The international ratings agency Standard & Poor’s (S&P) today warned of the possibility of another downgrade of Barbados over the next 12 months, while calling on the Freundel Stuart administration to take the necessary steps to lower the country’s high fiscal deficit, strengthen its external liquidity, and reverse its low level of international reserves.The warning came in a statement in which S&P announced that it was lowering its long-term local currency sovereign credit rating on the island to ‘CCC’ from ‘CCC+’.At the same time, S&P has affirmed its long-term foreign currency sovereign rating at ‘CCC+.However, the outlook on both long-term ratings is negative.The national deficit is currently estimated at six per cent of Gross Domestic Product (GDP) with Government’s overall debt said to be in the order of 140 per cent of GDP — one of the highest debt levels among Latin American and Caribbean. The level of reserves has also fallen well below the precautionary benchmark of 12 weeks to roughly nine weeks of cover, with S&P raising concern that the island may not be able to avoid a devaluation of its currency, which pegged at two to one against the US dollar.“In our opinion, monetary financing to the central government is at odds with sustaining Barbados’ currency peg to the dollar, and it significantly curtails the central bank’s ability to act as a lender of last resort in the financial system,” the ratings agency warned, adding that “low inflation is a reflection of global conditions rather than effective monetary policy execution given the fixed exchange-rate regime”.Following is the full text of the S&P release:
Barbados’ policy challenges include high general government debt, deficits, and debt servicing requirements; limited appetite for private-sector financing; and a low level of international reserves raising the risk to sustainability of the peg to the U.S. dollar.
The consideration of a debt-liability management exercise to alleviate near-term debt service on intragovernment holdings of local currency debt highlights higher fiscal stress, and with it, in our view, the risk of an exchange with private creditors that we could consider distressed.
We are lowering our long-term local currency rating on Barbados to ‘CCC’ from ‘CCC+’. We are affirming our other ratings on Barbados, including the ‘CCC+’ long-term foreign currency sovereign rating.
The negative outlook reflects the risk of a downgrade given difficulty turning around fiscal policy (with parliamentary elections in 2018), a possible domestic debt exchange that could be a default under our criteria, and prospects for a balance-of-payments crisis.
On Sept. 27, 2017, S&P Global Ratings lowered its long-term local currency
sovereign credit rating on Barbados to 'CCC' from 'CCC+'. We also affirmed our
long-term foreign currency sovereign rating at 'CCC+. The outlook on both
long-term ratings is negative. We also affirmed the short-term ratings at 'C'.
The transfer and convertibility assessment for Barbados remains 'CCC+'.
The negative outlook reflects the potential for a downgrade over the next 12
months should the government fail to advance measures to significantly lower
its high fiscal deficit, strengthen its external liquidity, and reverse its
low level of international reserves. These scenarios would likely lead to
further pressure on availability of deficit financing--be it from official or
private creditors--and pose challenges for the fixed exchange rate regime. Any
potential local currency debt exchange with commercial creditors, though not
currently under consideration by the government, would most likely be
considered a distressed debt exchange and constitute a default according to
We could revise the outlook to stable over the next 12 months if the
government succeeds in balancing its fiscal budget, either from implementation
of fiscal measures or a prolonged rebound in growth; improves its access to
financing, from private creditors locally and globally; and stabilizes the
country's external vulnerabilities and bolsters international reserves.
Barbados' history of wider fiscal deficits and low growth since 2009 has
resulted in a significant increase in general government debt and debt service
needs. Limited appetite for government paper in the local market has led to
reliance on financing from the National Insurance Scheme (NIS) and the Central
Bank of Barbados. Amid high current account deficits and limited external
inflows, external liquidity has been weakening. The decline in international
reserves reduces Barbados' capacity to defend the currency peg and increases
the risk of a balance-of-payments crisis. Our ratings on Barbados reflect our
view that its creditworthiness is currently vulnerable and is dependent upon
favorable business, financial, and economic conditions to meet its financial
Flexibility and performance profile: Rising debt and interest burden, limited
financing alternatives, and high external vulnerabilities
As of June 2017, Barbados' gross central government debt represented around
140% of GDP, one of the highest debt levels among Latin American and Caribbean
countries. We expect Barbados' net general government debt (which does not
include NIS and central bank holdings of government debt and incorporates
liquid assets) to rise toward 98% of GDP over the next three years from 95% in
2016. We consider this level of debt a key credit weakness, particularly given
Barbados' narrow, open economy (which depends highly on tourism) and fixed
exchange-rate regime. In addition, the general government interest to revenue
burden is over 15%. We assess Barbados' contingent liabilities as limited,
considering our view of the strength of the banking system, with assets around
170% of GDP and being fully foreign-owned.
Financing sources have become increasingly limited over the last five years.
Barbados has not tapped international capital markets since 2010. Financing
from bilateral and multilateral lenders has slowed, in part, as Barbados has
been slow to satisfy conditions for disbursement and advance projects
associated with borrowing. Historically, local capital markets provided most
of Barbados' financing. However, in recent years, the private-sector appetite
has dried up on weak policy execution. The government has relied on the
central bank and NIS; they met 85% of the financing requirements during 2015
and 2016. Commercial banks have had a limited appetite to finance the central
government deficit. During fiscal year 2017/2018 (fiscal years go from April
until March), the central bank aims to reduce financing to the central
government to only 1% of GDP, from the 6% in 2015/2016 and 8% in 2016/2017.
