Sector (NFPS)
- NFPS has negative net financial and net foreign currency positions and appears most vulnerable.
- Total liabilities increased from about 60 percent of GDP in 2006 to roughly 90 percent of GDP at end-2009.
- Domestic financial institutions held almost 33 percent of the NFPS’s liabilities in 2009, up from around 30 percent in 2006.
- As of end-2009, total liabilities exceeded total financial assets by about 80 percent of GDP compared with almost 55 percent of GDP at end-2006.
- Most NFPS liabilities are denominated in domestic currency; limited foreign currency assets have generated a net negative foreign currency position.
- Debt sustainability analysis:
  - Under current policies, debt ratios would be adversely affected by fiscal and revenue shocks.
  - Under the medium term fiscal strategy, the public debt outlook would improve and be more resilient to shocks.
- Despite negative financial position, NFPS debt is held by relatively stable investors (domestic financial system and the National Insurance Scheme).
- External debts are mostly long term and have a favorable amortization profile.
- Figures referenced: The Non-Financial Public Sector: Indicators of Vulnerability (Percent of GDP); Evolution of Liabilities (2006–2009) showing Total liabilities, Domestic, External; Liabilities by holder (33% Financial sector, 13% Corporate sector, 9% Other residents, 39% Nonresidents, 6% Central bank); Net Financial Position and Net Foreign Currency Position (2006–2009).

### The Financial System
- Financial system larger/deeper relative to most Caribbean countries; comparable to large emerging markets.
- Gross financial assets increased to about 180 percent of GDP from 150 percent of GDP in 2006.
- Components (banking system and other financial institutions) experienced significant growth in financial assets.
- Growth in banking system assets driven mainly by increased claims on other domestic residents and the nonfinancial public sector.
- Trust companies, finance companies, and merchant banks supervised by the CBB have total assets equivalent to 19 percent of GDP.
- Securities markets remain illiquid and lack depth; market capitalization is around 150 percent of GDP.
- Financial sector had a positive net FX position of about 3.5 percent of GDP at end-2009.
- Financial sector’s exposure to NFPS accounts for around 20 percent of the financial sector’s assets.
- Household exposure in banking system increased to 42 percent of assets in 2009, from 38 percent in 2006.
- Conclusion: balance sheet of the financial sector appears sound with positive net financial and net foreign currency positions; regulatory liquidity and foreign exchange exposure requirements helped keep banks liquid and only modestly exposed to foreign currency risk.
- Figure referenced: The Financial System: Indicators of Vulnerability (Percent of GDP).

### The Nonfinancial Corporate Sector
- Gross financial assets increased remarkably in 2007 but have since dropped due to declining profitability.
- Gross liabilities increased by about 5 percentage points of GDP between 2007 and 2009 due to large accumulation of debts.
- Net financial position remained positive but declined from almost 14 percent of GDP in 2007 to almost 7 percent of GDP in 2009.

*Source: _wp1231 - 2009. There are again important*

### 2007. The bulk of these net liabilities are held by the domestic banking system.

### _wp1231 - 2007. The bulk of these net liabilities are held by the domestic banking system.

### The Non-Financial Corporate Sector
- The sector has a positive net foreign currency position, implying it has enough foreign currency assets to match foreign currency liabilities.
- The sector’s net foreign currency position increased remarkably in 2007 as high profitability enabled accumulation of foreign currency assets.
- The sector net foreign currency position declined to around 12 percent of GDP in 2009 from roughly 18 percent of GDP in 2007.
- Balance sheet developments:
  - Debt has increased by about 5 percentage points since 2008, reflecting declining profitability and a deterioration in capital structure.
- Sensitivity analysis:
  - A 30 percent devaluation would significantly improve the sector’s financial position.

### The Other Domestic Residents Sector (Households and Other Residents)
- Total liabilities increased from 50 percent of GDP in 2006 to roughly 65 percent of GDP in 2009 as households increased debts with the banking system.
- Households improved their net financial position owing to accumulation of assets with the banking system, making them less vulnerable to solvency problems.
- Indirect exposure to the sovereign increased as the banking system passed some household savings to cover government long-term financing needs.
- Foreign currency mismatches are limited; the sector’s net foreign currency position increased from about 0.6 percent of GDP in 2006 to 1.8 percent in 2009 due to significant accumulation of foreign currency assets.
- Holdings of public sector liabilities by the sector increased from about 5 percent of GDP in 2006 to 8 percent of GDP in 2009.

