So Barbados has just had its 20th credit ratings downgrade since 2009. Certainly not the kind of news which the Freundel Stuart administration would welcome with the ruling Democratic Labour Party (DLP) facing an already upset electorate in a general election in less than nine months.
Late last week, Standard and Poor’s lowered the island’s sovereign rating to ‘CCC’ and gave notice that the possibility exists for a further downgrade within the coming year. This development, which follows a similar downgrade earlier this year by Moody’s, the other leading international ratings agency, has pushed the value of Barbados sovereign bonds further into junk territory.
Barbados is not the only Caribbean Community (CARICOM) country which has had its credit rating downgraded in recent years. Trinidad and Tobago and the Bahamas have suffered similar fates. However, given the number and the time frame in which they were given, it would be interesting to learn if Barbados’s experience is unprecedented within the region. Maybe some knowledgeable economist who follows these developments, could shed some light on this matter.
So what does the succession of downgrades mean for Barbados? Following a Moody’s downgrade three years ago, a dismissive Prime Minister Freundel Stuart said the opinions of the rating agencies only mattered if Barbados had intended to embark on “an orgy of foreign borrowing”. He made clear, however, that this was not his Government’s plan either in the short or medium term.
That being the case, “what they [the ratings agencies] say has as much value as what you would see in any garbage dump collected by the Sanitation Services Authority”, Stuart contended at the time.
However, the opinions of the ratings agencies do matter as international lenders not only take a cue from them but they also do shape the perception among investors with regard to how a country is being managed. And, as the saying goes, perception is the reality which has to be faced.
In an educational article published in last evening’s issue, Dr Justin Robinson, dean of the Faculty of Social Sciences at the University of the West Indies, Cave Hill, alluded to this effect when he observed that “as a society we have made credit ratings something they are not”. In other words, something other than “an opinion on the likelihood a country will default on its debt” in the future.
Whilst noting that the Barbados economy had shown improvements in the past few years with the resumption of growth, Dr Robinson went on to explain a major factor which may have influenced the latest downgrade which occurred against a backdrop of concerns about the high fiscal deficit, which Government is attempting to bring down, and declining levels of foreign reserves.
“Until the Government of Barbados can again reliably borrow money, either as a result of funding through an IMF [International Monetary Fund] programme; commercial banks and insurance companies again exhibiting a willingness to consistently roll over debt and provide new financing; or there is access to some other reliable consistent source of funds, the financing challenges will remain, and with it a high level of uncertainty about the Government’s ability to pay its debts, which is what the credit rating measures,” he explained.
The opinions of the rating agencies and the related negative perception of Barbados may also be a factor why Barbados does not seem to be attracting foreign investment on the scale as before. Truth be told, investors prefer to do business in a country which they consider to be financially stable and soundly managed.
It is quite clear, therefore, that more is required on the part of Government to address and turn around these negative perceptions both at home and in the international investor community. More adjustments, which some economists stress are needed, would obviously require more sacrifice from Barbadians who have been hit hard by tax increases in recent years.
With an election on the horizon, incumbent are usually not inclined to take any actions that would have the effect of jeopardizing their re-election chances by upsetting voters or, in our case, upsetting them more than they already are. It seems likely, therefore, that the status quo will remain pretty much the same, barring some unforeseen development that necessitates an immediate response, and that whatever additional action may be required it will have to wait until the outcome of the next general election.
If that is going to be the case, it might be better to get the election out of the way sooner rather than later. Delaying may be costlier for the country in the long run which Barbados surely cannot afford.