The NIS has already exceeded its own prudential limits on government paper,
and the growth rate of financing provided by the NIS has already decreased.
The government announced in May 2017 fiscal adjustment measures that are among
the most significant to date in an effort to balance its fiscal year 2017-2018
budget. They include raising the National Social Responsibility Levy (NSRL) on
imports and domestic manufactured goods to 10% from 2% and a 2% fee on foreign
currency transactions and the sale of Barbados National Terminal Corp. Ltd.
(BNTCL), which stalled last fiscal year because of the Barbados Fair Trading
Commission concerns of possible monopoly practices. However, a weak track
record of execution, the introduction of the measures half way into the fiscal
year, the likely overestimation of one-off revenues, and political
considerations while moving to an election year in 2018 leads us to assume
that the measures will fall short of balancing Barbados' budget this year and
next. Therefore, our base case expects a general government deficit (and
change in general government debt) of 4% of GDP during 2017-2020. General
government fiscal results include an NIS surplus below 1% of GDP during the
same period, down from a 3% in 2011. Lower profitability is attributed to
central government arrears on the NIS.
In an additional effort to reduce near-term pressure on the budget and
financing requirements, the government also announced it's considering a debt
liability management exercise on local currency debt held by the NIS, central
bank, and other government-related entities (GREs). Central bank and NIS
holdings represent around 40% of gross central government debt. The government
expects to finalize a voluntary debt exchange operation that extends
maturities without net present value losses before the current calendar year
ends. A transaction only focused on intragovernmental debt is not a default
under our criteria. But it highlights the extent of fiscal stress, and if it's
extended to private-sector creditors, it would likely constitute a default
under our criteria (see "Rating Implications Of Exchange Offers And Similar
Restructurings, Update," published May 12, 2009). The liability management
operations being considered by the government do not include
foreign-currency-denominated debt. There are not external commercial
maturities until 2019, but we estimate a debt service of around US$200 million
per year during 2017 and 2018.
Strong receipts from tourism, low private-sector demand, and low oil prices
resulted in flat imports, which helped reduce Barbados' current account
deficit (CAD) to 5% of GDP as of 2016, below the 10% average of the previous
five years. Our base case expects that tourism continues to perform
adequately, and that low oil prices and the NSRL further discouraging
consumption (and imports) would result in an average CAD of 4% during
2017-2019. Foreign direct investment won't be able to fully finance the CAD,
which should keep pressure on the level of international reserves during
International reserves stood at US$317 million as of June 2017. Usable
international reserves, which we consider for assessing external liquidity,
are even lower; we subtract the monetary base from international reserves
because reserve coverage of the monetary base is critical to maintaining
confidence in the exchange-rate regime. Barbados' usable reserves have been
negative since 2013, and the position continues to deteriorate, in part
because of the central bank's deficit financing, which has expanded the
monetary base. We expect Barbados' gross external financing needs to be above
200% of current account receipts (CAR) plus usable reserves. We expect narrow
net external debt to average about 30% of CAR during 2017-2019. Our external
assessment also considers that net external liabilities of a projected 140% of
CAR during 2017-2018 are substantially higher than narrow net external debt.
Finally, in our view, data on Barbados' international investment position have
inconsistencies and are not timely.
In our opinion, monetary financing to the central government is at odds with
sustaining Barbados' currency peg to the dollar, and it significantly curtails
the central bank's ability to act as a lender of last resort in the financial
system. Low inflation is a reflection of global conditions rather than
effective monetary policy execution given the fixed exchange-rate regime.
Institutional and economic profile: Subdued economic growth prospects and
weakened policy track record
With about US$16,771 per capita GDP projected for 2017, Barbados is still one
of the richest countries in the Caribbean. Strong flows of tourists and the
expansion of the Sandals hotel helped Barbados to grow 2% in real terms during
2016, the highest rate of growth posted since 2009. This contributed to an
improved economic assessment. However, historical growth has been below that
of peers with a similar level of economic development, and the economy depends
highly on tourism. Growth over the next several years balances a reduction in
length of stay and marginal growth in average tourist expenditure with higher
arrivals, especially from the U.S. market. A second source of growth would be
two major hotel projects that would open operations on the island in 2019--the
Hyatt and the Sam Lord's Castle project by Wyndham. But growth would be held
back by recurrent tourism project delays, higher taxes, low private-sector
confidence and consumption, and a significant level of red tape, which weakens
Barbados' overall economic profile.
Barbados has a stable, predictable, and mature political system, which has
traditionally benefited from consensus on major economic and social issues.
The government has alternated between the Democratic Labour Party (DLP) and
the Barbados Labour Party (BLP). Parliamentary elections are due by June 2018.
Despite the unpopularity of Prime Minister Freundel Stuart (DLP), the election
is likely be close given divisions within BLP led by opposition leader Mia
Mottley. Both parties have similar priorities: to restore growth and maintain
the currency peg with the U.S. dollar. Despite the fact consensus supports and
acknowledges the need for adjustment, there has not been success on this
front. Private-sector confidence in the current government has fallen on
ineffective and slow policy responses. This includes recurrent delays in many
investment projects, the failure to enact a comprehensive fiscal adjustment
plan, and declines in international reserves. Slow actions have weighed on our
policy assessment compared with when Barbados was higher-rated. Transparency
and timeliness of data publication are also weaker than higher-rated