Regional ratings agency, the Caribbean Information and Credit Rating Services Limited (CariCRIS), has upgraded Barbados’ local currency rating, while projecting economic growth of about one per cent this year.
The ratings agency said it assigned a rating of “CariBB” with a stable outlook, up from “CariD” on its regional scale local currency rating of the Government of Barbados.
CariCRIS has also maintained its Regional Scale Foreign Currency rating of CariD (Default) on the country’s foreign currency denominated debt.
“The Local Currency Regional Scale rating indicates that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean is below average,” said CariCRIS.
The Trinidad & Tobago-based ratings agency said its decision to upgrade the rating on the local currency debt was driven by the closure of the exchange offer for domestic debt.
The closure of the transaction marks the completion of the restructuring of $11.9 billion in Barbados dollar-denominated claims on the Government of Barbados (GoB) and its public sector. The restructuring is a central plank of the comprehensive debt restructuring programme and the Barbados Economic Reform and Transformation (BERT) Plan.
The restructured debt is estimated to potentially save $500 million in interest per year.
“Our decision to maintain the rating of CariD on the foreign currency debt is based on GoB’s selected default on its foreign currency debt payments. Upon successful completion of negotiations with foreign debt holders, we will similarly revise our ratings on the country’s foreign currency debt,” said CariCRIS.
Government is expected to complete the external debt restructuring by the end of March.
Outlining the supporting factor for its rating, CariCRIS said it was due to modest growth in the tourism sector, despite a contraction in economic growth for the nine-month period ended September 2018, and the growth in the other tradable sectors of manufacturing and agriculture.
CariCRIS said the main factors “constraining the ratings” included the high and unsustainable debt to gross domestic product (GDP).
The upgrade comes two months after the New York-based Standard & Poor’s (S&P) raised its long- and short-term local currency sovereign credit ratings on Barbados to ‘B-/B’ from ‘SD/SD’ (Selective Default).
At the same time S&P assigned its ‘B-‘ issue-level rating to Barbados’ long-term debt issued on its debt exchange and affirmed its ‘SD/SD’ long- and short-term foreign currency credit ratings on the island, and its ‘D’ rating on Barbados’ foreign-currency issues.
As at October last year, Barbados debt to GDP stood at just over 124 per cent, making it one of the highest in the Caribbean.
However, the ratings agency has warned that Barbados was not yet out the woods, while indicated that it expected the economy to grow between zero and one per cent for 2018 and 2019 “based on a continued stable performance in the tourism sector, and some rebound of construction over the next two years”.
“There are downside risks which could temper our growth expectation. These include: the impact of the United Kingdom’s ‘Brexit’ decision, which while still unknown, could potentially lead to a decline in UK visitors and/or a reduction in their expenditure; a continued delay in the construction of the 15-storey, 237-room luxury Hyatt hotel because of the threat of legal action by several entities; and a rapid decline in available options for further fiscal growth support to an already overtaxed economy,” said CariCRIS.
Pointing to Government’s targets under the four-year IMF arrangement reached last October, which include a cut in government spending and a comprehensive reform of state-owned enterprises, CariCRIS acknowledged that Government had embarked on several initiatives to help grow the economy and improve business facilitation.
The brunt of the domestic debt restructuring is to be borne by the National Insurance Scheme (NIS) and the Central Bank of Barbados (CBB), with the NIS to see write-offs of Government debt of 17.5 per cent per annum for the next four years while the CBB’s Government debt will be written off to the amount of $1.6 billion or 16 per cent of GDP.
CariCRIS said while this provided Government with some short-term fiscal space, there would be eventual need to recapitalize those institutions.
The ratings agency said it believed the proposed Economic Programme Oversight Committee (EPOC) would “provide greater oversight and would loosely monitor the implementation of the (BERT) progrmame and aid its success”.
“CariCRIS is of the opinion that the required fiscal space to increase growth, social security and infrastructural spending is being created,” it said.
The ratings agency pointed to the improvement in the fiscal deficit, which dropped to $34.4 million or 0.7 per cent of GDP as at September 2018, which was as a result of increased revenue and simultaneous decrease in expenditure.
For the six months to September 2018, total revenue rose by 5.7 per cent year-on-year to $1.3 billion. The increase in total revenue was driven by a 3.8 per cent increase in tax revenue, led by a significant gain in corporation taxes and property tax.
CariCRIS pointed out that while overall government expenditure declined, wages and salaries increased one per cent and 5.5 per cent respectively, up to September 2018.
Pointing to the island’s increase in international reserves to 13 weeks or $1 billion as at December last year, the ratings agency said it expected reserves to strengthen “with continued drawdowns on the remaining US$241 million from the IMF’s EFF”.
“In CariCRIS’ opinion, international reserves are likely to be strengthened over the next 12-18 months given IMF, IDB (Inter-American Development Bank) and CDB (Caribbean Development Bank) support and tourism-related construction projects,” it added.
The agency also pointed out that the banking sector remained exposed to de-risking and was at risk of losing itscorrespondent banking relations, adding that about eight correspondent banks had severed relations with the sector.
“Though many of the sector’s players were able to find replacements for some of the lines lost with other international organizations, not all of the banking relationships were replaced. A further concern in the sector is the potential loss of new business opportunities on the part of local banks due to the correspondent banks’ general unwillingness to increase their exposure to business from new bank customers,” said CariCRIS.