In the wake of the latest economic downgrade, a regional economist is warning the Freundel Stuart administration to take the latest Standard & Poor’s (S&P) warning seriously.
“With reserves currently in the vicinity of US$317 million in June 2017, according to S&P, it is clear how vulnerable Barbados is to a balance of payments crisis, unless the net outflow of USD [United States currency] is arrested as a matter of utmost urgency, which is contingent upon a balanced fiscal position,” said Marla Dukharan, the chief economist at the Barbados-based financial technology company Bitt.com.
“I think this S&P report in its entirety, should be read by every responsible citizen of Barbados. It is as loud and clear a warning as I have ever seen for the authorities, and for the nation as a whole,” she told Barbados TODAY.
In its report released last week, the New York-based ratings agency announced it was lowering its long-term local currency sovereign credit rating on the island from ‘CCC+’ to ‘CCC’, while maintaining its long-term foreign currency rating at ‘CCC+.
However, it said the outlook for both long-term ratings was negative while warning that the decline in international reserves reduced Barbados’ capacity to defend its currency peg and increased the risk of a balance of payments crisis.
While noting that there were no external commercial maturities until 2019, S&P estimated a debt service of around US$200 million per year between 2017 and 2018.
The international ratings agency also warned of the possibility of another downgrade of Barbados over the next 12 months, while urging the Stuart Government to take the necessary steps to lower the country’s high fiscal deficit, shore up the reserves, lower its debt and strengthen its external liquidity.
Dukharan said the negative outlook meant that the country’s overall rating was likely to be lowered, which would take it to ‘CC’ or “currently highly vulnerable to nonpayment.
“The ‘CC’ rating is used when a default has not yet occurred, but S&P expects default to be a virtual certainty, regardless of the anticipated time to default,” she explained.
Zooming in on the debt situation and negative outlook, Dukharan said the ratings suggested that local currency debt was at greater risk of default than foreign currency debt, pointing out that Barbados was the only S&P rated Caribbean country in which that was the case.
The S&P report acknowledged that “the liability management operations being considered by the Government do not include foreign-currency-denominated debt”.
“Typically, the foreign currency rating carries an equal or lower rating than the local currency rating, because presumably (unless you are a member of a currency union) the authorities can just print money to honour local currency obligations, but they have to earn or borrow foreign exchange to honour their foreign currency debt, which is usually more challenging,” Dukharan explained.
However, in a statement issued at the weekend Senior Lecturer in Management and Dean of the Faculty of Social Sciences at the Cave Hill campus of the University of the West Indies, Dr Justin Robinson cautioned that while ratings could affect Government’s ability to borrow and the terms and conditions it can borrow under, they do not “pronounce on the overall health or well-being of the economy, or the nature of Government’s economic policies”.
Robinson, who is the current Chairman of the National Insurance Scheme and also sits on the board of the Central Bank of Barbados, however acknowledged that “the [main] artery is now blocked in Barbados and needs to be unclogged, either through the financing and credibility that comes with an International Monetary Fund programme “with the bitter conditionalities of course”; a policy mix and/or dialogue that brings the commercial banks back on board since the recent attempt to balance the Budget does seem to have moved the banks; or through Government finding some new source of reliable financing.
He added that “the major cause of the decline in the foreign reserves is the fact that we have not been able to roll over foreign debts when they have matured and we have been unable to attract new foreign financing”.