Officials have welcomed the latest credit rating upgrade as a positive development for Barbados, but warn that it is not reason enough to celebrate just yet.
Last Friday, Standard & Poor’s raised its long and short-term local currency sovereign credit ratings on Barbados to ‘B-/B’ from ‘SD/SD’ (Selective Default), and assigned a B- local currency rating on the domestic debt issued in the recent debt exchange.
At the same time, S&P affirmed its ‘SD/SD’ long- and short-term foreign currency credit ratings on the island, and its ‘D’ (default) ratings on Barbados’ foreign currency issues.
President of the Barbados Economic Society (BES) Shane Lowe said although the slight change on the local credit ratings represented a positive development for the country, reflecting improved capacity to service newly-exchanged debt at lower interest rates and longer maturities, it was not surprising, since in its previous rating action, S&P had indicated that it could increase the government’s rating to “the ‘CCC’ or low ‘B’ categories”.
Lowe said while he welcomed the minor upgrade, it remained several notches below investment grade and thus the country’s debt was still characterized as “speculative grade or junk”.
In addition to a local debt exchange programme, Barbados is currently engaged in a four-year International Monetary Fund (IMF)-backed Barbados Economic Recovery and Transformation (BERT) programme, aimed at rescuing the economy from the economic doldrums.
The economist said as long as the Mia Mottley-led administration remained on track with the targets set under the BERT programme, the rating itself would not likely influence government’s interest costs or capacity to obtain local financing in the near-term.
Lowe said this was especially so, given that the IMF projected that the Government would not borrow from private domestic creditors over the next four years, since borrowing substantial amounts from this category of creditor may imply that the Government has fallen off track with its programme altogether.
“At no time over the life of the IMF-financed BERT programme is this desirable,” he warned.
He pointed out that the Central Bank’s recent decision to reduce the securities reserve requirement for commercial banks from 20 per cent of domestic deposits to 17.5 per cent, supported the IMF’s view on Government’s borrowing over the life of the programme.
Lowe said of utmost importance in the medium-term was the rating on Barbados’ foreign currency debts, adding that this rating would likely remain at default until negotiations with external creditors are completed.
Central Bank Governor Cleviston Haynes has already indicated that external creditors would know the planned restructuring of debt owed to them by Government “in the not-too-distant future”.
The BES president warned that the pace of future rating upgrades on foreign currency debt “will determine how quickly the Government of Barbados can regain access to international capital markets should the need arise once the four-year financing programme with the IMF ends”.
However, pointing to the Jamaica experience, Lowe said the pace of restoring the credit rating to investment grade status (BBB- or higher) even after substantial debt reduction and multiple, consecutive years of large primary surpluses can be very slow.
The international business community has also welcomed the news with President of the Barbados International Business Association (BIBA) Julia Hope telling Barbados TODAY the upgrade should result in an improvement in investor confidence.
“There is still some way to go but I think it is going to give investor confidence [a boost]. Government has been in power for less than six months. It is definitely giving the international business community the right signal,” said Hope.
“There are still a number of factors to look at and to be honest this timing could not have been better for us . . . It points to Barbados taking the proper action with regard to all of the threats and challenges,” she added.
Commenting on the development in a social media post immediate past president of the BES Jeremy Stephen said it should be expected that once local debt payments resumed the country’s local debt ratings would improve.
“This is a good thing. It is a vote of confidence,” he agreed.
Stephen said the upgrade of the local debt suggests that it could be considered safer to invest in government papers than it was a few months ago, and that the Barbados dollar would be at less risk devaluing.
However, the noted economist cautioned against any premature celebrations, pointing out that Barbados was still in a “wait and see” mode since the foreign currency rating was still at select default. He warned that the country was still in need of critical foreign direct investment, adding that Barbados needed to improve how it earned and borrowed foreign exchange.
“We still are rated SD – select default – on our foreign currency rating . . . So while it is a cause for celebration that the BLP has strategically done something right in terms of ‘there is a situation that needs to be fixed let’s fix it’, let us now wait and see when they strike a deal with foreign investors,” said Stephen.
Prime Minister Mia Mottley welcomed the upgrade over the weekend, saying it was an indication that Barbados was on its way back.
However, the BLP leader acknowledged that the news was not to “allow us to rest on our laurels, because the country is not where it wants to be”.