### Sensitivity to Exchange Rate Shocks
- Methodology and caveats:
  - Analysis examines impact of a large exchange rate devaluation on sectoral solvency using 2009 net foreign currency positions.
  - Absence of mark-to-market data and unknown hedging prevent an exact simulation; the assessment assumes most assets are unhedged.
- Key results for a 30 percent nominal devaluation of the Barbadian dollar (Table 3):
  - Central Bank: Before the Shock 481.7 Millions of Bds$; After the Shock 626.3 Millions of Bds$; Loss/Gain 144.5 Millions of Bds$; Percent of GDP 1.8; Percent of Own Assets 10.4.
  - Non-Financial Public Sector: Before the Shock -2,615.3 Millions of Bds$; After the Shock -3,399.9 Millions of Bds$; Loss/Gain -784.6 Millions of Bds$; Percent of GDP -9.9; Percent of Own Assets -32.0.
  - The Financial Sector: Before the Shock 266.0 Millions of Bds$; After the Shock 345.8 Millions of Bds$; Loss/Gain 79.8 Millions of Bds$; Percent of GDP 1.0; Percent of Own Assets 0.6.
  - The Corporate Sector: Before the Shock 926.4 Millions of Bds$; After the Shock 1,204.3 Millions of Bds$; Loss/Gain 277.9 Millions of Bds$; Percent of GDP 3.5; Percent of Own Assets 9.0.
  - Other Domestic Residents: Before the Shock 134.0 Millions of Bds$; After the Shock 174.2 Millions of Bds$; Loss/Gain 40.2 Millions of Bds$; Percent of GDP 0.5; Percent of Own Assets 0.6.
  - Total: Before the Shock -807.2 Millions of Bds$; After the Shock -1,049.3 Millions of Bds$; Loss/Gain -242.2 Millions of Bds$; Percent of GDP -3.1; Percent of Own Assets -11.5.
- Aggregate implications:
  - The net financial position of the country as a whole worsens by about 3 percent of GDP because the net foreign currency position is negative.
  - The balance sheet of all sectors except the non-financial public sector improves following the devaluation.
  - The public sector loses close to 10 percent of GDP and about 30 percent of the financial assets of the public sector.
  - The nonfinancial corporate sector gains about 4 percent of GDP from the devaluation because of its strong net foreign currency position.
  - The financial and the other domestic residents sectors improve their net financial position by about 1 percent of GDP.

### Barbados’ Balance Sheet in International Perspective
- Cross-country comparison highlights:
  - Barbados’ gross financial assets stood at 400 percent of GDP in 2009 compared with 148 percent for Jamaica.
  - External debt: Jamaica 82 percent of GDP compared with 99 percent of GDP for Jamaica (text contains duplication error but preserves source wording).
- Specific comparisons and observations:
  - In both countries, the public sector is the most vulnerable sector because of high levels of liabilities; vulnerability appears smaller in Barbados with a net foreign currency position of 35 percent of GDP versus Jamaica’s 95 percent of GDP.
  - Both countries have a negative net financial position with the rest of the world; Barbados’ net financial position with the ROW is lower (around 10 percent of GDP) than Jamaica’s (almost 60 percent).
  - Financial claims on nonfinancial corporates in 2009 were 32 percent of GDP in Barbados and 13 percent of GDP in Jamaica.
  - In both countries, nonfinancial corporations have a negative net position against the financial sector.
  - Corporations in both countries rely less on nonresidents for funding and more on the domestic financial system.
  - Financial system liabilities to nonresidents are higher in Barbados (12 percent of GDP) than in Jamaica (10 percent of GDP).
- Conclusion: Relatively strong balance sheets of the financial and nonfinancial corporate sectors make a crisis originating from the private sector less likely in Barbados.

### Summary and Conclusions
- Aggregate economy:
  - The balance sheet of the aggregate economy has been weakened by the recent deterioration in the balance sheet of the nonfinancial public sector.
  - The private sector appears healthy and resilient to shocks based on 2009 balance sheet matrices; this conclusion would not be much altered if 2010 and 2011 matrices could be constructed.
  - Rising current account deficit has led to a deterioration in the net financial position of the economy with respect to nonresidents.
  - The country has a negative net foreign currency position mainly due to accumulation of external liabilities by the public sector; aggregate economy has insufficient foreign currency assets to cover foreign currency liabilities.
- Sectoral resilience and risks:
  - The private sector has a positive net foreign currency position and could withstand a large foreign exchange shock easily.
  - NFPS (nonfinancial public sector) balance sheet deteriorated significantly; net financial and foreign currency positions are negative, exposing the sector to solvency and exchange rate risks.
  - Risks to NFPS are moderated by the fact that NFPS is a debtor mostly to domestic creditors and the largest share of public debt is denominated in domestic currency.
  - A devaluation of the Barbados dollar would hurt the public sector; a sovereign debt crisis would critically affect the banking system and the other domestic residents sector.
  - Vulnerabilities are limited in the nonfinancial corporate sector and the household sector because of strong net financial and net foreign currency positions.
  - The net financial position of households improved due to accumulation of assets with the banking system; however indirect exposure to the public sector increased as banks passed some household savings to finance the public sector.
  - The corporate sector has reduced exposure to exchange rate risk and accumulated foreign currency assets due to high profitability.
  - A devaluation would improve the balance sheets of households and the nonfinancial corporate sectors.
  - The financial system has a positive net foreign currency position and its balance sheet would improve following a devaluation; indirect effects are possible if debtors face liquidity problems.
  - Increasing credit exposure to the nonfinancial private sector and households bears watching, but financial health indicators are robust.

