Growing Downside Risks for Barbadian Growth as External Headwinds Mount

• Fitch BMI projects that growth in Barbados will slow from an estimated 2.7% to 1.9% in 2026 as spillover effects from a longer-lasting US-Iran conflict spur inflationary pressures and weigh on economic activity.
• The external macroeconomic outlook briefly improved after the US and Iran signed a Memorandum of Understanding on June 17, but a renewed flare-up of hostilities in recent days has pushed Analyst into a base case scenario of “Messy Negotiations”, implying further disruption to international shipping in the Strait of Hormuz and posing considerable upside risks to BMI’s Oil & Gas team’s forecast for Dated Brent to average USD84/bbl in 2026.
• As a small and open island economy that relies heavily on imported fuel, Barbados is exposed to increased inflationary pressures linked to higher global oil prices. Against that background, the country’s average inflation is expected to reach 2.8% in 2026 (previously 2.3%), compared to 0.9% in 2025, adding to already substantial cost of living pressures and weighing on consumption. Meanwhile, risks to tourism activity are also rising due to weaker growth in key source markets (like the US and UK) and rising transportation costs.
• That said, government support measures and a healthy pipeline of investment projects will help cushion the impact of the oil price shock and prevent a sharper slowdown in domestic demand over the coming quarters. The FY2026/27 budget includes fuel excise cuts and electricity subsidies to contain energy price rises for households and businesses in the near term, while also lowering personal income taxes and introducing a cost-of-living cash credit worth BBD100 per month for lower-income pensioners and welfare recipients.
• Meanwhile, several large-scale tourism resort developments, with a total investment estimated at nearly USD1bn, should support robust construction activity in the tourism sector through to 2027 at least, while boosting longer-term hotel capacity and growth potential. Other major capital projects include a USD200m Pierhead waterfront revitalisation project in Bridgetown and a USD300m expansion of the Grantley Adams International Airport (GAIA).
• The renewed escalation of the US-Iran conflict ensures risks lean firmly to the downside. For Barbados, the primary risk is that a more severe and prolonged oil price shock pushes inflation higher and suppresses growth further. The currency peg to the US dollar means that the country is particularly exposed to imported price pressures from the US, so BMI will be watching for signs of higher US inflation over the coming months.
• There are also near-term risks from the El Niño phenomenon, which is likely to put substantial stress on water supplies during H2 2026 and weigh on the agricultural sector. Barbados also remains vulnerable to the threat of severe weather events like hurricanes. On the other hand, the recent agreement on a 36-month, USD257mn Precautionary Stand-By Arrangement with the IMF will provide an important buffer against balance of payments pressures even in the face of a prolonged oil shock, bolstering stability.

(Source: BMI, a Fitch Solutions Company)