Credit check

New York-based bond credit ratings business, Moody’s Investor Services, today delivered a slight boost of confidence in the management of the Barbados economy, slowly reversing a decade-long trend of rating declines by modestly upping the still poor investment grade of Bridgetown’s own creditworthiness.

While also still carrying a very high credit risk, the local and foreign currency issuer ratings – a measure of the ability of the entity to meet its obligations are now at the top tier of Caa1, two notches up from Caa3. Another upgrade would see the country’s creditworthiness move from “poor” to “speculative” and “high credit risk”.

Moody’s explained: “The decision to upgrade Barbados’ foreign and local currency issuer ratings to Caa1 signals the improved debt service capacity now and in relation to future issuances.

With the completion of a debt restructuring exercise with domestic creditors last November and the successful negotiation of the International Monetary Fund’s (IMF) four-year $580 million (US$290 million) Extended Fund Facility (EFF), “the country’s capacity to service its restructured and potential future debt obligations has materially improved,” Moody’s acknowledged.

But Barbados’ foreign currency senior unsecured bonds remained at Caa3 – reflecting the ongoing stalemate on debt restructuring talks between Government and the foreign holders of Government paper, eight months after striking a deal with domestic creditors, which saw them take a large haircut on interest dividends and longer repayment terms.

The decision to maintain a Caa3 foreign currency senior unsecured rating signals the losses that private-sector holders of outstanding foreign currency bonds can expect.

Overall, however, Moody’s maintains a “stable” outlook on the economy.

Moody’s hedged its improved ratings on several key factors including the lowering of the country’s high debt. It also expects that the fiscal measures under the IMF-approved austerity and reform package known as the Barbados Economic Recovery Transformation (BERT) programme will continue to spur a return to economic growth.

It said: “Moody’s estimates that the stock of Government debt fell to 90 per cent of GDP from 101 per cent  the year before (excluding debt held by the National Insurance Scheme) — a material cut, though still to a very high level of indebtedness. The debt restructuring has also resulted in a significant cut in the interest burden on the Government’s budget. Moody’s estimates that the Government’s interest payments more than halved, to 13 per cent of revenue in 2018 from 27 per cent in 2017.”

It further pointed out that the local debt restructuring has virtually diminished the Government’s financing needs and overall liquidity risks.

The ratings agency projected that “Barbados’ gross borrowing needs are likely to remain very low, at no higher than five per cent of GDP, over the next five years”. It based that projection on the debt restructuring, in which nearly all of the country’s treasury bills were written down or converted into long-term instruments. Medium and long-term instruments also saw their maturity dates stretched out significantly, “further reducing rollover risk over the rating horizon”.

But Government’s failure to conclude negotiations with its foreign debt holders remains a concern for the bond ratings agency.

Moody’s said it expected those negotiations to be “protracted” adding: “Losses to external commercial creditors will ultimately prove to be similar to those incurred by domestic creditors, consistent with the Caa3 rating assigned to outstanding foreign currency bonds.”

The ratings agency also signalled its approval of the IMF-supported BERT programme which it deemed would help the country to knock the debt even lower and improve the country’s fiscal position.

“Combined with the debt relief, structural reforms will help correct the sovereign’s fiscal imbalances and put the country’s debt burden on a downward trajectory over the next three to four years,” Moody’s said.

“This recent turnaround in economic and fiscal policies will contribute to reducing public debt to reach the Government’s target of 60 per cent of GDP by 2033.”

Looking ahead, the agency explained its stable outlook was based on its expectations of continued improvement in the Government’s fiscal performance and debt metrics.

The agency said: “Moody’s expects the Government will maintain its effort to achieve the fiscal targets and structural reform goals of its IMF-supported programme.”

It especially urged authorities to maintain a tight rein on state-owned enterprises and limit any Central Bank funding to the Government.

But Moody’s cautioned there was no getting away from tough times ahead and warned that there was also “a risk of reform fatigue”, after several years of fiscal austerity.

it said: “A weak growth environment, with GDP growth unlikely to exceed one per cent by 2020, will also increase the burden of fiscal consolidation through next year.”

On the upside, Moody’s said Barbados could benefit from an upgrade once the debt burden continues to fall, suggesting that “Completion of the foreign currency debt restructuring would likely lead to the foreign currency senior unsecured debt rating moving to the same level as the foreign currency issuer rating.”

On the other hand, it warned that the rating could be lowered if the Mia Mottley administration failed “to maintain its fiscal adjustment efforts”, leading to renewed fiscal deficits and buildup of Government debt, which would also renew pressure on the currency peg and increase external vulnerability.

Barbados’ long-term foreign currency bond ceiling is changed to B2, while the short-term foreign currency bond ceiling is unchanged at “Not Prime” (NP), the lowest short-term grade.

At the same time, the long-term foreign currency deposit ceiling is changed to Caa2, while the short-term foreign currency deposit ceiling remains at NP. The long-term local currency bond and deposit ceilings are changed to B1.
sandydeane@barbadostoday.bb