### Policy Recommendations (from analysis)
- Reduce the level of public debt to decrease sector vulnerability and limit exposure to the financial system and the household sector; push ahead and aggressively implement the medium term fiscal strategy.
- Continue to accumulate foreign reserves in both the central bank and the commercial banks while monitoring and containing reserve money growth.
- Strengthen regulation and supervision to limit foreign currency mismatches in the financial sector and promote market based hedging mechanisms to manage foreign exchange exposures.
- Promote development of domestic securities markets to allow the other domestic residents sector and the financial system to diversify away from the non-financial public sector.

*Source: Author’s calculations based on BSA matrices (from the document _wp1231 - 2007. The bulk of these net liabilities are held by the domestic banking system.)*

### Appendix I

### Appendix I

### Intersectoral Net Financial Positions, December 2006 (Percent of GDP)
- Table A1: Cells indicate the net claims of the sector designated by the column on the sector designated by the row as a percentage of GDP.
- Total (by column, percent of GDP): 7.6, -63.1, 0.0, 6.5, 8.0, 23.4, 5.7, 11.6, 0.2
- Selected row entries (net claims of column sector on row sector, percent of GDP):
  - Central Bank row: 0.1, 0.0, 0.0, 4.4, -0.1, 0.0, -0.2, -11.8, -7.6
  - Central Government row: -0.1, ..., 14.5, 10.7, 3.7, 8.0, 5.1, 21.3, 63.1
  - Public Nonfinancial Corps. row: 0.0, -14.5, ..., 5.3, 0.0, ..., ..., 2.7, -6.5
  - Other Depository Corporations row: -4.4, -10.7, 0.0, -5.3, 19.8, -2.2, 6.8, -11.9, -8.0
  - Other Financial Corporations row: 0.1, -3.7, 0.0, 0.0, -19.8, 0.0, 0.0, 0.0, -23.4
  - Nonfinancial corporations row: 0.0, -8.0, ..., ..., 2.2, 0.0, ..., 0.0, -5.7
  - Other Domestic Resident Sectors row: 0.2, -5.1, ..., ..., -6.8, 0.0, ..., ..., -11.6
  - Nonresidents row: 11.8, -21.3, ..., -2.7, 11.9, 0.0, 0.0, ..., -0.2

### Intersectoral Net Financial Positions, December 2009 (Percent of GDP)
- Table A2: Cells indicate the net claims of the sector designated by the column on the sector designated by the row as a percentage of GDP.
- Total (by column, percent of GDP): 8.8, -94.5, 0.0, 15.4, 6.2, 20.6, 7.4, 25.7, 10.4
- Selected row entries (net claims of column sector on row sector, percent of GDP):
  - Central Bank row: -3.5, 0.0, 0.0, 7.8, -0.2, 0.0, -0.3, -12.5, -8.8
  - Central Government row: 3.5, ..., 23.7, 14.1, 4.8, 11.4, 8.0, 28.8, 94.5
  - Public Nonfinancial Corps. row: 0.0, -23.7, ..., 3.5, 0.0, ..., ..., 4.8, -15.4
  - Other Depository Corporations row: -7.8, -14.1, 0.0, -3.5, 16.0, -3.9, 17.9, -10.8, -6.2
  - Other Financial Corporations row: 0.2, -4.8, 0.0, 0.0, -16.0, 0.0, 0.0, 0.0, -20.6
  - Nonfinancial corporations row: 0.0, -11.4, ..., ..., 3.9, 0.0, ..., 0.0, -7.4
  - Other Domestic Resident S row: 0.3, -8.0, ..., ..., -17.9, 0.0, ..., ..., -25.7
  - Nonresidents row: 12.5, -28.8, ..., -4.8, 10.8, 0.0, 0.0, ..., -10.4

