On the heels of last week’s Standard & Poor’s (S&P) downgrade, Moody’s has downgraded Barbados’ Government bond and issuer ratings to Caa3.
In a press release issued today, the New York-based international ratings agency highlighted Government’s rising debt and its very limited prospects of fiscal reform. It also said that as a consequence, rising domestic and external financing pressures were very likely to impair the Government’s ability to service its debt.
The development comes on the heels of this week’s presentation by Minister of Finance Chris Sinckler of the 2017-2018 Estimates of Revenue and Expenditure, in which Government is proposing to spend $4.5 billion for the coming fiscal year, with a whopping $1.8 million due to go towards debt serving. A deficit of 4.4 per cent of GDP is also projected, down from the current eight per cent of GDP.
It was just yesterday that Prime Minister Freundel Stuart — without making mention of any ratings agency — sternly warned that Barbados had long passed the days when it needed external validation from “metropolitan capitals”.
And while likening the grading of an economy to the marking of an examination, the Prime Minister also made it clear that he was not about to let anyone from outside — let alone any external marker — “shame” Barbados into thinking it had failed.
To do that, he said, would belie the country’s proud boast of 50 years of Independence and take it back to a day when approval was needed from outside.
“We seem now to be working ourselves back into a frame of mind where once again we want to sit exams for people outside of Barbados and wait on them to grade us and if they tell us we have passed we are supposed to feel good that we have passed, and when they tell us we have failed we are supposed to hold our heads in shame and think that we are failures,” Stuart told the gathering for a presentation of $10 million in equipment by the Chinese Government at the Ministry of Education yesterday morning.
It was his second such economic rebuff after S&P downgraded Barbados to ‘CCC+/C’ based on its limited financing alternatives and low international reserves.
The New York based agency also issued a negative outlook for the island, while warning that the sustainability of the Barbados dollar was now under threat, amid Government’s continued reliance on the Central Bank to finance its deficit.
However, unlike S&P, Moody’s has maintained a stable outlook for the island.
“Despite the government’s efforts to contain the fiscal deficit and alleviate pressures on foreign exchange reserves, the fiscal deficit remains large and credit risks have increased in Barbados. The debt burden has risen in recent years and will continue to do so for the next few. Domestic and external liquidity pressures on the sovereign have increased. We assess the likelihood of a credit event in the near-term as very high, given lack of fiscal adjustment and increasingly limited financing options.
First Driver: The continued increase in government debt and very limited prospects of fiscal reform.
Although macroeconomic conditions in Barbados have stabilized with a pick-up in growth, driven by rebound in tourism and investment in the sector, the fiscal deficit remains high.
The economy grew by 1.6% in 2016 after reporting anemic growth of less than 1.0% since 2010. The drop in oil prices and an increase in tourist arrivals temporarily alleviated some of the mounting pressures on foreign exchange reserves. However, reform efforts to address persistently large fiscal deficits since 2014 have not achieved a meaningful turnaround in fiscal performance, leading to what we consider to be an unsustainable increase in the government’s debt burden.
The government debt burden reached 111% of GDP at end-2016, and the authorities have accumulated a large stock of arrears to the private sector and the National Insurance Scheme, estimated at a further 11% of GDP at end-FY2015/16. Large refinancing requirements and the high interest burden, which consumes around 27% of government revenues, pose increasingly severe credit risks.
Given the scale of the fiscal and structural reforms needed to correct the rising imbalance, the likelihood of a credit event is now very high.
Second Driver: In consequence, rising domestic and external financing pressures that are very likely to impair the government’s ability to service short-term debt
With commercial banks having reduced their exposure to the sovereign, the government has become increasingly reliant on short-term debt issuance, financed by the Central Bank of Barbados, to meet the rising refinancing and interest costs. The rapid increase in short-term debt since 2013, allied with the large financing gap, imply mounting concerns about rollover risk. In 2016, the central bank was the only source of new financing for the government. As of end-2016, the central bank’s holdings amounted to 34% of outstanding short-term T-bills, equivalent to 13.2% of GDP. The central bank’s unwillingness to increase its exposure to the government would trigger a credit event.
External financing pressures are also high and rising. A number of factors, in particular maintaining the peg to the US Dollar, caused the stock of international reserves to drop significantly last year coming to USD 340.5 million in December from USD 463.5 twelve months earlier. This is the lowest level of reserves recorded since 2009, and only half the average level observed between 2009 and 2012, equivalent to under 11 weeks of imports at end-2016, compared to 13.6 weeks and 14.7 weeks in 2014 and 2015, respectively. The persistent decline in reserves continues to pressure the exchange rate peg.
Rising refinancing pressures dominate more positive credit features. Those include Barbados’ moderately strong institutions, high governance indicators relative to peers, and stable political system that has historically supported a high degree of policy consensus. The government debt structure has relatively limited exposure to exchange rate risk with less than 30% f government debt denominated in foreign currency. The sovereign rating is also constrained by relatively weak growth compared to peers, and by the significant fiscal challenges.
The stable outlook on the Caa3 rating reflects the high probability of a credit event in the next 2-3 years, and reflects a balance of risks between lower and higher levels of loss given default.
WHAT COULD MOVE THE RATINGS UP
Upward pressure on the rating could build if the government initiates a credible fiscal consolidation program to arrest the rise in debt-to-GDP ratio and put debt on a sustainable downward trajectory. These developments would likely be accompanied by reduced reliance on short-term debt and financing from the central bank, and a rebound in international reserves.
WHAT COULD MOVE THE RATINGS DOWN
The rating would most likely come under additional downward pressure if, following a restructuring, losses imposed on creditors exceeded 35% in NPV terms, the highest level consistent with the Caa3 rating.
The long-term foreign currency bond ceiling is changed to Caa2, while the short-term foreign currency bond ceiling is unchanged at NP. The long-term foreign currency deposit ceiling is changed to Ca, while the short-term foreign currency deposit ceiling remains at NP. The long-term local currency bond and deposit ceilings are changed to B3, while the short-term local currency bond and deposit ceilings remain unchanged at NP.
GDP per capita (PPP basis, US$): 16,670 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.6% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.7% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -8.2% (2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.6% (2016 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 06 March 2017, a rating committee was called to discuss the rating of the Barbados, Government of. The main points raised during the discussion were: The issuer’s institutional strength/framework, have decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially deteriorated. The issuer has become more susceptible to event risks. “