### Intersectoral Asset and Liability Position Matrix, 2006 (Millions of BDS $)
- Table A3 (matrix format, fragmented in source). Selected sector-level entries and fragments as presented:
  - Central bank claims/liabilities fragments: 145 134 1 0000000350434509-9 0 3-3018-181918-918
  - Central government fragments: 134 145 -10 1,129 0 1,129 948 119 829 289 0 289 619 0 619 396 0 396 1,654 0 1,654
  - Other depository corporations fragments: 4 350 -345 119 948 -82 9000186602-415 1,7011611,5402,0732,247-1744,4733,9475277981,726-928
  - Other resident sectors fragments: 18 0 18 0 396 -396 3,947 4,473 -527 0 0 0
  - Nonresidents fragments: 918 1 918 0 1,654 -1,654 0 207 -207 1,726 798 928 0 0 0 0 0 0
- Total line (as presented, including domestic and foreign currency fragments):
  - Total 1,0874955922635,169-4,9060001,3158095069,9809,3556251,9901701,8202,6922,2504424,8703,9659052,6602,64416
  - Domestic currency 168396-2272623,515-3,2540001,3156027138,1557,5176391,7481701,5781,9392,250-3114,8263,965861101
  - Foreign currency 9189981921,654-1,6530000207-2071,8251,838-132430243753 0753430432,6592,64415

### Intersectoral Asset and Liability Positions, 2009 (Millions of BDS $)
- Table A4 (matrix format). Selected sector-level entries and fragments as presented:
  - Central bank fragments: 99375-2760000006105605017-17 0 0 0023-230974-974
    - In domestic currency fragment: 99375-2760000001185112017-17 0 0 0023-23000
    - In foreign currency fragment: 0000000004920492000 0 0 00000974-974
  - Central government fragments: 375 99 276 1,270 172 1,098 377 0 377 885 0 885 627 0 627 2,247 0 2,247
    - In domestic currency fragment: 37599276 1,85001,8501,2701671,1033770377885 08856270627000
    - In foreign currency fragment: 0 0 0 05-5000 0 0 000 2,24702,247
  - Other depository corporations fragments: 5610-605 1721,270-1,098000333608-275 1,6524041,2492,2122,517-3056,2564,8611,3959511,793-842
  - Other resident sectors fragments: 23023 0627-627 4,8616,256-1,395000
  - Nonresidents fragments: 9740974 02,247-2,247 0377-3771,793951842000 0 0 0
- Total line (as presented, including domestic and foreign currency fragments):
  - Total 1,394709685 2717,630-7,359000333985-65112,06311,5824812,0294201,6083,0972,5175806,8834,8841,9993,5752,767807
  - Domestic currency 420217203 2665,384-5,1170002,1796081,5719,7789,4343441,9014201,4802,1712,517-3466,7494,8841,865000
  - Foreign currency 974492482 52,247-2,242000-1,846377-2,2232,2852,1481381280128926 092613401343,5742,767807

### Jamaica: Intersectoral Asset and Liability Positions, 2009 (Millions of Jamaican Dollars)
- Table A5: Financial Sector, Nonfinancial Private Sector, Rest of the World (matrix fragments).
- Selected sector-level entries and fragments as presented:
  - Central bank total fragments: 6,083 132,625 -126,542 ... 4,064 0 4,064 101,674 0 101,674 86,513 2 86,510 ... 207 127,671 -127,464
    - In domestic currency fragment: 6,083 132,625 -126,542 ... 4,064 0 4,064 101,674 0 101,674 86,513 2 86,510 0 0 0 0 0 0 207 0 207
    - In foreign currency fragment: 0 0 0 ... 127,671 -127,671
  - Central government fragments: 132,625 6,083 126,542 160,579 17,591 142,988 ... 2,247 0 2,247
  - Other depository corporations fragments include large positions: 0 101,674 -101,674 17,591 160,579 -142,988 836 7 829 17,120 23,544 -6,423 75,599 42,215 33,384 81,330 136,508 -55,178 321,444 168,209 153,235 106,778 78,868 27,909
  - Nonresidents fragments: 127,671 207 127,464 0 732,073 -732,073 78,868 106,778 -27,909 ... 0 0 0
- Total (as presented):
  - Total 260,298 198,541 61,757 23,673 1,025,277 -1,001,603 836 7 829 21,184 23,544 -2,359 711,605 620,698 90,907 162,112 42,217 119,895 81,330 136,508 -55,178 321,444 168,209 153,235 106,985 206,539 -99,554
  - Domestic 132,627 198,541 -65,914 21,776 214,050 -192,274 708 7 701 14,629 6,346 8,283 437,729 346,080 91,649 151,291 37,871 113,420 40,480 50,618 -10,138 203,842 159,324 44,519 10,221 467 9,754
  - Foreign 127,671 0 127,671 1,898 811,227 -809,329 127 0 127 6,555 17,198 -10,643 273,875 274,618 -742 10,821 4,346 6,475 40,851 85,891 -45,040 117,602 8,886 108,716 96,763 206,072 -109,308

*Source: Standard Report Forms for Monetary and Financial Data, Joint External Debt Hub, Coordinated Portfolio Investment Survey, and Quarterly External Debt Statistics*

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